Published July 29, 2009

Genting's global plan a risky bet

Diversifying from home turf exposes it to stiff competition

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(KUALA LUMPUR) Malaysian conglomerate Genting Bhd could be placing a risky bet as it aims to take on US casino giants Las Vegas Sands and Wynn Resorts to diversify from its monopoly home turf.

Preparing to expand: With US$2b in cash and strong balance sheets, Genting is well placed to swoop on any US casinos up for grabs

Genting, Asia's largest casino operator, is looking to expand at a time highly-leveraged US rivals are barely meeting debt obligations and may turn to asset sales to stay afloat.

Genting's 3.2 per cent stake purchase in MGM Mirage, the biggest operator on the Las Vegas Strip, in June has triggered market talk Genting could buy out MGM's stake in its Macau business.

With more than US$2 billion in cash and one of the strongest balance sheets in the sector, Genting might also be best placed to swoop on any casinos up for grabs in the US.

But stiff competition in its new markets, still-struggling overseas businesses and a fragile global economy could derail the group's ambitious plans.

'Growth is limited in Malaysia and Singapore and they have money to spend. Now's probably the best time to actually buy something,' said UBS analyst Alain Lai. 'Certainly, the returns aren't going to be as attractive as in Malaysia because Malaysia is a monopoly,' he said.

The Genting Group earns more than 70 per cent of its profits from local operations, but it has put for sale its non-core businesses of palm oil plantations, property and power generation, which together account for about 30 per cent of revenue. Genting Bhd is the holding company for Genting Group.

Genting's international business, in particular Stanley Leisure, the UK's biggest casino operator, have been hit by the economic downturn and stricter rules on smoking and gaming machines.

Genting's head of strategic investments, Justin Leong told investors in London this month the company wants to be one of the top three gaming players in the world and will be patient in executing its expansion strategy.

The group, which operates Malaysia's only casino, also owns Star Cruises, Asia's largest cruise operator.

Genting's stock has surged 85 per cent so far this year, driven by the resilient gaming market, helping it outperform a 35 per cent rise in Malaysia's broader market.

Genting has been keen to grab a foothold in Macau, the Chinese gambling enclave, where gaming tycoon Stanley Ho's SJM Holdings and Las Vegas Sands hold a market share of 31 per cent and 25 per cent, respectively.

Some analysts said Genting might be keen to buy MGM's stake in its Macau business if it is up for sale, but others say it may use the investment in MGM as an expansion platform, mirroring a similar move in the UK.

Genting's investment in MGM raised speculation the Malaysian group may buy out MGM's 50 per cent stake in a joint venture with Mr Ho's daughter.

The gambling hubs of Macau and Las Vegas are clawing out of a deep slump but a glut of new casinos might put more pressure on the industry.

'There is clearly an opportunity for strong firms to poise themselves to capture the momentum of the next economic upturn,' said Jonathan Galaviz, a partner at Las Vegas-based consultancy Globalysis, referring to Genting's expansion plan.

Genting Singapore is building Singapore's second integrated resort, which starts operations early next year, and analysts expect this to be one of the key drivers for earnings growth.

On a 2009 enterprise value to Ebitda ratio (EV/Ebitda), Genting trades around 8.6 times, lower than 14 times for Wynn, 19.7 times for Las Vegas Sands and 11.3 times for MGM, according to Bank of America-Merrill Lynch.

'We see the potential of the group raising up to US$3.9 billion in financing ... if one assumes a 60:40 debt equity ratio, Genting can target up global gaming assets of almost US$7 billion,' said Melvyn Boey, analyst at Bank of America-Merrill Lynch. - Reuters