Business Times - 28 Jan 2011
HSBC pares Genting S'pore target price

Possibility of clampdown at MBS raises concerns

By GRACE LEONG

(SINGAPORE) Concerns over the government's response to alleged unlicensed junket activity at Marina Bay Sands (MBS) and the implications for Singapore's gaming market have prompted at least one analyst to lower its target price for Genting Singapore.

Sean Monaghan, HSBC senior consumer and gaming analyst South East Asia, said that he lowered his target price guidance on Genting Singapore because 'any clampdown on Marina Bay Sands could have implications for the greater Singapore casino market and, as such, Resorts World Sentosa (RWS)'.

In a report yesterday, HSBC maintained an 'underweight rating on Genting Singapore, and reduced its target price to $1.95 from $2.05. HSBC maintains its profit forecasts for the mainboard-listed casino operator, but now 'uses a lower EV/Ebitda multiple, reflecting concerns over future market growth'.

Shares of Genting Singapore dipped one cent or 0.5 per cent from the previous session to close yesterday at $2.06. The stock hit an intra-day high of $2.09.

Allegations of unlicensed junket activity surfaced in court documents filed last week by a highroller being sued in the High Court by MBS over a $250,000 gaming debt, The Business Times reported earlier this week.

In his affidavit, Lester Ong Boon Lin alleged that he had owed money to junkets he assumed were operating legally at MBS at the time he accepted the casino's credit line. The way the alleged junkets operated at MBS was similar to legal junkets he had seen operating in overseas casinos, Mr Ong said.

'As the matter is before the courts, it is inappropriate for the CRA to comment on this case,' said a spokesman for the Casino Regulatory Authority.

Mr Monaghan, in his report, asked how much these unlicensed junket agents (if they exist) could have contributed to Singapore's gaming revenues over the past 12 months.

This question is key as the potential size of this illicit segment (if it does exist) can have implications for future market growth, casino profitability, and as such, valuation, he noted.

Will the Singapore government now crack down on this segment, he asked. 'If the government cracks down on this illicit segment (if there is one) then it is reasonable to assume that this segment may no longer exist in the 2011 or 2012 period. This means that market forecasts may currently be higher than what they would eventually be,' Mr Monaghan explained.

Aaron Fischer, head of consumer and gaming research for CLSA Asia Pacific Markets, said that his forecasts for the Singapore gaming market to reach US$6.5 billion this year and US$8 billion for 2012 do not factor in the entry of licensed junkets. But if junkets were to be licensed this year, this could result in very significant upgrades to his numbers, he said.

But Mr Monaghan wondered if the Singapore government would postpone the licensing of junkets. 'If the Singapore government believes the Singapore casinos have been lax in terms of self-regulation, then it may not proceed with licensing junkets.'

It is unclear how many junket licence applications have been submitted to date and how many or when these will be granted.

And if there is indeed unlicensed junket activity, which casino employees knew of it, Mr Monaghan asked.

'If we assume that junkets have been operating, then the question is at what level within the casino management were they sanctioned to operate? For example, were the unlicensed junket operators allowed on the premise, and if so by whom? Was it a junior staff or were they encouraged to operate by senior executives? Was the board of the company aware of these activities?'

What will the government do to the casinos if it is found that they had operated improperly, he added.

'If the government formed the opinion that senior management facilitated the active breach of regulations, then could this have implications for the assessment regarding suitability of the licensee?

'You've got someone talking about an issue that isn't supposed to happen. A big part of government policy is: 'We want you to watch yourself.' If the government can't trust the casinos to self-regulate, then there may be a monumental change in the way it regulates the industry.'

Meanwhile, the hiring of Spectrum Gaming Group to conduct background checks on the junket licence applications was deemed a negative development by CIMB Singapore, which issued a report earlier this week. CIMB said that it took a 'negative view' of this development as junkets may be deterred by these rigorous checks and having to pay high investigation fees that are non-refundable.

Junket operators source players for casinos, and often extend credit to entice them to gamble. Joseph Wong, a CIMB analyst, said that such strict junket-related guidelines could threaten RWS's VIP gaming revenues in the long run. But in the short term, the novelty effect of the IRs would continue to pull in punters, he added.
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