Tuesday, September 11, 2012

Genting Singapore - Part 1 (Financial Statement Analysis)

This is likely to be one of the last New company that I will do an analysis on for the next 2-3 months as I intend to focus on my studies which has been a bit overloading at times. Nonetheless, I do hope to be able to resume research on new company when holiday is here. I will still continue coverage on VICOM and Silverlake Axis whenever possible.

This will be a 2-part analysis and as always I will start off with financial statement analysis. Genting Singapore operates one of two casinos in Singapore, owning 6 hotels with 1800 rooms as well as 2 key attractions of USS and Marine Life Park. While price might have fallen quite a bit from its peak, it may still have been overvalued at its current price. For the past few years, investors have been pricing in high teen growth rate for this company that seemed to have a long way to go. However, it seemed like RWS might have reached a stagnant market already.

Figure 1 - Income Statement

For the 1st half of 2012, Genting Singapore reported decline in gaming revenue of 19% and 4% for the first 2 quarter which seemed to imply that they have been affected by the decline in macroeconomic condition. Total revenue dropped by 14.2% and 2.9% in Q1 and Q2 2012 as 80% of Genting's revenue comes from gaming. And the decline was as a result of lower rolling chip volume and not lower hold rate (luck factor of casino). In Q2 2012, VIP rolling volume dropped by 14% and Mass volume contracted by 4% in spite of a slightly higher win rate of 3.1% than the theoretical win rate.

There has also been decline in the profit margin which the management has attributed to pre-opening expense of Marine Life Park. However, pre-opening expense increase is very insignificant and the fact is simply a lower gaming revenue. Despite 2 of its hotels, Equarius and Beach Villas, being opened in Feb 2012 which results in 8% increase in room inventory, non-gaming revenue only rises by 1%. RWS also recorded higher average room rent of $432 and occupancy rate of 92% as well as higher visitation rate. These did not lead to    significant increase in non-gaming revenue which could imply the use of its non-gaming asset as complementary to attract the VIP players. If this trend continues, then we should not expect much from the non-gaming revenue as well.

 Figure 2 - Balance Sheet

For the balance sheet, the right column of 2012 Q1 and Q2 is where I transferred the $2.3 billion worth of perpetual securities to the long-term debt. While it is being accounted as equity, it is clearly a form of debt of which the company will have to pay $118 million in interest tax per year, representing 9.6% of FY 11 net profit. While the company has the right not to pay out interest, it is cumulative and will hurt the company's reputation. Of course, debt level is still manageable as it can be cleared by Genting with 3-5 years of profits.

In any case, the company has not proven its need to raise cash through perpetual securities though the cost of debt is lower than its ROA of ~8%. Instead, "the Group invested in a portfolio of quoted securities, unquoted equity investment and compounded financial instruments amounting to S$1,148.9 million" in Q2 2012. This amounts to 9% of its total asset and yet there is a lack of transparency as to what sort of equity investment and financial instrument did Genting Singapore decide to play with. In any case, equity investment is definitely not a core competency of Genting Singapore.

Figure 3 - Receivables
Figure 4 - DSO Not Accounting the Mass Market Revenue

Figure 3 is something that I don't find very comfortable with, which is that Days' Sale Outstanding of Genting Singapore is as high as around 3 months and have been rising ever since RWS commenced operation in 2010. And if we take into account the fact that casino is not supposed to grant any Singaporeans and PRs credit unless they are Premium Player (deposited $100k as credit balance), the actual DSO is much higher as seen in Figure 4.  In fact, it has gone up as high as 150 days in 2012 1H which is equals to 5 months of receivables. This is just the tip of the iceberg...

Figure 5 - Impairment Loss of Receivables

In actual fact, Genting Singapore has been taking significant amount of impairment loss ever since RWS started. It has ranged at an average of 17% of total receivables and 4% of total revenue which is not a small amount. This figure is not shown explicitly in the Income Statement as it is hidden in the "PROFIT/ (LOSS) BEFORE TAXATION – CONTINUING OPERATIONS" under rows of figures. Alternatively, it can also be found in the cash flow statement. Performing impairment losses every quarter is something that's worth noting about and I will elaborate on the reasons for the receivables in Part 2.

Figure 6 - Profitability Ratio

Figure 7 - Profitability Ratio of Macau Peers

I have always thought that being one of two casinos in Singapore should have made it very profitable, but it seemed otherwise with its average ROA of 7-8%, ROE of 12-13% and ROIC of 12-13%. While some might have thought that the $2.3 billion perpetual securities have dragged the profitability, ROA and ROE are at 7% and 12% after taking away the perpetual securities. Such profitability ratio seemed to imply an average company and not one with sustainable competitive advantage.

Now, compare to Macau Peers with an average ROA of 20% and ROE of 60%, it seemed like RWS really pale in comparison especially as an Integrated Resort company operating in a duopoly structure. Given that Genting Singapore has a high profit margin of 23% to 31%, it means that its asset turnover ratio is very low. Not forgetting that Macau's casino are subjected to a 40% tax on gross gaming revenue as compared to 12% in Singapore. Looking back at Figure 2, PPE accounted for 45% of total asset, which means that volume is much more important than profit margin in order to drive operating leverage. Macau's peers does have a lower  profit margin, but they are able to make it up with high asset turnover. This will be explained in Part 2.

Figure 8- Cash Flow Statement

Figure 9 - Cash Flow Analysis

Free cash flow has been unstable as the company is still at an investment phase as the West Zone and Marine Life Park is not yet opened. Until the investment phase is over, we will not be able to see a clear picture of the maintenance capex and derive a stable state FCF.  However, as a guide, PPE as a percentage of revenue has been around 20-40% of revenue during this phase and I expect the maintenance figure to be around 5% -8% of total revenue when it is done with the initial investment.

In conclusion, we can see from its financial statement that it is certainly not a company with a very strong business model. In that case, it seemed to have been overpriced at PER of 16x and 18X based on FY 11 results and forecast FY 12 result. Part 2 will be on the industry and Genting's business model.