Wednesday, November 9, 2011

Genting Malaysia: More Surprises Ahead?

10 November 2011
Price Target: RM4.07
Share Price: RM3.86


Highlights
# GenM’s US operations, Resorts World New York (RWNY) recorded a surprising net wins of US$651/VLT/day on its first day of business on 28th October 2011.

# Monticello Casino & Raceway appeared to be the most suffered video gaming operator in terms of net wins (18% declined in net wins/VLT/day) on the same week RWNY was
launched.

# Its closest competitor, Empire City Casino (ECC) showed a 14% fall in its net wins, from US$310 to US$/VLT/day. For the remaining seven video gaming operators, their net wins movements vary within the range of ±6%.

# On the following week, RWNY recorded an average net wins of US$629/VLT/day (-3% wow), while the net wins of other operators climbed back up.

Comments
# The robust net wins/VLT/day implies significant potential upside, as it is 117% above our conservative assumption of US$300 per VLT per day.

# We observed that despite some cannibalization, RWNY actually enlarged the overall market size as state wide’s net wins improved 23% after the inclusion of RWNY.

# We will continue to closely monitor RWNY’s net wins as the positive surprise might be due to novelty effect. We remained optimistic with RWNY’s performance given the potential upside from our conservative assumption.

# If the net wins are able to maintain at current level, there is 12% and 7.4% potential upside to our earnings forecasts and SOP based target price respectively. Recall that ECC only recorded a net win of US$311/VLT/day during its first week of
operation in Oct 2006. This underpins our view that RWNY has the potential of overtaking ECC as the market leader.

Catalysts
# International operations to help boost GenM’s future earnings.

# Better-than-expected performance from GenUK.

# Approval of Florida’s destination resort legislation.

Risks
1) Regulatory risk;
2) Weaker hold percentage;
3) Pandemic breakouts;
4) Cannibalization from Macau & Singapore;
5) Appreciation of RM; and
6) Destination resort legislation not approved by Florida Legislature.

Forecasts
Unchanged, pending more data points on RWNY’s net wins.

Rating - BUY, Target Price: RM4.07
Positives
(1) Defensive stock;
(2) Monopoly in the industry; and
(3) New source of earnings from international markets to drive earnings growth.

Negatives
(1) Highly regulated industry; and
(2) earnings highly dependable on luck factor and hold percentage.

Valuation
Maintain BUY with target price of RM4.07 based on SOP.



Source: HLIB Research

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