Genting Hong Kong (KE)

Event

Genting Hong Kong (GENHK) is trading at 37% off the high of US$0.455 on 1 August 2011, near a 52-week low and at about book value. Although it traded as low as 0.24x book value during the financial crisis in 2008, it was then a pure cruise operator struggling with losses. Today, the company’s financial position and corporate focus are vastly different. We reiterate our BUY recommendation and target price of US$0.45.

Our View

Jointly-controlled entity Norwegian Cruise Line (NCL) reported a strong set of 3Q11 results in its traditionally strongest quarter. Corresponding quarterly net profit grew by 18.5% YoY to reach US$110.2m, indicating that there was no major let-up in cruise activities despite the European debt crisis. It further affirms a successful turnaround from its loss-making years between FY06 and FY09. Travellers International, the operator of Resorts World Manila (RWM), registered a 68% YoY increase in 9M11 net profit to P4.2b (about US$97m), with EBITDA of P6.5b (about US$150m). It is on track to achieve our FY11 net profit forecast of US$134.7m.

Adjusted EBITDA for GENHK had already reached US$208m in 1H11, and NCL’s and Travellers’ 3Q11 performance would add another US$136m to this figure, bringing it nearer to our forecast of US$495m for FY11. From a company which was grappling with losses and high leverage a few years ago, GENHK’s position today is vastly different, with contributions from NCL’s turnaround and RWM which opened its doors in August 2009.

In the recent Cruise Shipping Asia conference, industry players estimated that Asian cruise passengers could reach 11m by 2030, from about 1.5m currently. Star Cruises continues to tap on this growing Asian market by expanding its offerings. SuperStar Aquarius has been deployed to ply the Sanya-Vietnam route for the next five months to attract the growing number of mainland Chinese opting for cruise travel. Competitors such as Royal Caribbean Cruises and Costa Crociere also have plans to sail their ships to China next year, but we believe Star Cruises has an added edge in that it is familiar with the Asian market.

Action & Recommendation

We reiterate our BUY recommendation on GENHK with a target price of US$0.45. The stock currently trades at a lower-than-peers FY12F adjusted EV/EBITDA of only 8.0x.