Genting’s investments in resort casinos in Las Vegas, New York and Florida could surpass $10 billion over the next several years. That’s if everything unfolds as planned. But even if it doesn’t, there’s enough to pose an enticing prospect for investors— possibly in an IPO.
When the Nevada Gaming Commission gave Genting its blessing to develop its US$4 billion Resorts World Las Vegas, an Asian company became for the first time the largest prospective developer of casinos in the United States.
The firsts just flow from there. When it opens the doors three years from now it will be the first all-new Las Vegas Strip megaresort in nearly a decade. It will be the first to feature a rooftop sky park and observation deck and water rides and possibly the first casino in the world to house a live panda habitat.
Importantly, it will be the first casino conceived from the ground up with the Strip’s increasingly influential Chinese market in mind and the first that will be themed top to bottom with the specific aim of delighting that market.
“It will be a game-changer,” Gaming Commission Chairman Peter Bernhard said back in May when the state’s top regulatory body found Genting suitable to hold a gaming license.
It’s been tough for the Strip to get back to the salad days it enjoyed before the recession. Since 2007—a peak year for revenues, the one just before the housing market collapsed and domestic consumption with it— passenger traffic through McCarran International Airport is down 12%. Total visitation to Clark County, which includes the city and the outlying towns, has been flat (though it has been picking up). Gaming revenue countywide the last six years is down 11%. The biggest Strip operators have fared a little better in this area. Their cumulative decline has been 4.4% over the same period. It would’ve been a lot worse, though, if table games hadn’t held their own at +9%; and for that they can thank baccarat, which is booming: it has soared 76% in revenue terms the last six years, and for the big casinos it’s now generating around almost half of total table win.
“Baccarat contributed roughly 25% of all Las Vegas Strip revenue and 46% of total table revenue in the 12 months ending June 2014,” notes Praveen Choudhary, Hong Kong-based gaming analyst with Morgan Stanley, ”and most of the baccarat players are Asians and Chinese high-end gamblers. Genting would have a lot of means to leverage that to develop something that some of the incumbents don’t have access to.”
So it’s not just Genting’s deep pockets the town needs, it’s the knowledge it’s amassed as a leading operator of casinos in Asia going back more than 40 years.
And Genting, the largest Asian operator without a presence in Macau, needs Las Vegas. There’s not a lot about the company on a same-store basis to excite investors. It hasn’t had a really compelling story to tell since Singapore and Resorts World Sentosa.
“Their strategy is become a major national and international operator of casino resorts,” says Andrew Klebanow of Las Vegas based industry consultants Global Market Advisors. “In the United States and around the world. Their goal is to get into as many lucrative markets as possible. That’s what they’re doing.
” And they’re doing it big, despite Vegas’ post-recession hangover and the over-supply weighing down most regional markets.
“I also think the US is a lot about prestige,” says Mr Choudhary. “You want to be a global gaming company you have to have a casino in Las Vegas.”
A CASE FOR AN IPO
Under the broad umbrella of Genting Malaysia (GENM), which trades in Kuala Lumpur, the company has more than $6 billion in proposed gaming investments on the table in Miami and New York state. Resorts World Bimini, which opened in the Bahamas last summer as part of a joint venture, operates a small casino (10,000 square feet) about 50 miles from Miami that is being expanded with a hotel and docking facilities for cruise ships. GENM’s wholly owned Genting Casinos UK is Britain’s largest operator with 41 casinos and a 42nd under development in Birmingham that will be the country’s largest. Genting’s presence in the US actually goes back decades to private investments in tribal gaming by founder Lim Goh Tong, who died in 2007, and by his son and current Chairman and CEO Lim Kok Thay. But it wasn’t until a GENM subsidiary won the license for the racino at New York City’s famed Aqueduct Racetrack in the borough of Queens that the company burst onto the US scene, seemingly out of nowhere.
Aqueduct established Genting in America. It was a notorious political football, years in coming together, and it took a prodigious combination of patience, finesse and financial muscle on Genting’s part to secure it. It would cost more than $800 million when all was said and done, and that’s without the table games the company had sought or the convention center that was to be the centerpiece and which disappeared in a hail of political infighting and controversy.
But Resorts World New York City is the largest and most successful machine gaming operation in the country, good for $785 million in revenue last year. Genting New York retains only 38% of the win after tax (plus 8% for marketing). It’s more about the symbolic value, and that cannot be overstated. When New York City’s only casino opened in October 2011, the US had its first Asian operator, and one to be reckoned with.
It speaks volumes, in Mr Klebanow’s view. “They’re willing to wait,” he says. “They’re not beholden to shareholders for the next quarter’s performance of their stock. They’re patient. They wait for their opportunities. No US gaming company has that luxury.”
