How Japan's integrated resort project could drastically impact Genting Singapore

It's too big to ignore.

According to CIMB, newsflow from Japan is expected to become incrementally positive in 2014, with the Diet possibly legalising casino gambling in 1Q14. Although it is still early days, the potential impact of securing a US$$10bn integrated resort (IR) project in Tokyo or Osaka is too large to ignore.

GENS is seen to be on the front foot, having invested a large amount of time putting boots on the ground and with S$4.3bn of unencumbered cash sitting on its balance sheet.

Here's more from CIMB:

We are still very early in the timeline with regard to Japan's potential move to legalise casino gambling but this opportunity cannot be ignored.

It looks like the Japanese Diet will consider legalising casino gambling in 1Q14, followed by a year of formulation (determining locations and finalising regulations) and then execution, which will realistically bring IRs into fruition by 2019, just in time for the 2020 Olympics in Japan.

Despite the protracted timeline, the opportunity in Japan cannot be ignored because of its size. It is understood that given that only two locations will be allocated for the IRs – Tokyo and Osaka – Japan expects an investment of about US$10bn per location since the prime objective is to stimulate and sustain economic activities as well as drive tourist arrivals.

The Japanese opportunity has become material to GENS's valuations because GENS is very much on the front foot in capitalising on it for the following reasons:

1) It has the strongest balance sheet among its peers, with S$4.3bn of encumbered cash after issuing S$2.3bn of perpetual securities in 2012.

2) Given the expectation of a US$10bn investment, Japan could be looking for IRs that will be as iconic as the Singapore IRs which have a strong non-gaming element relative to the Macau properties.

3) GENS has invested a lot of time in Japan and has put boots on the ground. It is believed that GENS has already roped in a strategic local partner for its proposed IR. The local partnership in Japan will be key, in our view, since there will be many stakeholders with vested interests such as the pachinko industry.

Based on a simple simulation of ROCE against a US$10bn investment, the Japan opportunity could be worth S$0.37 per share to GENS – assuming that it takes a 50% stake and ROCEs are in a sustainable rate of 15%.

We have applied a 12x EV/EBITDA multiple on the future valuation which is the average 1-yr fwd EV/EBITDA multiple that GENS has been trading on over the last three years.

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