GenM reported a weaker-than-expected set of results in 3Q22 which we believe have now been duly priced in by the market resulting in the current weakness in share price. However, looking ahead, we believe the group will see a much better FY23 due to (i) reopening of the remaining hotel room inventory in RWG; (ii) SkyWorld ride capacity increase and extended operating hours; (iii) seasonally stronger CNY period; (iv) opening of RWHV in Dec 2022; and (v) Super Bowl in Feb 2023 auguring well for Empire’s mobile sports betting. Maintain BUY with an unchanged TP of RM3.44 based on SOP valuation.

3Q22 results recap. GenM’s 3Q22 core PATAMI of RM92.3m (+4.8% QoQ; 3Q21: -RM282.4m) brought 9M22’s sum to RM66.4m (9M21: -RM1.13bn), which came in below our and consensus expectations. Despite visitations to RWG recovering to almost pre-pandemic level in 3Q22, core earnings still lagged behind due to (i) higher finance and depreciation costs post opening of theme park; (ii) higher tax expense due to deferred tax as some of the credit from previous year was reversed; and (iii) higher visitor mix to its non-gaming premises which has a lower margin.

Unsuccessful in Macau bid. As announced in Nov 2022, GenM was unsuccessful in its Macau casino bid. The results alleviated investors’ concern on GenM’s near term credit risk in financing the project should it win the bid. As at 30 Sep 2022, net gearing stood at 75.8%.

Listing of Miami property assets. GenM recently indicated that it is looking to sell some of its Miami real estate, and is seeking more than USD1bn. The 16-acre parcel, once home to the Miami Herald newspaper, is one of the largest undeveloped pieces of land in the city. Recall that GenM acquired the site in 2011 for USD235m, which was originally slated for a mixed development that includes a luxury casino resort. With the indicative price of USD1bn (c.RM4.5bn), this implies a fourfold appreciation in value of the site since acquisition. In retrospect, the listing of the assets could perhaps shed some light that the sale could be one the ways the group intended to finance its now forgone Macau project. For perspective, should the sale materialize at the indicative price of USD1bn, this would reduce its net gearing substantially to 39.2% (from 75.8% as at 30 Sep).

Further capital injection to Empire. With the Macau bid out of the picture, the group is turning its attention to scale its growth through other avenues. On 5 Dec, it announced that it will inject another USD100m to its 49%-owned associate Empire Resorts through the purchase of Series F preference shares (Series F) from Kien Huat (major shareholder of Genting Berhad). Prior to this, GenM had invested a total of USD524.4m. Upon the full conversion of preference shares by GenM, including Series G, Series L and Series F, GenM’s effective shareholding in Empire would increase to c.76.3% (from the current 49%).

Brightening prospects of Empire. Recall that in 2019, when the group first announced its acquisition of loss-making Empire, share price tumbled -11.9% a day after the announcement. However, on hindsight, we are now starting to appreciate the value behind the acquisition. Despite the Covid-19 pandemic, Empire’s operational performance had improved with GGR exceeding pre-pandemic levels for most of the months since May 2021. In FY21, it achieved positive EBITDA of USD30.6m for the first time since commencement of operations, while for 9M22, Empire registered EBITDA of USD31.8m. Empire is now close to breakeven level with 3Q22 losses narrowed to less than USD2m (or -RM6.6m vs. -RM30.9m SPLY). In addition, Empire also opened up the opportunity for the group to (i) win the bid in mobile sports betting license in Mar 2022; and (ii) expand and operate its new Resorts World Hudson Valley (RWHV), a 90k sqft facility featuring 1.2k video lottery terminals, a bar and a lounge, which is targeted to open in Dec 2022. The opening of RWHV is expected to contribute positively to Empire’s earnings in the coming quarters given that it’s a low capex venture resulting in only marginal incremental depreciation expense post opening. As such, with brightening prospects, we view the injection positively as it allows the group to participate in the growth prospects of Empire.

Plenty of positives in FY23. We believe the current weakness in share price of GenM (-14.2% from its YTD high) is pricing in the 3Q results shortfall. We anticipate that footfall to RWG may be weak in 4Q22 due to the month-long World Cup 2022 (20 Nov-18 Dec). However, looking ahead, we believe the group will see a much better FY23 due to (i) reopening of the c.21% remaining hotel room inventory in RWG (8.3k out of 10.5k opened as at 30 Sep); (ii) SkyWorld capacity increase with 2 more additional rides to total of 20 rides; (iii) extended operating hours in SkyWorld; (iv) seasonally stronger CNY period for RWG gaming segment; (v) opening of RWHV in Dec 2022; and (vi) Super Bowl in Feb 2023 which should augur well for Empire’s mobile sports betting.

Forecast. Unchanged.

Maintain BUY with an unchanged TP of RM3.44 based on SOP valuation. We like GenM as we believe RWG is one of the prime beneficiaries of borders reopening and recovery in tourism activities. Under the new administration, the tourism segment may benefit as the government capitalizes on the sector as a lever to support the domestic currency and economy. We believe that visitations to RWG has the potential to scale beyond pre-pandemic level given the capacity increase and the more diverse crowd it attracts due to the addition of its theme park.

Source: Hong Leong Investment Bank Research - 13 Dec 2022