Genting Hong Kong - Smooth sailing (KimEng)

Event

 1H11 results were broadly in line with expectations with revenue of US$227.0 (+23% YoY) and net profit of US$62.4m (+421% YoY). Travellers contributed US$25.7m, while Norwegian Cruise line (NCL) contributed US$12.3m to EBT. GenHK is on course to a stronger 2H11, with further developments in Resorts World Manila (RWM), and for NCL, it would enter into its seasonally strongest 3Q. Maintain BUY with revised target price of US$0.45 (previously US$0.54) as we adjust our assumptions for higher risk premiums.

Our View

 Travellers’ delivered strong net profit of US$54.0m (+97% YoY) on revenue of US$280.6m (+89% YoY). EBITDA was US$88.2m (+107% YoY) with EBITDA margin of 31%. Margins were lower than our expectation and we adjust for this in our revised FY12‐13 forecasts. Average daily visitors to RWM reached 15,000, compared to 6,400 the same period last year. A third hotel, Remington Hotel with 712 rooms is scheduled to open in the second‐half of this year. We expect 2H11 performance to accelerate as RWM continues to extend its offerings to attract more visitors.

 NCL’s 2Q11 net profit of US$29.2m, announced previously on 2 August 2011 was in line. Given the current volatile equity market condition, we believe that its IPO listing could be delayed. Again, we reiterate that a delay in listing would not be detrimental although the market is looking forward to this event as a possible price catalyst. 3Q results would be a key to watch as it is traditionally the strongest quarter.

 Management shared that although there may be headwinds in the North American cruise business with the current economic turmoil, it should not pose as a major challenge as cruising is still a value‐for‐money travel proposition. For Star Cruises, management would continue to focus on managing the cost side of the operations and its ongoing fleet rationalisation would allow for efficient deployment to maximise revenue.

Action & Recommendation

We lower our profit forecasts for FY12‐13F by 5‐10% as we factor in lower margins for Travellers. Our SOTP target price is lowered to US$0.45 as we also adjusted for (1) compression in peer valuations for the cruise business, and (2) a higher discount rate of 9.6% (from 8.8%) for our DCF valuation on Travellers due to increased equity risk premium. Maintain BUY.