Las Vegas, the biggest bet on the table, is held separately under Bursa Malaysia-listed parent Genting Berhad, which can bring to bear cash reserves equivalent at the end of 2013 to US$5.6 billion and whose leverage at 21% net gearing is more than comfortable for a company whose cash flow from operations—which is to say, the sum of its three independently traded resort operators—exceeded $1.4 billion last year. Berhad’s A-minus credit standing is the best among Fitch-rated global gaming companies, and Fitch says it doesn’t expect that to change when net debt levels start to rise, as they’re likely to do when construction on the Strip begins later this year.
An equity-raising would be another option, and there’s been talk of it ever since the Las Vegas site was purchased last spring and the company immediately publicized its thinking in terms of the scope of the project. A US IPO makes sense on several levels and certainly would fit with the uniquely decentralized setup that defines Genting and allows each of the operating companies to leverage the financial markets and its own balance sheet independently in pursuit of opportunities.
“Such was the case for Genting Singapore and Genting Hong Kong associates Travellers International Hotel Group and Norwegian Cruise Line Holdings, which listed on Nasdaq [in January 2013],” Cindy Yeap wrote earlier this year in Malaysian business weekly The Edge.
If there is a US appetite for the risks and potential rewards these plans imply, and they are profound, especially with Resorts World Las Vegas in the mix, it would take Wall Street to unlock it. Berhad has no relevance as an operator. Fifty percent of its EBITDA comes from Sentosa, which is separately held under SBX-traded Genting Singapore; 45% comes from the Resorts World Genting complex in Malaysia, held by GENM, which derives upwards of 85% of its EBITDA from it; and GENM is plowing in big money to make it over because it isn’t really growing. From an EV/EBITDA standpoint, GENM trades like a US regional operator. The UK has been the success story in percentage growth terms. EBITDA there was up 17.8% last year. North America was up 7.2% with the addition of Bimini. Combined they accounted for a little over 17% of GENM’s pre-tax earnings.
“We know, for instance, that Melco’s US-listed stock trades more than any of the Asian-listed stocks—Sands China, Wynn Macau, even Galaxy—Melco’s is still the strongest,” notes Philip Tulk, director of equity research for the Conglomerates, Hotels and Gaming section of Standard Chartered in Hong Kong. “That may point to the appeal of Genting separately listing their company in the US.”
As CIMB Research analyst Lucius Chong has put it, “It makes sense to combine all three strategic assets of [Resorts World New York City], Miami and Las Vegas together and spin them off into a US listing to crystallise their value once their gaming potential materializes.”
Mr Tulk adds, “I can see the Nevada regulators appreciating that as well, simply from a transparency point of view. I can see that as being appealing.”
Genting Americas is the obvious choice for the public company. This is the wholly owned GENM subsidiary in charge of the megaresort proposed for Miami, which includes some $400 million worth of prime real estate on the city’s Biscayne Bay, and bids on two resorts in Orange County, NY., targeting the massive New York City market.
There are a couple of other prospective assets that could be folded in to make Genting Americas even more interesting. These are tied more or less to Kien Huat Realty, the private company that holds the Lim family’s controlling interest in Genting Berhad
Kien Huat’s $160 million investment in getting Foxwoods Resort Casino off the ground back in the early ’90s is the stuff of industry legend. Wall Street and the banks wouldn’t touch Indian gaming in those days, and it would take Foxwoods to change that. It would grow to become the largest casino in the world, it’s still the largest in the US, and it was the most lucrative before the recession and regional competition and expansion-related debt took their toll. It’s reported that Kien Huat still collects 10% of gaming revenue, and to get an idea of what that’s been worth, at its peak in 2005, Foxwoods generated more than $819 million just from slots.
Kien Huat also owns 61.5% of the stock of Nasdaq-listed Empire Resorts, which owns Monticello Casino & Raceway, a harness track with 1,100 VLTs and e-tables in the Catskill Mountains about 100 miles northwest of New York City. Monticello made $15.5 million in the quarter ended 31st March. Kien Huat plans to invest in Empire’s jointventure bid in the Catskills for one of the four new casino licenses the state is expected to award sometime before the end of this year. The casino portion would be part of a $1 billion mixed-use development to which Empire wants to commit more than $600 million if it can raise the money. If the JV were to win a license, and Genting wins one of its bids farther south in Orange County, this could all be folded into a publicly traded Genting Americas, presenting investors with a company positioned to dominate the greater New York City market with $2 billion worth of new resort casinos in addition to the 5,000 VLTs at Aqueduct.
