The Hills are alive!

The hills are alive....dun worry...come up and play! This is probably what Lim Goh Tong will be saying if he is still alive today. Genting and Resorts shares were sold down drastically in recent weeks and investors were left scratching their heads wondering what has happened to their beloved stocks? Have the stocks been sold down by big funds because of 1) anticipate slowing down of the economy and the reduction of subsidies resulting lower visitors arrivals and spending, 2) competition from overseas gaming centres, 3) the cost over run of Resort World Sentosa in Singapore, 4) further losses in Stanley UK or 5) Genting Group's financial crunch? etc. AmResearch came out with some valuable insights and perhaps possible unfounded rationale for the selldown with special emphasis on Resorts World Bhd.

AmResearch: Genting Bhd’s share price fell 20 sen yesterday while Resorts World’s (“RWB”) share price declined 9 sen. Year-to-date, Genting Bhd’s and RWB’s share prices have weakened 31% and 28% respectively. We checked with management, who said that there are no negative corporate developments.

We attribute the weak share price performances to a few reasons.

First, fears of an increase in gaming tax or implementation of a windfall tax. Since these were not announced last week, there are fears that they might be announced during the budget. Currently, the gaming tax is 25% on casino wins from non-VIP customers and slot machines.

Second, Genting Group’s share prices have been falling in tandem with the de-rating of global gaming companies. Since the start of the year, share prices of companies like Las Vegas Sands and MGM Mirage have declined 9% to 48%. In fact, share prices of Las Vegas Sands and MGM reached their year-lows yesterday. Ex-Las Vegas Sands, the current simple average PE of the regional gaming companies is 23x for FY08F and 17x for FY09F. We reckon that the de-rating of regional gaming companies is due to a potential slowdown in casino activities resulting from uncertainties in the global economy. Macau gaming companies were also affected by concerns over an industry oversupply.

However, we believe that these concerns are misplaced for RWB as the group’s earnings are relatively resilient and domestic-centric. Even during the period of SARS in 2003, the group’s turnover only shrank 2.6% due to lower average spending/visitor. Visitor growth was still a positive 1.3% in 2003. More importantly, RWB’s cash reserves are expected to be rock-solid, forecast at RM4.4bn for FY08F. Free cash flows are envisaged to rise due to diminishing capex requirements. We estimate RWB’s FCF/share to improve from 17.2 sen in FY08F to 18.8 sen in FY09F. Capex is forecast at RM300m to RM400m annually.

In terms of earnings, we anticipate slower topline growth of 8% for FY08F compared to 14% in FY07. We are also assuming a 4% visitor growth for FY08F against 6% in FY07 and an average spending/visitor increase of 5% versus 8% in FY07. EBITDA margin is estimated to remain stagnant at 37% for FY08F. Our FY08F net profit forecast of RM1.28bn is 3.5% below consensus estimates of RM1.3bn.

We believe that the fall in RWB’s share price presents a good opportunity to Buy.(TP RM4.40) Also, it makes the case for the privatisation of RWB even more attractive for Genting Bhd. Ex-cash, RWB’s FY08F and FY09F PEs are 11x and 10x respectively. RWB’s last share buy-back was from 3 March to 10 March at prices between RM3.36 to RM3.68. As at 14 March, outstanding treasury shares amounted to 129.1m.

Technically, due to the sell down the daily indicators for RWB and Genting are all showing weaknesses. They may stage a technical rebound in the next few trading sessions due to their oversold position but most likely trade sideways in the near term. RWB is supported thinly at RM2.90 but strong support at RM2.50. Resistance are at 3.06 and 3.16. For Genting, it is supported at RM5.25 and at RM4.70 while resistance is at levels RM6.00 and RM6.25.

* China's inflation rate fell to 7.7% in May amid signs efforts to rein in food prices were finally taking hold. Meanwhile the PPI is still at a stubborn 8.2%. The Shanghai Composite Index however certainly did not take heart at the good CPI figures. It dropped nearly 2.2% today to close at 2,958. So the magic 3,000 number has been broken. Will the Doctor (discussed here previously) come in again to intervene the market for the second time? The failure to successfully intervene the market again will undermined the Doctor's credibility in the future.

* CIMB: The 30% windfall tax on IPP could potentially cut earnings of companies as follows:- YTLPower(TP RM2.50) =6 to 7% and Tanjung(TP RM20.30) =4 to 5% based on total assets rather than fixed assets. So far authorities have not spelt out the exact definition of Return on Assets(ROA). If fixed assets is used, the total impact would be greater.


* According to Forbes.com, the 2008 ranking by OECD countries ranked South Korea as having the longest working hours per year-2,357 hours followed by Greece-2,052 hours while the lowest working hours is in Holland-1,391 hrs.(note: US-1,797 hours). For some short facts. Assuming we calculate working days as follows, take 52 weeks x 5 days =260 days; less 10 days holiday = 250 days of working a year. South Koreans working hours per day 2,357/250 = 9.4 hours per day while Dutch's would be 1,391/250 = 5.56 hours. Did I hear somebody saying "lets go to Holland to work" or "not to work if we are in Holland"?