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Gaming | 14 March 2011

BUY Genting Hong Kong

Initiating Coverage Deft hands at play
Analyst We initiate coverage on Genting Hong Kong Limited (GenHK) with a BUY
YEAK Chee Keong, CFA
recommendation and a target price of US$0.54 based on sum-of-the-
(65) 6433 5730 parts valuation. Approximately half of our valuation is attributed to the
gaming operations as the company evolves from a cruise operator into
a gaming-focused enterprise. The unrealised potential from its casino
Price US$0.395 operations in Manila is mind-blowing, to say the least. Trading at an
Target US$0.540 adjusted FY11F EV/EBITDA of 10.6x and P/B of 1.6x, GenHK is the
ST Index 3,043.49
cheapest gaming stock compared with its peers, in our view.
Gaming licence is the jewel in the crown
Historical Chart
The crown jewel of GenHK is its gaming licence in the Philippines, which
allows it to operate up to 2,000 tables and 7,000 slots in two locations in
Price ($) Vol ('000) Manila. The licence is currently held by its 50%-owned associate, Travellers
0.60 400,000
International Hotel Group. When fully utilised, the attributable value to
0.40 GenHK from Travellers alone could amount to as much as US$0.56 per share.
0.20 100,000 Cruising up to speed in North America
0.10 0 The proposed IPO of Norwegian Cruise Line is expected to take place this
year, which could unlock more value for GenHK. In our view, this could also




be an avenue for GenHK to dispose of its cruise business to concentrate on

the gaming business. Nevertheless, the North American cruise market is
Performance 1m 3m 6m
Absolute (%) -8.1 -11.2 -16.8
seeing one of the highest booking seasons in history with 2011 likely to be
Relative (%) -6.3 -7.3 -16.7 another year of record passenger figures.
Restructuring efforts have paid off for Star Cruises
Stock Information GenHK, which houses Star Cruises, is benefitting from a leaner balance sheet
and improved profitability after undergoing capital restructuring and cost
Ticker code GENH.SI cutting. With the Asian cruise market growing rapidly, many cities vie to be
the Caribbean of the East and are building and/or upgrading cruise
Market cap (US$m) 3,069.7
52-week high (US$) 0.535
52-week low (US$) 0.160 A good hand finally
Shares issued (m) 7,771.3 In our opinion, the tide has just turned for GenHK. FY10 would be the first
6m avg d.vol (US$m) 21.0
year that it turns in a net profit after reporting losses for the past four
Free float (%) 23.3
Major shareholders (%) consecutive years. Our SOTP analysis values the stock at US$0.54 with an
Lim Kok Thay (57.5) implied FY11F adjusted EV/EBITDA of 13.0x and a potential upside of 37.3%.
Resorts World Ltd (18.4) Initiate with BUY.
Year End Dec 31 2008 2009 2010F 2011F 2012F
Sales (US$ m) 441.0 376.8 392.6 424.9 434.1
Key Indicators
Pre-tax (US$ m) (97.6) (24.0) 76.8 175.2 203.8
ROE (%) 4.0 Net profit (US$ m) (80.1) (25.3) 74.9 168.9 196.3
Net cash (US$m) -434.0 EPS (US cts) (1.08) (0.34) 1.01 2.27 2.64
NAV (US cts) 25.8 EPS growth (%) n.m. n.m. n.m. 125.5 16.2
Interest cover (x) 1.4 PER (x) n.m. n.m. 39.2 17.4 14.9
Adj. EV/EBITDA (x) 48.7 20.3 13.2 10.6 10.0
Yield (%) 0.0 0.0 0.0 0.0 0.0
Co. Reg No: 198700034E
MICA (P) : 090/11/2009
Genting Hong Kong 14 March 2011

Investment merits
Genting Hong Kong Limited (GenHK) was formerly known as Star Cruises Limited.
The new name was adopted in October 2009 to reflect the company’s focus – as
part of the overall strategy of the Genting Group – to become a global leisure,
gaming, entertainment and hospitality enterprise, with both land and sea-based

A gaming-focused strategy
The most exciting part of GenHK’s business comes from its 50%-owned associate,
Travellers International Hotel Group, which holds a licence to operate casinos in
the Philippines. Resorts World Manila (RWM) marks the first land-based foray for
GenHK. Since its opening in August 2009, the gaming-cum-entertainment resort
has attracted an ever-increasing number of visitors. Travellers has the first-mover
advantage in launching the first integrated resort in the Philippines. Its second
integrated resort, Resorts World Bayshore City (RWB), could open in 2013-14.
Combined, the revenue potential from these two facilities could be in the region
of multi-billion-dollars a year, assuming the licence is operating at full capacity.

Third-largest cruise line in the world

Being the third-largest cruise operator in the world, GenHK has exposure to the
North American market through its associate, Norwegian Cruise Line (NCL). The
cruise industry is expected to witness another strong year of growth, riding on
record passenger growth. Cruise lines are planning to expand their capacities to
meet the rising demand. NCL also has two large cruise ships on order which are
expected to come on-stream by 2013 and 2014. Operating with the youngest
fleet and with a reputation for innovative itineraries and programmes, NCL is
ready to ride the next wave of growth. In addition, it is preparing for a public
listing this year, which could further unlock the value of the company. In our
view, this also could be an avenue for GenHK to dispose of the cruise business to
concentrate on its land-based gaming business.

Building a Caribbean of the East

In Asia, Star Cruises is an established player with intimate knowledge of the
market. Gaming has been the predominant focus, generating almost 60% of its
revenue. However, the industry is also seeing a gradual change as people accept
cruise as a form of alternative travel. We believe this should present more
opportunities for Star Cruises.

In the black after four consecutive years of losses; initiate with BUY
Through effective cost-cutting, sale and redistribution of assets and capital
restructuring, GenHK now has a stronger balance sheet. We also expect FY10 to
be the first year the company turns in a net profit after four consecutive years of
net losses. We value the stock using a SOTP methodology, deriving a target price
of US$0.54. Our target price implies an upside of 37.3%. Initiate with BUY.

Genting Hong Kong 14 March 2011

Room for further upside

Sailing past a sea of red ink
Based on its historical financial records, GenHK was usually mired in a sea of red
ink and did not seem worthy of a second look. At the height of its problems in
November 2008, its share price plunged to US$0.06 as persistent losses battered
its cruise businesses. However, over the past nine months, GenHK has seen a
phenomenal turnaround in terms of share price performance. Part of the reason
could be the positive sentiments infused by other listed entities of the Genting
Group, riding on the regional gaming theme.

Capable of holding its own

The surge in GenHK’s share price, however, is not without solid ground. Even
without the influence of the Genting Group, we believe GenHK is capable of
holding its own. The crown jewel lies in its germinating land-based casino
business. Restructuring of the group’s businesses has also resulted in a stronger
balance sheet, together with improving operating profits, and these have not
gone unnoticed. Stock price has more than doubled over the past nine months
and we acknowledge that we might have missed part of the boat. Nevertheless,
with a new focused strategy and strong growth prospects, we believe there is still
headroom for further upside.

Gaming business is the key stock price catalyst

While we anticipate its cruise businesses to post strong recovery from the loss-
making years, we believe that the key stock price catalyst would come from its
land-based gaming business. Based on our forecasts, EBT contribution from
Travellers is expected to grow from a negligible amount in FY09 to US$125m in
FY13F, accounting for 45% of our total estimated EBT of US$275m for that year
(Figure 4).

Best played as a growth stock

We classify GenHK as a stock with high growth potential. Although it has been
incorporated since 1993, we believe it is currently in the early stage of a new
evolution into a leading land and sea-based gaming and entertainment
enterprise. After all the interest in Genting Singapore, it is time GenHK gets its
fair share of attention.

Genting Hong Kong 14 March 2011

Figure 1: GenHK – net profit, FY05-1H10 Figure 2: GenHK – share price performance
US$ m US$
40 0.60
0.50 0.575
-20 FY05 FY06 FY07 FY08 FY09 1H10 0.40
-80 0.20
NCL deconsolidated 0.06
from FY08 onwards


Source: Company data Source: Bloomberg

Figure 3: Genting Group – share price performance Figure 4: Increasing EBT contribution from
from Jan 2010 Travellers
(Jan 10 = 100) US$ m
220 300
200 GENS 250
180 GENM 125
160 GENP 87
150 71
100 94
120 72 76
50 40
100 9 41 54
1 24 27 32
0 5
80 -45
-50 FY08 FY09
-3 FY10F FY11F FY12F FY13F
60 -104














Star Cruises NCL Travellers

Source: Bloomberg Source: Company data, Kim Eng estimates

Genting Hong Kong 14 March 2011

Expanding gaming footprint

A gaming-focused strategy
Star Cruises Limited had its name changed to Genting Hong Kong to align with its
corporate strategy of diversifying into land-based integrated resorts and
entertainment under the Genting brand name. Already the world’s third-largest
cruise operator, GenHK is now eyeing the role of a leading global leisure,
entertainment and hospitality enterprise. Judging from the restructuring
activities undertaken by the Genting Group, gaming is the key focus of its entire
business and GenHK has been singled out to lead the expansion into East Asia
and Taiwan.