The company also could be in a position to share in the profits of a Boston-area casino, also through entities controlled by Mr Lim, who shares his father’s taste for opportunities in US tribal gaming. The Mashpee Wampanoag Tribe won federal recognition in 2007 and has applied to the government to take land into trust on its behalf for a $500 million casino with 3,000 slots, 150 table games, 300 hotel rooms and other amenities in the city of Taunton about 35 miles south of Boston. Mr Lim is backing the bid with loans to the tribe that have totaled a reported $90 million to date.
GAMBLING ON A RECOVERY
The guy in charge at Genting Americas is Christian Goode, the 38-year-old CFO and senior vice president of development. He is also CFO of Genting New York. A lawyer with a background in commercial gaming, he served for a time as controller at Seneca Niagara Resort & Casino, whose construction was financed by Kien Huat. Later, he was director of compliance for Seneca Gaming Corp., which has grown to become a corporate power in western New York with assets that include two other casinos, two hotels and a golf course. A New York native, Mr Goode is reported to have moved to the West Coast to be closer to the action in Las Vegas.
The plan for the Strip calls for 3,000 hotel rooms and 22 “villas” in the first phase, housed in a 675-foot tower sheathed in red as befitting its Chinese theme. There will be shops, dozens of food and beverage outlets, a convention center and attractions that include the sky park and a 50,000-square-foot aquarium. The casino will encompass 100,000 square feet and feature 3,500 slots and tables.
It could open in 2016, more likely in 2017. For now, it’s a $4 billion bet on the come “It’s probably the gutsiest thing they have done,” says Mr Tulk. “I think a lot of participants and market-watchers have been predicting the Vegas turnaround for a long time, and some of them are still predicting it, and we haven’t really seen it to a large degree.”
Asian patronage naturally is expected to be robust, and Asians and Asian-Americans have been the fastest-growing demographic in Las Vegas the last five years, up from 2% in 2009 to 12% in 2013, according to a survey conducted annually by the Las Vegas Convention & Visitors Authority.
“I think [Genting] have a particular expertise, given their Asian heritage, and increasingly it’s these Asian and Chinese players that are driving growth in a lot of the overseas markets,” Mr Tulk says.
Of course, Mr Lim is shooting for more than that. Resorts World Las Vegas, he has said, “will cater to the high-end visitor as well as the budget-minded tourist. We will give first-time guests a new reason to visit Las Vegas and other tourists a great reason to return”.
Mr Klebanow believes he’ll hit it. “What Resorts World Las Vegas is going to become is a must-see destination that’s going to attract regional—Southern California and the Southwest—national and all the key markets that come to Las Vegas, and some international customers. It will have the same effect on the Las Vegas gaming market as Bellagio did, The Venetian did and the Wynn properties did.”
The comparison is interesting since all three opened during periods when the US economy was roaring. It isn’t now, obviously, as any operator in the regional markets will attest. Las Vegas’ fortunes are bound up with a recovery, and the future of that is difficult to gauge. Corporate profits are up nationwide, and residential housing prices, a key piece of the puzzle, appear to be on the mend.
Unemployment was down to 6.1% in June, its best showing since September 2008. But that’s difficult to gauge too. GDP grew 2.6% last year. But economists are more pessimistic now, and forecasts are that 2014 growth will fail to reach 2%.
The question is whether the Strip can buck the trends. Private equity giant Blackstone Group, for one, is a believer. They’re shelling out $1.73 billion for The Cosmopolitan, which has never made money in the casino since it opened in 2010.
Based on last year’s room inventory, Las Vegas as a whole is around 875,000 visitors shy of pre-recession occupancy rates. Which is key because rooms account for a greater share of profits than gaming does (37% versus 30% in 2013). On the plus side, June was the best visitor month on record, up 3.1% year on year to 3.5 million. The town is on a pace to exceed 41 million arrivals in 2014. That’s even more than were coming before the recession. Convention attendance was up 4.5% in the first half. Hotel occupancy on the Strip is up to around 92%, driving a 2.1% increase in ADR in June, and RevPAR, up a corresponding 4.4%, is responding.
“The growth we have been observing this year has been led by non gaming segments,” brokerage Union Gaming Research said in a recent client note. “If we start to see some growth in the gaming segment, it would be an added catalyst to the Las Vegas Strip recovery.”
Gaming revenue growth has been spotty. June was a good month, though. Table drop citywide, excluding baccarat, was up 6%, slot handle, 3%, resulting in an increase in “core mass-market revenue,” as defined by Union Gaming, of 4.5%.
The Strip, on the other hand, enjoyed a 22.5% increase (and 14.4% in the second quarter) because baccarat has been off the charts. Volume was up 19.7% in April, 26.4% in May, 57.4% in June. June baccarat revenue was up 155% year on year.
But Lim Kok Thay doesn’t need anyone to tell him the score. “Cannibalizing the existing Las Vegas market is not an option,” he has said. “We think we can drive new visitation.”