EUR 850.00 For Business Accounts Only

Morningstar | Genting Singapore's Expansion Plan Is Necessary but Expensive; Reducing FVE to SGD 1.18

Narrow-moat Genting Singapore announced a SGD 4.5 billion expansion plan for its integrated resort, Resorts World Sentosa. While we think the revitalization of RWS is necessary to sustain long-term growth and fend off regional competition, the magnitude of the capital expenditure is above our and market expectations of around SGD 1 billion-2 billion. In addition, a tiered casino tax structure with higher tax rates on gross gaming revenue will be introduced. We cut our fair value estimate to SGD 1.18 from SGD 1.40 after taking into account the higher capital expenditure and tax rates. While we expect negative sentiment on the stock to linger in the near term, we think Genting Singapore remains attractive in the long run. We expect the project to be funded by internal resources and debt while strong cash flow should allow the firm to maintain the annual dividend of SGD 0.035 in the next five years.

In view of this significant investment, the Singapore government has decided to extend the exclusivity period for RWS’ and peer Marina Bay Sands’ casinos to the end of 2030. In addition, RWS will be given options (subject to additional land costs) to increase its approved gaming area and gaming machines by 3.3% (500 square meters) and 800 units, respectively. However, these positives were mitigated by higher tax rates for premium gaming (8% for first SGD 2.4 billion of gross gaming revenue and 12% thereafter, from 5% currently) and mass gaming (18% for first SGD 3.1 billion and 22% thereafter, from 15%) from March 2022 onward. Further, the government goal to minimize the social impact of problem gambling remains, and the casino entry levies for Singaporeans and permanent residents is raised by 50% to SGD 150 for the daily levy and SGD 3,000 for the annual levy. Although we are negative on the higher tax rates, we do not expect RWS to hit the higher tier 2 tax rates, given that gross gaming revenue will remain below the thresholds in our explicit 10-year forecast.

We do not anticipate the higher levy to have a significant impact on the firm as foreign gamblers remain the key revenue contributor for RWS.

The expansion project is expected to be completed within five years starting from 2020, with capital expenditure concentrated in later years. RWS’ gross floor area will be expanded by 50% or 164,000 square meters, including key attractions such as two new environments (Minion Park and Super Nintendo World) for Universal Studios Singapore, creation of a new oceanarium (expansion from S.E.A. Aquarium) , an enhanced waterfront promenade, two new hotels (addition of 1,100 rooms), expansion of meetings, incentives, conference, and exhibition facilities, and the introduction of a driverless transport system to improve accessibility to Sentosa Island. While there may be concerns that competitor MBS is getting a bigger increase in approved gaming area (2,000 square meters) and 1,000 gaming machines, we believe the focus should be on RWS’ overall attractiveness. We think the firm should be able to remain competitive, especially with the higher hotel room capacity (a bottleneck currently).