Figure 5: Genting Group and its gaming focus

Bloomberg Listed members of Possible future
code Genting Group Company description Current gaming operations gaming markets
GENT MK Genting Berhad Investment holding and management Through GENS, GENM and GENHK. n.a.
company of Genting Group.
GENS SP Genting Singapore A leading integrated resorts development Resorts World Sentosa, Singapore. Japan
specialist. Owns RWS and recently sold
Genting UK to Genting Malaysia
GENM MK Genting Malaysia Operates the only casino in Genting Resorts World at Genting Vietnam
Highlands. Recently acquired UK casino Highlands, Malaysia; 46 casinos in
businesses from Genting Singapore. UK under the brands Crockfords,
Maxims Casino Club, The Colony
Club, The Palm Beach, London
Mint, Circus, Maxims and Mint.
GENHK SP Genting Hong Kong Third-largest cruise operator in the world Resorts World Manila at Newport Macau, Taiwan,
with Star Cruises and Norwegian Cruise City, the Philippines; another Sri Lanka
Line. Also holds a 50% stake in Travellers casino, Resorts World Bayshore
with a licence to operate casinos in the City, at Manila Bay (yet to be
Philippines. constructed).
GENP MK Genting Plantation A palm oil producer with 133,000ha of n.a. n.a.
plantation land in Malaysia and Indonesia.
Has also ventured into property
development and the biotechnology
Source: Company data

The pie that grows and grows

Theoretically, the size of the gaming market is limited by the world’s population
and the amount of wealth available. Monies for gaming can also be geared up
with debt. On a more practical level, we are putting forth the notion that the
gaming market is an ever-growing one.

In Asia, the penetration rate for gaming is known to be low, despite the region
having some of the largest populations in the world. Additionally, Asian wealth is
improving rapidly with strong GDP growth potential and increasing per capita
spending. This is aided by strong tourist arrivals in the region. Put another way,
Asia has the greatest capacity for growth and GenHK is in the right place at the
right time. According to the report, Playing to Win, by PricewaterhouseCoopers
(PwC), a global professional services firm, Asia Pacific’s share of the gaming
market is estimated to almost double from 22% in 2009 to 41% in 2014.

Genting Hong Kong 14 March 2011

Figure 6: GDP growth rates for Asian countries Figure 7: Selected gaming market size
2010 (%) 2011 (%)
Japan 4.2 1.5 Est. mkt size (US$m) 2011-14
China 10.3 9.0 2010 2014 CAGR (%)
Hong Kong 6.6 4.7 Nevada (incl. Las Vegas) 9,950 12,500 5.9
India 9.1 9.0
Atlantic City 3,550 3,350 (1.4)
Indonesia 5.9 6.0
Malaysia 6.8 4.3 Macau 22,445 45,149 29.1
Singapore 14.8 4.1 Singapore 2,750 8,318 31.9
South Korea 6.1 3.9
The Philippines 607 1,215 18.9
Taiwan 10.1 3.3
Thailand 7.0 4.3 Vietnam 81 139 14.5
The Philippines 6.9 5.4 Malaysia 920 1,089 4.3
Vietnam 6.8 6.9
Source: The Economist Source: PwC report “Playing
g to Win”, Kim Eng estimates

Figure 8: Regional share of gaming market, 2009 Figure 9: Regional share of gaming market, 2014
Latin Canada Latin Canada
America 4% America 3%
0% 0%

Asia Pacific
22% Asia Pacific

Source: PwC report “Playing to Win” Source: PwC report “Playing to Win”

Not just the sea, but also the land

GenHK’s gaming
gaming operations were confined to its cruise ships until the acquisition
of a 50% stake in Travellers in 2008 for US$335m. In June 2008, Travellers was
awarded a licence to develop and operate integrated resorts in two locations in
Manila. The first, Resorts
Resorts World Manila (RWM), is already operational while the
second, Resorts World Bayshore City at Manila Bay, is awaiting regulatory
approval for construction to begin. RWM features an integrated leisure and
entertainment attraction with hotel facilities, shopping
shopping mall, high-end
high cinemas, a
performing arts theatre and more importantly, a casino.

Figure 10: Current and potential land-based

land based operations
Resorts World Manila (Newport City) Resorts World Bayshore City (Manila Bay)
Casino Casino
suite luxury hotel, Maxims Hotels
room 5-star
5 Marriott Hotel Manila Theme park
room affordable hotel, Remington Museum
30,000-sq-m retail mall
seat performing arts theatre
4 cinemas
Source: Company data, media reports

Genting Hong Kong 14 March 2011

RWM playing out well

Since opening in August 2009, RWM has seen an ever-increasing number of
visitors every day. Of greater significance is the fact that it has penetrated the
Philippine casino scene. While this gaming market is not as established as the
more matured markets in Las Vegas and Macau, we believe it is because it does
not yet have the infrastructure and attractions to compete for casino-goers.
However, all this is set to change when the new Manila Bay Integrated City is
completed in 2013-14.

Figure 11: Resorts World Manila

Source: RWM website

Genting Hong Kong 14 March 2011

Putting Manila on the gaming map

New star rising
Without a doubt, Las Vegas, Atlantic City and Macau are some of the most well-
known gaming destinations in the world. More recently, however, the buzz has
shifted to Singapore where two integrated resorts, Marina Bay Sands and Resorts
World Sentosa, opened their doors. Manila may soon join the ranks. With the
opening of RWM, GenHK is putting the Philippine capital on the gaming map.
During its 2Q10 results briefing, management revealed that RWM’s gaming
revenue has exceeded all expectations and that on some days, wins could match
any other casino in the world. With tourist arrivals in the Philippines hitting a
record level of 3.5m last year and expected to grow further, we think the market
to be tapped is bigger than it seems.

PAGCOR the monopoly operator

Before RWM’s opening, the casino scene in the Philippines was dominated by the
state-controlled Philippine Amusement and Gaming Corporation (PAGCOR). This
single monopoly was created in 1977 to tackle the proliferation of illegal casino
operations. This gives it the right to regulate, authorise and license casino gaming
in the country. In June 2007, the Philippine Congress passed an act to extend the
corporate life of PAGCOR by 25 years and renewable for another 25 years. The
new act expanded PAGCOR’s role from an operator to one with regulatory

PAGCOR operates about 13 casinos in the Philippines with four of them in Metro
Manila. It also has another 25 exclusive clubs. PAGCOR is now leading a multi-
billion-dollar Vegas-styled casino and entertainment city project at the Manila
Bay area. Media reports suggested that it could be considering consolidating its
position and relinquishing its operator status to become more of a regulator

The Bagong Nayong Pilipino-Manila Bay Integrated City

The Manila Bay Integrated City is a US$15b integrated resort, which will house
four casinos and other hotel and entertainment facilities. The entertainment city
spans 120ha of reclaimed land along Manila Bay in Paranaque City, a short
distance away from the international airport and central business district of
Manila. PAGCOR has awarded four provisional licences for the development of
the four casinos. Each licence holder will need to commit at least US$1b in
developing the resort over a 10-year period and spend at least US$400m in the
first two-and-a-half years. Along with the casinos, the Manila Bay area will also
boast a host of other entertainment facilities to boost tourism at the same time.

First-mover advantage
Travellers is one of the provisional licence holders for one of the four new
casinos. The others are Universal Entertainment Corp, Belle Corp and Bloombury
Investments. Having already set up RWM, Travellers has the first-mover
advantage in operating integrated resorts in the Philippines. Additionally,
management has revealed that Travellers is well ahead of the other licence
holders in terms of construction progress at the new integrated city.

