GenS’ 1Q19 core net profit of SGD207.8m (+36.4% QoQ; -13.5% YoY) accounted for 26% and 28% of ours and consensus earnings forecast. However, we deemed the results below expectation as the first quarter is usually a seasonally stronger quarter amidst the Lunar New Year. The weaker YoY results were due to lower VIP volume and we believe this trend will persist in the following quarters. We downgrade our earnings forecast and maintain HOLD rating on the stock with lower TP of SGD1.08 (from SGD1.23) in view of a more challenging operating environment.

Below expectations. Core net profit of SGD207.8m accounted for 26% and 28% of HLIB and consensus full year forecasts, respectively. We deem the results below ours and within consensus expectations, as the first quarter is usually a seasonally stronger quarter. The negative deviation was mainly due to weaker than expected gaming revenue.

Dividend. None.

QoQ. 1Q19 both gaming and non-gaming revenue deteriorated by 3.2% and 4.9% due to lower volume of VIP business coupled with lower footfall (1Q19: 19k vs 4Q18: 21k). That said, core earnings and core EBITDA grew by 36.4% and 15.3% on the back lower impairment on trade receivable and higher operating efficiency.

YoY. Gaming revenue declined by 15.2% this is due to stronger regional competition proven by the lower VIP volume recorded this quarter. Core earnings and core EBITDA were down by a lower magnitude of 13.5% and 8.2% driven by impressive cost savings initiatives.

Outlook. We believe the VIP market segment will be shaken by the rising completion from Asean Casinos (Vietnam, Cambodia and Philippines). We are also in the view that the weaker YoY results will persist in the subsequent quarters due to weaker VIP business.

Japan IR. The group continues to pay close attention on the possible destinations of IRs especially in Osaka. GenS mentioned that the request for concept (RFC) in Osaka is scheduled for submission in August and the request for proposal (RFP) will be around end of this year.

Resort World Singapore (RWS) 2.0. The SGD4.5bn expansion plan of RWS is expected to be expanded progressively starting from the two new theme park attraction in 2021/22 followed by the additional 1100 hotel rooms in 2024/25. The additional 500 sqm new gaming space is likely to be the last phase of the RWS 2.0. Capex wise, management guided that the first heavily expensed item will be the ~1 hectare new land purchase cost of ~SGD1bn. Capex is expected to peak in 2022/23 and subsequently taper off in 2024 onwards.

Forecast. Our FY19-20 core earnings are lowered by 7.3/5.8% respectively after we reduced our overall GGR margin assumptions in view of the weaker VIP volume as well as some model up keeping from updating of annual report. We also introduced our FY21 earnings of SGD822.7m (+6% YoY) underpinned by maiden contribution of the new theme park attraction (Minion or Nintendo Land).

Maintain HOLD. Post earnings revision, we maintain HOLD on GenS with lower TP of SGD1.08 (from SGD1.23) based on a FY19 lower EV/EBITDA multiple of 8x (previously 9x) in anticipation of a more challenging operating environment. However, the possible venture in Japan may act as a huge upswing factor in the near term.

Source: Hong Leong Investment Bank Research - 10 May 2019