Genting Singapore shorts at highest in year as earnings weaken

Short-sellers are betting that Genting Singapore Plc, the worst-performing stock on the city’s benchmark equity index this year, has further to fall amid plunging earnings at Southeast Asia’s biggest casino operator.

Bearish bets on the stock climbed to the highest level in a year as Genting tumbled 11% since it announced in August that second-quarter profit dropped 27%. Brokers from Mizuho Securities Co. to Macquarie Group have cut their ratings on the company.

“Given the way earnings are being downgraded, it may be too early to buy the stock,” Alan Richardson, whose Samsung Asean Equity Fund outperformed 96% of peers tracked by Bloomberg during the past five years, said by phone from Hong Kong. “Genting is still trading at a premium over the Singapore stock market. Even if the shares fell another 20%, it will still be more or less trading at the market’s multiple.”

While most analysts recommend buying or holding Genting, the shares are currently trading at $1.14, a 19% discount to the consensus price target. The stock is the sixth most-shorted on the benchmark Straits Times Index, according to Markit Group data compiled by Bloomberg. Short interest climbed to 2.2% of freely-tradeable shares at the end of last week, the highest ratio since July 2013, the data show.

Samsung Asset Management Co. sold its Genting stock after the results announcement in August and may consider purchasing the company’s shares again should they fall to about $1, Richardson said. The South Korean money manager doesn’t use short-selling as an investment strategy, he said.

Genting slumped 24% this year through yesterday, making it the worst-performing stock on Singapore’s Straits Times Index and dragging valuations to about 20.7 times estimated earnings, according to data compiled by Bloomberg. That is still above a multiple of 14.5 for the city’s benchmark gauge. Company spokeswoman Lee Sin Yee declined to comment.

Tempering Expectations

“We think the stage is set for disappointment,” Somesh Kumar Agarwal, an analyst with Macquarie, wrote in a note published on Sept. 12 when the brokerage downgraded its rating on the stock to underperform from outperform and reduced its share-price forecast by 39% to $1. “We think the Singapore gaming market cannot grow and Genting will be pushed into extending more credit to VIP players to protect market share, leading to more bad debts and deterioration of returns.”

Analysts have been tempering their earnings estimates for Genting, with the average forecast by 18 brokerages predicting the company will post a profit of $680 million this year, according to data compiled by Bloomberg. Growth will remain weak, with a chance of further earnings downgrades given declining tourist arrivals in Singapore and rising risk of bad debts from gambling, Samsung’s Richardson said.

Tourism Decline

Visitors to Singapore declined 2.5% to 8.92 million in the seven months ended July 31 from a year earlier as arrivals from China plunged 29%, according to the Singapore Tourism Board. Chinese travelers have been deterred by political violence and the disappearance in March of a Malaysia Airlines plane bound for Beijing.

“We’re not optimistic about the Singapore gaming market,” Aaron Fischer, an analyst at CLSA Asia-Pacific Markets in Hong Kong, said by phone. “The key opportunity for Genting is really securing one of the gaming licenses in Japan.”

Japanese Prime Minister Shinzo Abe said in June his ruling party will seek to pass a law in the next session of parliament to legalize casinos as part of a plan to boost tourism before the Tokyo Olympics in 2020. The legislation may win lower-house approval this month, lawmaker Koichi Hagiuda said yesterday.

Japan Casino For MGM Resorts International, Japan’s casino market could be bigger than Macau, the world’s largest gambling destination, Chief Executive Officer James Murren, has said. MGM, Las Vegas Sands Corp. and Genting Singapore are among the best-positioned foreign companies to get a gaming license in Japan, CLSA said in August.

Getting a gaming license in Japan will be a key catalyst for Genting, Morgan Stanley said on Sept. 23, when the brokerage raised its rating on the stock to overweight from equal-weight.

“Genting, along with U.S. players, is a front-runner and could outperform in the near term,” analyst Praveen Choudhary wrote in the note.

Genting and partner Landing International Development also are building a US$2.2 billion ($2.75 billion) casino resort on South Korea’s Jeju island to target Chinese bettors. This project won’t be significant enough to help counter sluggish growth from Singapore, Samsung’s Richardson said.

“Should Genting get a license to operate a casino in Japan, the earnings impact won’t be felt until at least 2018,” Carey Wong, an analyst at OCBC Securities Pte in Singapore, said by phone on Sept. 19. “There isn’t any catalyst for the stock in the near term.”