Genting Hong Kong 14 March 2011

Figure 12: Provisional licence holders of Manila Bay Integrated City project
Licence holder Operating partners Name of project Plans
Travellers International 50%-owned by GenHK and Resorts World Bayshore City Theme park
50% by Alliance Global Hotels
Universal Entertainment Known for its ties with Okada Resort Manila Bay Casino
Corp (previously known Wynn Resort in Las Vegas 2,000 hotel rooms
as Azure Corp), a and Macau 300 VIP suites
leading Japanese World’s largest oceanarium
gaming machine maker Theatres
Sports arena
Giant ferris wheel
Belle Corp Partly owned by SM The Belle Grande Manila Bay Target soft opening by 4Q11
Investment Corp, a 17,600-sq-m casino
Philippine shopping (~150 tables, 1,500 slots)
mall giant Hotels
Bloombury Investments Linked to businessman n.a. Target opening by 4Q12
Enrique K. Razon Jr (head 20,000-sq-m casino
of multinational port (~200 tables, 1,200 slots)
operator, Int’l Container Meeting and convention rooms
Terminal Services Inc.) who Health and wellness facilities
acquired controlling stake
from Jose CH Alvarez
Source: Company data, media reports

Figure 13: Bagong Nayong Pilipino-Manila Bay Integrated City

Note: The PAGCOR observation tower has been scrapped from the overall plan. Source: Web sources

Genting Hong Kong 14 March 2011

Boost for tourism, competition for casinos

When the entertainment city is operational, most likely in 2013-14, the casino
and tourism scene in the Philippines will receive a major boost. In turn, stiff
competition will erupt among the casinos and will affect not just those in Manila
itself but also around the region. RWM will inevitably face the heat.

Where will demand come from?

With new casinos sprouting up in Manila and around the region, the question is
“Where will demand come from?” Media industry sources estimated the size of
the Philippine gaming market to be about US$0.85b in 2010, while PwC estimated
it at US$0.61 in its report, Playing to Win. However, according to PAGCOR, there
is also a large market of illegal gaming whose size is estimated to be in the region
of US$1.7b. If other forms of gaming such as lottery and horse betting were
included, legal casino gaming would only make up 20% of the market. Based on
the PwC report, the Philippine casino gaming market is expected to grow at
18.9% CAGR between 2011 and 2014. We expect the demand to come from
1) the migration of illegal gaming to legal gaming, 2) the lure of a new attraction
and proximity to visitors from nearby region, and 3) increased tourist arrivals in
the region.

Potentially a US$3.0b-a-year business

RWM currently operates with 219 tables and 1,200 slots. By end-2011 it is
expected to have 300 tables and 1,600 slots. The opening of its malls and hotels
should contribute another 10-15% in revenue. RWM generated daily gross
gaming revenue of about US$1.6m in 2010 and this could rise to about US$1.8m
in 2011.

However, Travellers has the licence to operate up to 2,000 tables and 7,000 slots
in the two sites, RWM and Resorts World Bayshore City (RWB). When fully
utilised, it could be a US$3b-a-year business with EBITDA of US$1.2b. Applying an
EV/EBITDA multiple of 13x, the attributable value to GenHK from Travellers alone
could be as much as US$0.56 per share in this case. However, our actual forecasts
are more conservative, in which we value Travellers at US$0.25 per share (See
Page 22 and Figures 36 – 39).

Figure 14: Travellers’ potential

2010F 2011F 2013F Full potential Est. future value based on full potential
Resorts World Manila 325 456 571 1,501 EBITDA (US$ m) 1,230
Gaming Revenue (US$ m) 296 416 521 1,368 Applied EV/EBITDA (x) 13
Non-gaming Revenue (US$ m) 29 40 51 133 Assumed Debt to Equity 70%
Operating Stats
No. of Tables 219 300 300 1,000 Enterprise Value (US$ m) 15,984
No. of Slots 1,200 1,600 1,600 3,500 Less: Debt (US$ m) 6,582
Resorts World Bayshore City 0 0 212 1,573 Equity Value (US$ m) 9,403
Gaming Revenue (US$ m) 0 0 194 1,368 GenHK’s stake (50%) 4,701
Non-gaming Revenue (US$ m) 0 0 19 205 Diluted No. of Shares (m) 8,455
Operating Stats Equity value per share (US$) 0.56
No. of Tables 0 0 150 1,000
No. of Slots 0 0 1,200 3,500
Total Revenue (US$ m) 325 456 784 3,074
EBITDA (US$ m) 124 176 313 1,230
Source: Kim Eng estimates

Genting Hong Kong 14 March 2011

Foray into existing and new gaming markets

Taking on the big boys in Macau
A more ambitious but not unachievable goal is entry into Macau, one of the
largest and most lucrative gaming markets in the world. While the Genting Group
does not yet have a meaningful presence in this territory, where SJM, Wynn
Macau, Galaxy and Sands China are among the well-entrenched casino players,
GenHK has long set eyes on a slice of the pie. To be sure, it is no novice to the
field, given the extensive casino operations of its sister companies such as
Genting Singapore.

As early as 2007, GenHK took the first step into Macau by acquiring a 75%
interest in Macau Land Investment Corporation (MLIC) together with Genting
International. The reason: MLIC owns a piece of land, about 8,100 sq m in area,
which could be developed. However, new developments in the territory are
currently stalled as the government has announced a cap on the number of
gaming tables at 5,500 until 2013 and will not accept any new casino application
during this period.

Appeal of Sri Lanka

GenHK’s subscription for shares in the Union Bank of Colombo in 2010, resulting
in a 5.96% stake, appears to confound investors. Collectively, the Genting Group
holds an effective 26% stake in the bank. Market talk suggested that the move
was a stepping stone for GenHK to be ready for an opening up of legislations in
Sri Lanka for a new gaming market. The island appeals chiefly because it has
recently emerged from a civil war and, based on our conversations with
management, is reminiscent of Malaysia when it was an emerging economy many
years ago.

Taiwan gaming market en route to liberalisation

Taiwan is another potential market where legislation to liberalise casino gaming
is underway. GenHK has been operating cruises to Taiwan and we believe it is
part of its efforts to position itself for land-based operations if market
liberalisation were to materialise.

Genting Hong Kong 14 March 2011

2011 to be another strong year for cruise industry

Resilient and high growth
During the global financial crisis in 2008-09, the cruise industry displayed
remarkable resiliency, leading up to impressive gains in 2010 with 15m
passengers carried and an estimated occupancy rate of 103%. According to Cruise
Lines International Association (CLIA), 2011 is expected to be another year of
record-high cruise passengers with the industry outperforming other segments of
travel. Since 1980, passenger growth has averaged more than 7.5% pa. CLIA
expects 16m passengers for 2011, up 6.6% YoY, with 11.7m likely to come from
the North American market.

More value in cruises

Consumers are seeing increased value in cruises compared to other forms of
travel. Anecdotally, this optimism is reflected in improvements in booking
windows and higher yields reported by public cruise companies. In a survey
conducted by CLIA, agents anticipate an average booking window of 5.8 months
in 2011 as opposed to 4.5 months in 2009. The latest “Wave Season” is also well-
received with cruise lines reporting record booking trends. In the cruise industry,
the “Wave Season” refers to the period between January and March when the
highest volume of booking is seen and cruisers get the best discounts.

Figure 15: Cruise passenger growth, 1980-2010 Figure 16: Top 10 cruise destinations for 2011
1 Caribbean and Bahamas
2 Alaska
3 The Mediterranean
4 Europe
5 Hawaii
6 Panama Canal
7 European Rivers
8 Bermuda
9 Canada and New England
10 Mexico and US West Coast

Source: CLIA Source: CLIA

Biggest and most matured market

The North American market is the primary and biggest market for cruise
activities, accounting for more than 70% of cruise passengers in the world.
Europe is next and is growing rapidly. NCL commands a market share of about
9.8% in the North American market. Asia is emerging as the next growth engine
with the increasing affluence of the middle-class. Noting the potential for growth
in Asia, the Royal Caribbean Cruise Line (RCL) is already penetrating the region.

Fortunes and plans of other North American cruise lines

Carnival Corporation (CCL) and RCL are the largest North American cruise lines
with 22 ships each. Riding on the same macro factors, the duo have delivered
good performances and like many major cruise lines, they plan to expand their
capacities with new ship additions in the next few years, confirming the general
expectation in the cruise industry of greater demand ahead. NCL, too, is following
suit with two new ships scheduled for delivery in 2013 and 2014.

Genting Hong Kong 14 March 2011

Figure 17: Top 10 largest North American cruise lines and planned expansion
Planned berths
Cruise line
li Current berths Ships up to 2012 % addition
Royal Caribbean Cruise 61,888 22 0 0%
Carnival Corporation 54,602 22 7,342 13%
Princess 37,220 17 -710 -2%
Costa 30,785 15 6,024 20%
Norwegian Cruise Line* 26,346 11 0 0%
MSC 24,358 11 5,100 21%
Holland 23,493 15 0 0%
Celebrity 20,068 10 3,830 19%
Cunard 6,712 3 0 0%
Hurtigruten 5,923 13 0 0%
*NCL has plans to add 4,000 berths each in 2013 and 2014. Source: CLIA

Figure 18: 2011 North American cruise market share Figure 19: 2011 rest-of-world
world cruise
cruis market share
Disney Other Louis Other
3.3% 4.8%
NCL 1.7% 6.4%
Disney 7.7%
MSC 1.9%
9.8% MSC

Royal Carnival Royal Carnival

Carribean 52.9% Carribean 51.6%
27.6% 25.6%

Source: Cruise Market Watch Source: Cruise Market Watch

Genting Hong Kong 14 March 2011

NCL – a turnaround story

Poor historical performance with seasonal earnings
NCL was acquired by GenHK in 2000 and historically, its profitability had not been
smooth sailing. To be fair, the cruise industry suffered from the effects of the
financial crisis in 2008. Nevertheless, in comparison to other major cruise line
such as RCL and CCL during those periods, NCL does seem to pale in comparison
with lower net yields. However, NCL has shown positive signs of a turnaround
with its restructuring efforts.

