Straddling Asian and US leisure
GENHK offers a unique exposure to both Asian and US leisure with its Asian cruise business, integrated resort (IR) investment in the Philippines and stake in Norwegian Cruise Lines (NCL). The stock is leveraged to Asian discretionary spending and the US recovery.
We maintain our EPS forecasts and our RNAV-based target price. Based on the breakdown of RNAV, the cruise businesses are worth US$0.50 per share which implies that its exposure to the Philippines, via its 45% stake in Travellers, is free. The expansion of NCL and Travellers's market cap is a key catalyst. Under our new rating structure our call is changed from Outperform to Add.
NCL the immediate driver
The US cruise business is one of the best proxies for the US economic recovery because 95% of its cost base is fixed, while the ticket pricing environment is in an upcycle. Moreover, NCL has one of the youngest fleets in the industry which will allow it to bring costs down further while enjoying premium ticket pricing. It is also adding capacity at the right time in the pricing upcycle. We expect GENHK’s 37.7% stake in NCL to drive much of its earnings growth over the next three years, contributing to half of its net profit.
The Philippines is poised to become a major regional gaming destination in view of its four IR licences and conducive regulatory environment. Its geographical location and improving economy will allow the IRs to grow a well-balanced foreign VIP and local mass business. Travellers is the best proxy for this and its listing will allow GENHK to re-rate and monetise its exposure to the Philippines.
Revival in Asian cruising
While the IR model offers a better gaming experience and broadens the market, Asian cruising provides an alternative value proposition. Star Cruises’s focus on duty free shopping (20% lower than airport prices) to complement gaming is driving this value proposition even further. GENHK has just ordered a €707m new ship for Star Cruises to be delivered in late 2016 to boost its Asian berth capacity by 44%. This will be the largest ship with an Asian home port. It will feature more than 1,000 sq m of retail space and have a passenger capacity of 4,500 targeting the HK, Shanghai and Taiwan markets.
Publish date: 02/12/13