Playing catch up
• Singapore’s GGR could hit US$7bn in 2012F, surpassing Las Vegas as the world’s second largest gaming market
• Western Zone opening should help RWS catch up in market share, potential early beneficiary of junket approvals
• Attractive risk-and-reward ratio, one of our top gaming picks; maintain BUY and S$2.05 TP
Emerging powerhouse. We expect Singapore’s gross gaming revenue (GGR) to hit an impressive US$6bn in 2011E and US$7bn in 2012F (yet to include potential impact of junkets). While junkets could lead to potential cannibalisation of the direct VIP segment and lower margins due to commissions, these should be mitigated by stronger volume growth and lower receivable provision/ impairment. Key risks to sector include
slower tourist arrivals (>2/3 of visitors are foreigners), higher credit risk (given pure exposure to direct VIPs), and deleveraging.
Regaining ground. MBS has overtaken RWS as the market leader with 52% share of GGR. But RWS should start catching up soon on the back of: a) Ramp up in slot operations (+33% to 2470 machines by end-11, comparable with MBS); b) Higher visitor arrivals with world’s first Transformer ride (launched on 3 Dec) and potential spin-off from Genting Plantation’s Johor Premium Outlets; and c) Opening of Western Zone (Maritime Museum launched on 15 Oct; 200-room Equarius Hotel and 20 beach villas by early-12 to attract higher-end VIPs; Marine Life Park & Equarius Water Park by mid-12). While MBS is closer to the CBD and stands to benefit from completion of the Circle Line and International Cruise Terminal in 1H12, RWS can leverage on its theme parks and Genting Group’s 40-years experience in ASEAN (extensive customer database, good relationships with junkets).
Attractive valuation. While we prefer Macau stocks for their stronger earnings growth (Sands China & Galaxy are our top gaming picks in the region), GENS is still the most direct proxy to Singapore’s burgeoning GGR. Valuation is attractive at 9x 2012F EV/EBITDA vs big-cap Macau casino operators’ 12x, on decent 2011-13F earnings CAGR of 8%. Dividend payout, however, will likely be post-2013 due to existing debt covenants. With strong balance sheet (net cash) and operating cashflows, GENS is actively looking for new IR opportunities (eg Japan, Korea).
RWS has been losing market share to MBS since 1Q11 (especially in VIP segment), and is now trailing behind with 48% share of overall GGR. We expect RWS to narrow the gap soon, driven by additional slots (+33% to 2470 machines by end-2011, comparable with MBS) and gradual opening of Western Zone (targeted at higher-end VIP patrons). GENS could be an early beneficiary of junkets (should licences be approved) given Genting Group’s long relationship with ASEAN-centric junkets. MBS may still have an advantage in the mass segment given its more strategic location (closer to CBD) and completion of Circle Line station by 1Q12 and International Cruise Terminal by 2Q12.
Singapore’s GGR increased by 15% q-o-q in 3Q11, as both VIP and mass segments expanded by 21% q-o-q and 8% q-o-q respectively. We expect Singapore’s GGR to surpass Las Vegas as the world’s second largest gaming market with GGR hitting US$7bn in 2012 (2011E: US$6bn; 2010: US$3bn).
Sector rolling chip (VIP volume) grew strongly by 18% q-o-q in 3Q11, driven by MBS. RWS’ rolling chip remained flat, arresting the decline since 1Q11. MBS has taken over the lead in the VIP segment with its share of sector rolling chip expanding to 56%. RWS could catch up soon with the opening of 200- room Equarius Hotel and 20 beach villas by early 2012 (bigger rooms to attract higher-end VIPs from untapped markets such as Middle East and North Asia).
Sector daily net wins/table and slots rose by a healthy 12% and 8% q-o-q respectively despite the increase in the number of tables (+1%) and slots (+5%). With limited headroom to increase capacity (10-15% remaining for tables, slots almost reaching 2500 cap), we expect daily net wins/table and slots to continue to improve as both IRs focus on yield management (eg increase dealers’ efficiency, table limits, length of play, games mix).
EBITDA margins eased marginally in 3Q11 with higher contribution from the VIP segment (RWS: 53% from 50% of GGR; MBS: 52% from 49%). Singapore IRs remain the most profitable in the region, due to lower gaming taxes (12-22% vs Macau’s 39%, Malaysia’s 25%) and pure direct VIP exposure. We expect EBITDA margins to continue to ease as Singapore IRs focus on growing the VIP segment in view of tepid growth and higher policy risk for the mass segment. Margins will also be dragged by junkets (should licences be approved), but should be compensated by stronger rolling chip growth and lower credit risk.
Visitor arrivals to Singapore rose 14.7% y-o-y, 7.7% qo- q in 3Q11 driven by the Formula 1 Grand Prix and the school term break. October continued to see an increase of 10.8% y-o-y, and should remain strong up to the year-end with the long festive/school holidays. With 10M visitor arrivals already touching 10.9m (+14% y-o-y), we expect 2011 visitor arrivals to meet the higher end of STB’s projection of 12m–13m (+12% y-o-y). Based on 7% CAGR to achieve STB’s target of 17bn visitors in 2015, we project 13.5-14.0m visitors in 2012, with stronger growth in 2H12. The strong combination of new attractions and MICE events should continue to draw visitors to Singapore.
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