Figure 20: Seasonality in NCL’s revenue and earnings

US$ m
-100 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10

Revenue EBITDA Net Income

Source: Company data

Restructuring makes a difference

Formerly a 100% subsidiary of GenHK, NCL became an associate company in 2008
when private equity players Apollo Management and TPG Capital acquired a
combined 50% stake in the cruise line for US$1b. It was a time when the cruise
line was struggling amid the global recession. NCL reported losses of US$227.0m
in 2007 and US$211.8m in 2008. In 2009, signs of a turnaround emerged as it
turned in its first positive net profit of US$67.2m since 2005. Post-recession
rebound aside, we believe a far more important reason for the turnaround was
the restructuring and repositioning of the company, which led to improved ticket
pricing and lower net cruise cost (eg, disposal of older ships, reflagging US-
flagged ships and cutting unprofitable routes and operations).

Youngest fleet among major cruise liners

NCL’s fleet of 11 ships has an average age of about six years, making it the
youngest fleet among major North American cruise lines. This was achieved
through the disposal of several older ships (Norwegian Dream, Norwegian
Majesty and Marco Polo). NCL also ploughed US$1.3b into buying new ships and
took delivery of the Norwegian Epic, its largest passenger ship with 4,100 berths,
in June 2010. It also has two other 143,500 GT with 4,000 passenger capacity
ships on order from Meyer Werft GmBH of Germany, pending delivery in 2013
and 2014. The total contract price for these two vessels is estimated to be
US$1.7b. Financing has been secured from a syndicate of banks for export credit

Genting Hong Kong 14 March 2011

Rise in net yield reflects improving efficiency

NCL has reported an increase in net yield along with other cruise operators as
they ride on improved demand. This development is in stark contrast to the
substantial plunge in net yield in 2009, an industry-wide phenomenon at the
time. However, a more important observation is that NCL is closing the gap in net
yield between itself and both CCL and RCL. We regard this as evidence of a real
improvement in its operating efficiency.

Figure 21: Net yields – NCL vs CCL vs RCL

NCL closing the gap
190 in net yields with






2004 2005 2006 2007 2008 2009 2010

Source: Company data

New cruise ships add to capacity

Following the success and popularity of its newest ship, Norwegian Epic, NCL is
hoping to replicate this success with two other similar ships. When they come
into service in 2013 and 2014, the new ships would boost existing capacity by
approximately 30% and possibly increase revenue by about 47% vis-à-vis FY10.

Figure 22: Potential from addition of new ships

FY10 With addition of new ships
Berths 26,352 34,352
Passenger Cruise Days 9,559,049 13,603,392
Capacity Days 8,790,980 12,366,720
Occupancy 109% 110%

Revenue (US$ m) 2,012 2,966

Passenger ticket 1,393 2,054
Onboard and Other 620 911

EBITDA (US$ m) 400.4 691.0

EBITDA Margin 19.9% 23.3%
Source: Company data, Kim Eng estimates

Genting Hong Kong 14 March 2011

Unlocking value through public listing…

NCL announced last October its plans to go public in the US in 2011 with a
relatively small IPO offering of US$250m, according to its filings with the US
Securities and Exchange Commission. We believe the public listing will serve to
unlock more value in NCL through greater earnings visibility and business

…and a chance to cash out

At the same time, we believe that a potential listing offers a chance for Apollo,
TPG Capital and GenHK to cash out on their investments. This makes natural
sense for Apollo and TPG Capital who are private equity players. For GenHK, we
believe that it may decide to do so in order to concentrate on expanding its land-
based gaming business. Although we expect improving profitability from NCL, it is
after all a relatively volatile business, judging from its historical performance. To
recap, GenHK sold 50% of its stake for US$1b to Apollo and TPG for a gain of
US$80.8m. We believe that if it decides to cash out, this would be a minimum
level that it would sell its remaining stake at.

Genting Hong Kong 14 March 2011

The Caribbean of the East

Gaming and cruising go hand in hand
Unlike the American cruise market in which cruises are regarded as a form of
holiday and an alternative to air travel, many Asians book a cruise with gaming in
mind. This is reflected in the proportion of gaming revenue generated by Star
Cruises in comparison to NCL. Unlike NCL, the bulk of Star Cruises’ total revenue
comes from gaming and not from the sale of passenger tickets. However, this
trend could slowly be changing as cruise lines roll out more interesting itineraries
to develop Asia into a major cruise hub.

Figure 23: Snapshot of Star Cruises’ and NCL’s FY09 revenue breakdown
Star Cruises US$ m NCL US$ m
Total Revenue 377 100% Total Revenue 1,855 100%
Passenger ticket revenue 95 25% Passenger ticket 1,276 69%
Onboard and other revenues 32 8% Onboard and Other 579 31%
Gaming revenue 219 58%
Charter hire and others 31 8%
Source: Company data

Changing the Asian mindset

Asia has an all-year-round sailing condition similar to the Caribbean, as well as a
variety of ports and destinations. As such, it seems to have all the makings of a
major cruise hub. The key lies in changing the mindset of its people to view
cruising as a vacation alternative, separate from gaming. This has to be done by
introducing more innovative itineraries and exciting activities, as well as cruise
destinations. Happily, the change is taking place – slowly but surely. Structurally,
we believe the Asian cruise market has the wherewithal to grow. There are over
3.5b people in the Asia Pacific and the cruise penetration rate is only about 0.05%
compared to 3.2% in North America and 2.4% in the UK.

Possibly 7m passengers a year by 2015

At the inaugural meeting of the Asia Cruise Terminal Association (ACTA) last
December, Mr Soo Kok Leng, the chairman of the Singapore Cruise Centre,
estimated that Asia’s cruise industry may see up to 7m passengers by 2015. This
was in contrast to a forecast of 2m passengers in a report by Britain’s Ocean
Shipping Consultants, published in 2005. According to industry players, the
number of passengers for the Asia Pacific may have already exceeded the 2m
mark. In 2009, passenger throughput hit 1.8m in Hong Kong and 1.1m in
Singapore, the highest in the Singapore terminal’s 19-year history. The forecast of
7m passengers thus seems like an achievable target.

Genting Hong Kong 14 March 2011

Figure 24: Cruise penetration rate Figure 25: Global cruise sales
Region Penetration rate Region 2009 value (US$ m) % market share

North America 3.2% North America 16,706 56.7%

Western Europe 5,997 20.3%
UK 2.4%
Asia Pacific 5,393 19.3%
Europe 1.0%
Latin America 907 3.1%
Canada 2.3%
Australia 277 0.9%
Australia 1.5% Eastern Europe 154 0.5%
New Zealand 2.7% Middle East/Africa 51 0.2%

Asia Pacific 0.05% Total 29,485 100%

Source: Media reports Source: Euromonitor International

Scramble to build/upgrade cruise terminals

Singapore, Hong Kong and Shanghai have each announced plans to upgrade their
existing terminals and/or build new ones as they vie to become Asia’s cruise hub.
Although this would heighten competition among port operators, it will also fuel
cruise activities in the region, auguring well for operators like Star Cruises.

In October 2009, Royal Caribbean Cruises, Silversea, Costa Cruises and Star
Cruises signed a Memorandum of Understanding (MOU) to promote the
development, professional growth and commercial success of the cruise industry
in Asia. And ACTA was formed recently with the aim to develop Asia into a cruise
hub. Investment in port infrastructure is important to facilitate the delivery of
services and to compete with the well-established North American and Caribbean

Figure 26: Bid to become Asia’s cruise hub

Recent cruise terminal activities
Singapore Upgraded International Cruise Terminal at SCC@Harbourfront.
Building new International Cruise Centre at Marina South to double cruise
berthing capacity by 2011.
Hong Kong Building new cruise terminal at the old Kai Tak Airport by 2013.
Shanghai Built second cruise terminal at Paotai Bay in Baoshan District’s Wusong Port.
Building China’s largest cruise terminal at the mouth of Huangpu River.
Korea Incheon to build new international cruise terminal by 2014.
Vietnam Plans to build new ferry and cruise terminal in Port of Danang.
Source: Media reports

Genting Hong Kong 14 March 2011

A revamped Star Cruises

Flexibility in asset deployment
Star Cruises has been proactive in redeploying its assets, stepping up marketing
efforts and introducing changes to its itineraries in a bid to maintain its industry
positioning. SuperStar Virgo, the largest and most extravagant Asian cruise ship,
was redeployed to Hong Kong in 2008 with marketing efforts in China and India.
This brought fresh niche markets, such as meetings and incentive groups
markets, to cruise on SuperStar Virgo. The ship has been redeployed and
currently serves the Singapore and Malaysia routes, and we understand that
SuperStar Pisces might be moving to Hong Kong while SuperStar Aquarius would
be moved to be based in Taiwan. Cost-cutting measures were also taken, which
yielded positive results as reflected in the improved EBITDA margins.

Penetrating new markets

In August 2009, Star Cruises became the first cruise line to bring mainland
Chinese tourists to Taiwan on SuperStar Aquarius. The trip was met with such
success that Star Cruises has since increased the frequency of such cruises. This
opens up a new and enormous market in the Greater China region.

Getting it right in Asia

Star Cruises has been in the Asian market for a considerable time and its
knowledge of it surpasses that of many of its newer competitors. If anything, the
cruise line has got one thing right and that is the Asian cruise market is more
about gaming than cruising, at least for the next few years. Many North American
cruise lines that see opportunities in the Asian market have failed to grasp this
fact and continue to operate cruises similar to the ones back in their home
country. Nevertheless, we believe they are making inroads and it is possible they
may change the mindset of Asians through exposure. But this will take a while. In
the meantime, they could be bleeding losses.

Putting assets to better use

Of the eight ships Star Cruises owns, only four are effectively operating at this
juncture as the company has reorganised its assets to better utilise them. As for
the rest, one is on charter to NCL while the other three – Megastar Taurus,
Megastar Aries and Norwegian Dream – are being laid up and could be sold. We
believe the total sale value would be in the region of US$500-600m. Star Cruises
is constantly on the lookout for more lucrative and efficient routes for its
operating ships, and seeking the best way to use them to generate the highest
revenue for the company.

Genting Hong Kong 14 March 2011

Not-so-straightforward comparison
Comparing the historical financials of GenHK is no straightforward task. This is
because prior to FY08, NCL was a subsidiary and its financials were consolidated
with Star Cruises’. However, NCL ceased to be a subsidiary from FY08 and its
results have subsequently been reported at the associate level. In addition, due
to the nature of the cruise business, depreciation charges are high and EBITDA is
therefore an important measure to examine.

Profitability masked at net profit level

GenHK’s EBITDA has been positive but profitability may have been masked by the
net losses reported at the net profit level. This is due to the heavy depreciation
and interest charges. From FY08, contributions from NCL and Travellers were
reflected at the associate and JV lines, which would contribute to net profit but

Adjusted EBITDA a better gauge

The topline and EBITDA thus mainly reflect revenue and profitability from Star
Cruises’ business. Going forward, net profit could overtake EBITDA as
contributions from NCL and Travellers increase. We therefore introduce adjusted
EBITDA figures in which 50% each of NCL’s and Travellers’ EBITDA are added to
GenHK’s EBITDA (Figure 29).

Figure 27: EBITDA vs net profit Figure 28: EBITDA margin vs net profit margin
US$ m 70%
300 50%

200 40%
0 10%

FY05 FY06 FY07 FY08 FY09 FY10F FY11F FY12F FY13F 0%

-10% FY05 FY06 FY07 FY08 FY09 FY10F FY11F FY12F FY13F
-200 -20%
EBITDA Net Profit EBITDA Margin Net Margin

Source: Company data, Kim Eng estimates Source: Company data, Kim Eng estimates

Figure 29: Adjusted EBITDA

(US$ m) FY08 FY09 FY10F FY11F FY12F FY13F
EBITDA (US$ m) 50.9 83.8 108.0 123.5 128.6 139.7
Adjusted EBITDA (US$ m) 100.6 240.8 370.0 461.5 492.4 591.7
Adjusted EV/EBITDA (x) 48.7 20.3 13.2 10.6 10.0 8.3
Source: Company data, Kim Eng estimates

Genting Hong Kong 14 March 2011

Balance sheet strengthening

GenHK’s current balance sheet is very different from what it was like three years
ago. Following a series of restructuring, it has been tidied up considerably. For
example, in FY07, the current ratio was 0.3x and net gearing was 1.8x. In 1H10,
the current ratio stood at 1.7x and net gearing was 0.15x. The steps taken to
strengthen the balance sheet included the following:
 Sale of 50% of NCL for US$1.05b. This resulted in the deconsolidation of NCL’s
balance sheet, effectively taking US$3.2b in debt off GenHK’s balance sheet.
 Sale of ships (Gemini, Majesty and Queen) in 2008, raising cash of US$173m.
 Issue of US$150m worth of convertible bonds.
 Sale of Port Klang Cruise Center and Shanghai properties for US$56m.

Cash flow turning positive

GenHK has been generating positive operating cash flows from its businesses.
Investing outflows were rather significant in FY07 and FY08 due to the
acquisitions and investments. We expect the positive operating cash flows to
continue and net cash flow to turn positive with no major capex at the group
level other than normal maintenance capex. However, at the associate level, NCL
has a US$1.7b commitment for its two new ships, in which it has secured
financing. Travellers also has a US$1.3b commitment for the development of
casinos at the two sites in Manila.

Figure 30: Decreasing gearing Figure 31: Improving net cash flows
2.0 US$ m
1.8 Operating Cashflow
1.6 600 Investing Cashflow
1.4 400 Financing Cashflow
Net Cashflow
0.8 0

0.6 -200 FY05 FY06 FY07 FY08 FY09 FY10F FY11F FY12F FY13F
0.0 -600

FY05 FY06 FY07 FY08 FY09 FY10F FY11F FY12F FY13F -800

Source: Company data, Kim Eng estimates Source: Company data, Kim Eng estimates

Dilutive convertible loans

GenHK issued US$150m worth of convertible bonds on 20 August 2009. This was
a step to recapitalise the company amid the global financial crisis. The proceeds
raised were used to repay the group’s borrowings as well as deployed for general
working purposes. The conversion feature, together with the low conversion
price relative to the stock price, indicates possible dilution to the stock. We are
therefore treating the convertible bonds as equity.

Figure 32: Convertible bonds

Principal amt US$150m Conversion features Right of conversion to ordinary
Due August 2016 shares at initial conversion price
Interest 7.5% paid of HK$1.13 (US$0.15)
semi-annually No. of conversion shares 1,028,761,061
Source: Company data

Genting Hong Kong 14 March 2011

Revenue and profit forecasts

We expect both Star Cruises and NCL to experience higher occupancy rates,
driven by the positive industry dynamics discussed earlier. Ticket prices, too, look
set to trend higher. This combination of factors should fuel revenue growth.

NCL’s revenue would also increase from a capacity boost when its new cruise
ships come into operation in 2013 and 2014. Margin expansion should follow
with EBITDA margins likely to post an improvement to 22-23% eventually. Star
Cruises’ margins would also be enhanced as it redeploys its assets to maximise
utilisation and garner more gaming revenue.

As for Travellers, we believe RWM would continue to deliver positive results with
EBITDA margins at close to 40% level. The action will get bigger when RWB starts
operation in 2013-14. However, we have been conservative in our forecasts in
deriving our current valuation of US$0.25 per share for Travellers. Our forecasts
assume 450 tables and 2,800 slots by 2013, growing to 1,000 tables and 4,000
slots by 2017 which is slightly more than half of its full potential. We also
performed a scenario analysis based on different assumptions in the number of
tables and slots and its effects on our DCF value of Travellers (Figure 39). Our
base case key assumptions and forecasts are presented in Figure 33.

Genting Hong Kong 14 March 2011

Figure 33: Key model forecasts and assumptions

FY2008 FY2009 FY2010F FY2011F FY2012F FY2013F
Star Cruises
Operating Stats
Passenger Cruise Days ('000) 2,106 1,504 1,469 1,573 1,606 1,721
Capacity Days ('000) 2,492 1,654 1,686 1,691 1,691 1,812
Occupancy Rate 85% 91% 87% 93% 95% 95%
Revenue (US$ m) 436.6 376.8 392.6 424.9 434.1 467.3
Passenger ticket revenue 152.7 95.1 108.0 118.9 120.6 131.8
Onboard and other revenues 52.6 31.7 30.7 33.0 33.7 36.1
Gaming revenue 217.3 218.7 224.8 243.0 249.8 269.4
Charter hire and others 14.0 31.3 29.1 30.0 30.0 30.0
Operating Expenses excl Dep & Amort (US$ m) 312.0 223.3 223.4 239.8 242.6 259.9
Ship Operating Expenses 247.7 194.6 182.2 195.0 197.6 211.7
Fuel Cost 64.3 28.6 41.1 44.8 45.0 48.2
EBITDA (US$ m) 50.9 83.8 108.0 123.5 128.6 139.7
EBITDA Margin (%) 11.5% 22.2% 27.5% 29.1% 29.6% 29.9%
Norwegian Cruise Line
Operating Stats
Passenger Cruise Days ('000) 9,504 9,243 9,559 10,383 10,478 11,665
Capacity Days ('000) 8,901 8,451 8,791 9,439 9,439 10,555
Occupancy Rate 107% 109% 109% 110% 111% 111%
Revenue (US$ m) 2,106.4 1,855.2 2,012.1 2,221.7 2,252.1 2,537.3
Passenger ticket 1,501.6 1,275.8 1,392.5 1,533.4 1,557.7 1,764.7
Onboard and Other 604.8 579.4 619.6 688.3 694.4 772.6
Cruise Op Expenses (US$ m) 1,578.5 1,289.5 1,347.3 1,435.5 1,452.5 1,615.3
Comm, transport & others 341.9 311.3 379.7 367.5 370.8 414.1
Onboard & others 182.8 158.3 153.1 169.1 170.6 190.1
Payroll & related 377.2 318.2 265.4 298.8 305.4 336.9
Fuel 258.3 162.7 207.2 228.4 230.5 256.6
Food 126.7 118.9 114.1 124.6 125.7 140.0
Other 291.5 220.1 227.8 247.1 249.4 277.6
EBITDA (US$ m) 99.3 324.1 400.4 500.3 509.6 590.6
EBITDA Margin (%) 4.7% 17.5% 19.9% 22.5% 22.6% 23.3%
Travellers International
Operating Stats
Resorts World Manila estimated
Table - Daily Win (US$) 0 600 2,800 3,200 3,500 3,700
Slot - Daily Win (US$) 0 30 185 200 220 220
No. of Tables 0 109 219 300 300 300
No. of Slots 0 872 1,200 1,600 1,600 1,600
Resorts World Bayshore City
Table - Daily Win (US$) 0 0 0 0 0 2,800
Slot - Daily Win (US$) 0 0 0 0 0 150
No. of Tables 0 0 0 0 0 150
No. of Slots 0 0 0 0 0 1,200
Total Revenue (US$ m) 0.0 8.6 325.5 455.8 544.8 783.7
Gaming Revenue 0.0 8.2 296.5 415.5 496.6 714.4
Hotel, food Beverage & Others 0.0 0.4 29.0 40.3 48.2 69.3
EBITDA (US$ m) 0 -10.0 123.7 175.7 217.9 313.5
EBITDA Margin (%) 0.0% -115.7% 38.0% 38.6% 40.0% 40.0%
Source: Company data, Kim Eng estimates, Note: SG&A expenses to derive EBITDA are not shown in table

Genting Hong Kong 14 March 2011

Valuation and recommendation

We initiate coverage on GenHK with a BUY recommendation. The company is in
the early phase of a transformation into a leading land- and sea-based gaming
and entertainment enterprise as it morphs from a cruise-oriented business to a
gaming-focused entity. We believe there is potential for further upside even
though its share price has more than doubled over the past nine months.

In our view, positive developments that will drive the value of the stock include:
1. Growing involvement in the gaming business through RWM and the
upcoming RWB.
2. Improving business of NCL, with capacity expansion underway.
3. Impending listing of NCL.
4. Growth of the Asian cruise industry.
5. Successful restructuring of GenHK with improved balance sheet strength.

We value GenHK using a sum-of-the-parts (SOTP) methodology.

We value Star Cruises, its Asian cruise business, based on 13x FY11F EV/EBITDA,
which is a premium to peer cruise lines. We believe this is justified given the high
level of gaming content in its business vis-à-vis its counterparts.

For NCL, we peg our valuation to its peer and value it at 10x FY11F EV/EBITDA.
Capacity expansion from the addition of two new ships will increase its EBITDA
substantially, although this will not be visible until 2013 and 2014 when the ships
become operational.

As for Travellers, we use the discounted cash flow (DCF) methodology as we

believe it is more reflective of the cash-generating nature of the company’s
casino and entertainment businesses, as well as the future cash flow as the
casino business grows and new entertainment facilities come onboard. Using our
base case assumptions, our DCF model values GenHK’s share of Travellers at
US$0.25 per share. We also perform a scenario analysis of the outcomes based
on different sets of assumptions on the number of tables and slots as presented
in Figure 39.

Our SOTP valuation model yields a fair value of US$0.54 per share using our base
case assumption, translating to an upside potential of 37.3% from its current
share price. The implied adjusted FY11F EV/EBITDA is 13.0x, which is
undemanding in our opinion, given the growth potential of GenHK. We initiate
coverage with a BUY recommendation.

Genting Hong Kong 14 March 2011

Figure 34: SOTP valuation

FY11F Valuation Enterprise Net Equity Attributable Per share
EBITDA basis value debt/(cash) value Stake value value
(US$ m) (US$ m) (US$ m) (US$ m) (%) (US$ m) (US$) Remarks
Star Cruises Premium to
124 1,606 291 1,314 100% 1,314 0.16 peers due to
gaming nature
NCL 10x Pegged to
500 5,003 3,145 1,858 50% 929 0.11
Travellers See Fig. 39 for
176 DCF 4,242 50% 2,121 0.25
other scenarios
Others n.a. Book Value 221 100% 221 0.03
RNAV (US$ m) 4,586 0.54

Weighted Avg No. of Shares (m) 7,426

Convertible Bonds (m) – see Figure 32 1,029
Fully Diluted Weighted Avg. No. of Shares (m) 8,455

RNAV per Share (US$) 0.542

Current Share Price 0.395
% upside/(downside) 37.3
Source: Kim Eng estimates

Figure 35: Peer comparison

Mkt Cap Last EV/EBITDA (x) PER (x) P/B (x) Debt/Equity
Curr (b) Price 2011F 2012F 2011F 2012F (%)
Cruise Lines
Carnival Corp USD 33.6 40.45 8.9 10.0 13.8 11.5 1.4 40.7
Royal Caribbean Cruises Ltd USD 9.4 43.39 9.4 10.2 12.9 10.7 1.2 115.2
Average 9.1 10.1 13.4 11.1 1.3 77.9
Regional Gaming Peers
Galaxy Entertainment Group Ltd HKD 46.4 11.32 14.4 23.5 37.5 26.6 5.1 69.4
SJM Holdings Ltd HKD 70.1 12.80 11.2 13.9 20.5 15.7 6.6 92.7
Sands China Ltd HKD 137.0 17.02 10.1 13.7 21.4 15.2 4.0 71.8
Wynn Macau Ltd HKD 108.9 21.00 16.1 20.0 26.2 20.8 28.9 212.6
Genting Singapore PLC SGD 23.9 1.96 11.2 12.9 21.3 17.8 4.7 68.8
Average 13.7 16.9 27.8 20.6 6.9 142.5
World Gaming Peers
Las Vegas Sands Corp USD 29.0 39.89 10.3 12.5 22.3 17.9 4.4 120.2
MGM Resorts International USD 6.3 12.87 11.8 13.7 - - 2.1 401.8
Wynn Resorts Ltd USD 15.3 123.09 12.3 13.8 39.3 30.3 6.9 137.3
Average 11.5 13.4 30.8 24.1 4.4 219.8

Genting Hong Kong Ltd USD 3.1 0.395 27.8 31.4 30.4 17.2 1.6 31.0
Source: Bloomberg

Genting Hong Kong 14 March 2011

Figure 36: DCF valuation for Travellers

(US$ m) FY11F FY12F FY13F FY14F FY15F FY16F FY17F FY18F FY19F FY20F
FCF 5 42 126 279 331 443 562 606 626 645
PV of FCF 4 35 98 199 217 268 312 309 294 278
Terminal Value 4,974
PV of Terminal Value 2,147
Firm Value 4,162
Less: Net Debt/(Cash) -80
Equity Value 4,242

Key Assumptions
Discount Rate 8.8%
Terminal Growth Rate 3.0%
Source: Kim Eng estimates

Figure 37: Sensitivity analysis of Travellers’ value attributable to GenHK

Discount Rate
0.25 7.0% 8.0% 8.8% 10.0% 11.0% 12.0%
0% 0.28 0.23 0.20 0.17 0.15 0.14
1% 0.30 0.25 0.22 0.18 0.16 0.14
2% 0.34 0.27 0.23 0.19 0.16 0.14
Terminal Growth Rate
3% 0.39 0.30 0.25 0.20 0.17 0.15
4% 0.48 0.34 0.28 0.21 0.18 0.15
5% 0.66 0.42 0.32 0.23 0.19 0.16
Source: Kim Eng estimates

Figure 38: Sensitivity analysis of GenHK’s target price

Discount Rate
0.25 7.0% 8.0% 8.8% 10.0% 11.0% 12.0%
0% 0.57 0.52 0.50 0.46 0.44 0.43
1% 0.60 0.54 0.51 0.47 0.45 0.43
2% 0.63 0.56 0.52 0.48 0.45 0.43
Terminal Growth Rate
3% 0.68 0.59 0.54 0.49 0.46 0.44
4% 0.77 0.63 0.57 0.50 0.47 0.45
5% 0.95 0.71 0.61 0.53 0.48 0.45
Source: Kim Eng estimates

Figure 39: Scenario analysis of Travellers’ DCF value

GenHK’s DCF Value
Target Attributable Scenario
Price to GenHK Analysis FY11F FY12F FY13F FY14F FY15F FY16F FY17F FY18F FY19F FY20F
Base Case
US$0.54 US$0.25 No. of Tables 300 300 450 500 550 800 1,000 1,000 1,000 1,000
No. of Slots 1,600 1,600 2,800 3,000 3,200 3,600 4,000 4,000 4,000 4,000
Best Case
US$0.74 US$0.45 No. of Tables 300 300 450 650 950 1,150 1,400 1,600 1,800 2,000
No. of Slots 1,600 1,600 2,800 3,600 4,000 4,400 4,800 5,600 6,400 7,000
Worst Case
US$0.46 US$0.17 No. of Tables 300 300 450 500 550 575 600 600 600 600
No. of Slots 1,600 1,600 2,800 3,000 3,200 3,200 3,200 3,200 3,200 3,200
Source: Kim Eng estimates

Genting Hong Kong 14 March 2011

Change in consumer travel preferences and patterns
The appeal of cruises lies in the ability of the cruise operator to innovate its
products to suit consumer preferences. If other more attractive travel
alternatives were to emerge, GenHK’s cruise business could be affected. That
said, travel preferences also hinge on individual tastes and perception and these
factors are not controllable because travel patterns are constantly evolving.

Increase in oil prices

Fuel costs make up at least 10% of cruise operating expenses. Increase in oil
prices will drive operating costs up, but the hike may not be passed on easily to
consumers without the risk of losing businesses.

Weather, seasonality and political events

The cruise business is dependent on weather and sea conditions. During
particular seasons and/or under adverse weather conditions, it will not be
possible to operate the business as per normal conditions. This could affect sales
volume. Events that affect tourism, such as terrorism, may also deal a blow to the
cruise industry.

Competition from new casinos

The casino scene in Asia has been heating up with the opening of several new
casinos. This could dilute the market for each operator. Moreover, land-based
casinos may be competing for the same pool of customers that frequent the
cruise-based casino operations.

Government policies
Casino operations are heavily regulated. Being able to secure a licence is as
important as understanding the tax regime under which the casino will operate.
Regulation on casino operations, for example, junket operations, may also have
an impact on earnings. There is also a need to address and tackle social problems
that may arise from gambling addiction.

Genting Hong Kong 14 March 2011

Company profile
Genting Hong Kong (GenHK) is in the leisure, entertainment and hospitality
business. It was incorporated in September 1993 and was formerly known as Star
Cruises Limited. It operates luxury cruises and cruise-related activities under the
Star Cruises and Norwegian Cruise Line (NCL) brands. The company owns an
operating fleet of 15 ships, cruising to over 200 destinations worldwide. Star
Cruises and NCL combined stand as the third-largest cruise operator in the world.
In addition, GenHK recently ventured into land-based activities through Resorts
World Manila (RWM).

GenHK is listed on the Hong Kong Stock Exchange and is traded on the Quotation
and Execution System for Trading of the Singapore Exchange.

Star Cruises
A 100%-owned subsidiary, Star Cruises owns a fleet of eight ships. Three are laid-
up and could be sold, while a fourth is on charter to NCL. The rest are operating
ships. Star Cruises offers cruise itineraries to various regions in the Asia Pacific,
including Singapore, Malaysia, Hong Kong, Taiwan and Thailand. Its cruises have a
strong tinge of gaming, which generates almost 60% of its revenue. In
comparison, a normal cruise operator like NCL, its associate, derives 70% of its
revenue from passenger ticket sales.

Figure 40: Star Cruises’ fleet and current operating routes

Gross Tonnes Berths Routes and destinations
SuperStar Virgo 76,800 1,804 Singapore, Malaysia
SuperStar Libra 42,276 1,472 Penang, Phuket, Krabi
SuperStar Aquarius 51,039 1,529 Hong Kong, moving to Taiwan
Star Pisces 40,053 1,168 Penang, moving to Hong Kong
MegaStar Aries 3,341 66 Laid-up
MegaStar Taurus 3,341 66 Laid-up
Norwegian Dream 50,764 1,747 Laid-up
Norwegian Sky 77,104 2,002 On charter to NCL
344,718 9,854
Source: Company data

Norwegian Cruise Line

NCL was a 100%-owned subsidiary of GenHK before private equity players Apollo
Management and TPG Capital together acquired a 50% stake for US$1b in 2008.
Since then, it has been accounted for as an associate in GenHK’s balance sheet.
NCL is a leading North American cruise operator with cruises to the US and
Europe. It operates 11 cruise ships and has one of the youngest fleets in the
North American cruise market. Another two cruise ships are on order for delivery
in 2013 and 2014. Each has a berth capacity of 4,000 and gross tonnage of

Genting Hong Kong 14 March 2011

Figure 41: NCL’s fleet and current operating routes

GRT Berths Routes
Norwegian Epic 155,873 4,100 Caribbean & Europe
Norwegian Dawn 92,250 2,244 Bermuda, Caribbean, Canada & New England
Norwegian Gem 93,530 2,394 Bahamas, Bermuda & Caribbean
Norwegian Jade 93,558 2,402 Europe
Norwegian Jewel 93,502 2,376 Bahamas & Caribbean
Norwegian Pearl 93,530 2,394 Alaska, Caribbean, Pacific Coastal & Panama Canal
Norwegian Sky 77,104 2,002 Bahamas
Norwegian Spirit 75,338 2,018 Caribbean & Bermuda
Norwegian Star 91,740 2,348 Mexico, Pacific Coastal & Panama Canal
Norwegian Sun 78,309 1,936 Bahamas, Caribbean & Europe
Pride of America 80,439 2,138 Hawaii
1,025,173 26,352
Source: Company data

Resorts World Manila

GenHK also owns a 50% stake in Travellers International Hotel Group Inc through
a joint partnership with Alliance Global Group. Travellers develops and operates
Resorts World Manila (RWM) in the Philippines, the country’s first integrated
leisure and entertainment complex. Other than a world-class casino, RWM
features several renowned international and luxury hotels, a shopping mall and
movie theatres. It had a soft launch on 28 August 2009. Travellers has been
awarded a gaming licence in the Philippines to operate up to 2,000 tables and
7,000 slots in two sites in Manila. It is currently building a second integrated
entertainment city with casino facilities at the Bagong Nayong Pilipino-Manila Bay
Integrated City.

Figure 42: Location of Resorts World Manila

Source: RWM website

Genting Hong Kong 14 March 2011

Figure 43: Genting Group’s shareholding structure

Tan Sri Lim Kok Thay & Family


Genting Berhad

Genting Malaysia Genting Singapore Genting Plantations

(48.6%) (51.7%) (54.6%)

Genting UK Resorts World at Sentosa Pte Ltd

(100%) (100%)

Genting Hong Kong


Source: Company data

Figure 44: Genting Hong Kong’s shareholding structure

Genting Hong Kong

Leisure, hospitality, entertainment

Cruise Others
& gaming

Star Cruises My Inn (Hangzhou) Hotel Co Ltd Suzhou Trip-X Info Tech Co Ltd
(100%) (100%) (100%)

NCL Corporation Suzhou My Inn Hotel Co Ltd Genting Star (Shanghai) Edu
(50%) (100%) Information Consulting Co (100%)

Macau Land Investment Corp


Travellers International Hotel

Group Inc (50%)

Source: Company data

Genting Hong Kong 14 March 2011

Key management
Tan Sri Lim Kok Thay, Chairman and Chief Executive Officer
Tan Sri Lim has been with GenHK since the company was formed in 1993. He is
also the Executive Chairman of Genting Singapore, Chairman and Chief Executive
of Genting Berhad, Chairman and Chief Executive of Genting Malaysia and a
director and Chief Executive of Genting Plantations. He and his family own about
39.6% of the Genting Group and also 60.4% in GenHK. Tan Sri Lim was involved in
the development of many of the resorts under the Genting Group. He holds a
Bachelor of Science (Civil Engineering) degree from the University of London and
also attended the Program for Management Development at the Harvard
Graduate School of Business.

Mr David Chua Ming Huat, President

Mr Chua has been the President of GenHK since May 2007 and was the chief
operating officer of Genting Berhad prior to his appointment as President. He has
also held several key management positions in international securities companies
in Malaysia, Singapore and Hong Kong; hence, his extensive knowledge of
securities, futures, derivatives trading, asset management and corporate finance.
He holds a Bachelor of Arts degree in Political Science and Economics from the
Carleton University, Ottawa, Canada.

Mr Blondel So King Tak, Chief Operating Officer

Mr So was the chief financial officer of GenHK until his appointment as Chief
Operating Officer in October 2009. He has more than 23 years of experience in
the financial sector and has held a number of positions in multinational
corporations and listed companies in Hong Kong. He has a bachelor’s degree in
mathematics from Simon Fraser University, Canada, a post-graduate certificate in
professional accounting from City University of Hong Kong and a master’s degree
in corporate finance from Hong Kong Polytechnic University.

Mr William Ng Ko Seng, Chief Operating Officer – Cruise

Mr Ng was with Genting Singapore from 1987 before joining GenHK in 1994. He
had also been in public practice with international accounting firms in the UK and
Malaysia. He is a Fellow of the Institute of Chartered Accountants in England and
Wales, a Fellow of the Hong Kong Institute of Certified Public Accountants and an
associate of both the Institute of Chartered Accountants in Australia and the
Malaysian Institute of Accountants. Mr Ng also holds a Master of Arts degree in IT
from Macquarie University in Sydney, Australia.

Ms Tan Wei Tse, Chief Financial Officer

Ms Tan was the Senior VP of Corporate Finance before she was appointed as
Chief Financial Officer. She held various positions in financial advisory, corporate
finance, investment banking and asset management in Hong Kong and Malaysia.
She graduated with a degree in accounting from the University of Hull, the UK,
and is a member of the Institute of Chartered Accountants in England and Wales.

Genting Hong Kong 14 March 2011

Profit and loss Cash flow

YE Dec (US$m) 2008 2009 2010F 2011F 2012F YE Dec (US$m) 2008 2009 2010F 2011F 2012F
Sales 441.0 376.8 392.6 424.9 434.1 Operating cash flow 6.7 25.5 112.4 95.5 103.9
Cost of goods sold (372.6) (291.2) (288.2) (302.9) (302.8) Net profit (101.1) (28.3) 75.5 172.3 200.2
Gross Profit 68.4 85.6 104.4 122.0 131.3 Depreciation & amortisation 67.1 78.5 68.9 67.3 64.3
Operating expenses (84.6) (80.3) (65.4) (65.8) (67.0) Change in working capital (14.3) (40.0) (0.6) 5.7 1.3
Operating Profit (16.2) 5.3 39.0 56.2 64.3 Others 54.9 15.3 (31.5) (149.9) (162.0)
Net interest (25.4) (24.0) (26.0) (23.9) (23.6) Investment cash flow (93.3) (62.0) (2.1) (20.0) (20.0)
Interest income 3.2 0.2 2.6 5.8 7.9 Net capex 80.8 (11.8) (20.0) (20.0) (20.0)
Interest expense (28.6) (24.2) (28.6) (29.7) (31.5) Change in LT investment (174.1) (50.2) 7.9 0.0 0.0
Net investment income/(loss) 0.0 0.0 0.0 0.0 0.0 Change in other assets 0.0 0.0 10.0 0.0 0.0
Net other non-op. JV+Assoc. (102.6) 21.1 49.4 143.0 163.1 Cash flow after invt. (86.6) (36.5) 110.3 75.5 83.9
Net extraordinaries (99.9) (28.6) 0.0 0.0 0.0 Financing cash flow 50.7 60.6 24.1 19.8 60.1
Pretax income (97.6) (24.0) 76.8 175.2 203.8 Change in share capital 0.0 0.0 0.0 0.0 0.0
Income taxes (3.5) (4.3) (1.3) (2.9) (3.5) Net change in debt 118.5 (84.3) 24.1 19.8 60.1
Minority Interest (21.0) (2.9) 0.6 3.4 3.9 Change in other LT liab. (67.8) 144.9 0.0 0.0 0.0
Net profit (80.1) (25.3) 74.9 168.9 196.3 Net cash flow (35.9) 24.1 134.4 95.3 144.0
EBITDA 50.9 83.8 108.0 123.5 128.6 Source: Company data, Kim Eng estimates
Adjusted EBITDA 100.6 240.8 370.0 461.5 492.4
EPS (US cts) (1.1) (0.3) 1.0 2.3 2.6
Source: Company data, Kim Eng estimates
Key ratios
YE Dec 2008 2009 2010F 2011F 2012F
Growth (% YoY)
Balance sheet Sales (82.9) (14.6) 4.2 8.2 2.2
OP (119.2) (132.7) 635.1 43.9 14.5
YE Dec (US$m) 2008 2009 2010F 2011F 2012F
EBITDA (84.5) 64.6 28.9 14.4 4.1
Total assets 2,568.5 2,602.3 2,717.5 2,913.6 3,177.6
NP (49.7) (72.0) (367.0) 128.1 16.2
Current assets 621.9 394.3 500.7 600.7 746.0 EPS (61.0) (68.4) (395.6) 125.5 16.2
Cash & ST investment 112.1 137.6 272.0 367.2 511.2
Profitability (%)
Inventories 5.4 5.4 5.5 5.8 5.8
Gross margin 15.5 22.7 26.6 28.7 30.2
Accounts receivable 311.7 53.0 53.9 58.4 59.6
Operating margin (3.7) 1.4 9.9 13.2 14.8
Others 192.7 198.4 169.3 169.3 169.3
EBITDA margin 11.5 22.2 27.5 29.1 29.6
Other assets 1,946.6 2,208.0 2,216.8 2,312.8 2,431.6 Net Profit margin (18.2) (6.7) 19.1 39.8 45.2
LT investments 981.5 1,063.1 1,106.0 1,249.4 1,412.5 ROA (1.8) (1.0) 2.8 6.0 6.4
Net fixed assets 708.2 1,101.0 1,052.1 1,004.7 960.4 ROE (4.2) (1.4) 4.0 8.5 9.0
Others 257.0 43.9 58.7 58.7 58.7
Total liabilities 677.6 730.4 758.6 789.1 851.8 Gross debt/equity (%) 0.3 0.3 0.3 0.3 0.3
Current liabilities 207.4 248.1 240.8 269.1 281.8 Net debt/equity (%) 0.2 0.2 0.2 0.1 0.1
Accounts payable 138.2 137.1 137.6 148.0 150.6 Int. coverage (X) (0.6) 0.2 1.4 1.9 2.0
ST borrowings 54.0 98.7 86.1 103.8 113.8 Int. & ST debt coverage (X) (0.2) 0.0 0.3 0.4 0.4
Others 15.1 12.3 17.1 17.3 17.4 Cash flow int. coverage (X) 0.2 1.1 3.9 3.2 3.3
Long-term liabilities 470.2 482.3 517.8 520.0 570.1 Cash flow int. & ST debt (X) 0.1 0.2 1.0 0.7 0.7
Long-term debts 467.0 480.0 516.7 518.9 569.0 Current ratio (X) 3.0 1.6 2.1 2.2 2.6
Others 3.3 2.2 1.1 1.1 1.1 Quick ratio (X) 3.0 1.6 2.1 2.2 2.6
Shareholder's equity 1,845.1 1,827.7 1,913.8 2,075.6 2,275.8 Net debt (US$m) 408.9 441.1 330.9 255.4 171.5
Paid-in capital 742.6 742.6 742.6 742.6 742.6 Per share data (US cts)
Reserve 1,102.5 1,085.1 1,171.1 1,333.0 1,533.2 EPS (1.1) (0.3) 1.0 2.3 2.6
Minority Interest 45.8 44.2 45.2 48.9 49.9 CFPS 0.1 0.3 1.5 1.3 1.4
Source: Company data, Kim Eng estimates BVPS 24.8 24.6 25.8 27.9 30.6
SPS 5.9 5.1 5.3 5.7 5.8
EBITDA/share 0.7 1.1 1.5 1.7 1.7
Adj. EBITDA/share 1.4 3.2 5.0 6.2 6.6
DPS 0.0 0.0 0.0 0.0 0.0
Source: Company data, Kim Eng estimates



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Haripreet BATRA Our recommendation is based on the
+91226623 2606 following expected price
 Education performance within 12 months:
Ganesh RAM
+91226623 2607 +15% and above: BUY
-15% to +15%: HOLD
-15% or worse: SELL

Genting Hong Kong 14 March 2011



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