Genting Malaysia Bhd is certainly less glamorous than the glitzy, newly-opened Genting Singapore plc. But when it comes to profitability and cash flow, the old horse whose operations are mainly focused on Genting Highlands is still the king.

A cursory look at both Genting Malaysia’s and Genting Singapore’s Resorts World Sentosa’s (RWS) latest quarter shows that the Malaysian operation generated RM500 million more in operating profit before working capital changes compared with Singapore.

The prime reason for Genting Malaysia’s stronger cash flow is that Genting Highlands continues to be the main destination for thousands of day-trippers and its prices cater for the mass market. RWS targets the VIP market and the more affluent tourist.

RWS does not offer cheap rooms, for example, while there are often bargains to be had at Genting Highlands. This has translated into Genting Malaysia’s stronger cash flow.

For the nine months ended Sept 30, Genting Malaysia chalked up RM1.45 billion in operating cash flow without working capital changes. Singapore, meanwhile, recorded S$383.05 million, or RM916.78 million, in operating profit before working capital changes.

The question that arises is whether Genting Malaysia can sustain the trend.

According to Nomura Securities Malaysia Sdn Bhd, the Malaysian outfit should be able to keep up its performance.

“Margins and cash flow in the mass market, such as Genting Malaysia, are more sustainable. We think the mass market business will be a key growth driver for the regional gaming sector in FY2011F. The high-margin mass market business is more defensive in the event of a downturn and offers sturdier cash flow in comparison with the VIP business,” says Nomura Securities.

While Genting Malaysia is seeing a decline in foreign visitors, it is the hardcore local punters and day-trippers who make repeated trips that form the backbone of the business.

OSK Research reports that domestic day-trippers contributed 73% of total visitor arrivals, while the number of domestic hotel guests jumped 11% y-o-y.

The steady day-tripper market drives domestic visitation and is more than sufficient to offset the impact of lower foreign visitation, which declined to 17% y-o-y, says OSK.

According to Nomura Securities, despite the competition from the two newly opened casinos in Singapore, Genting Malaysia’s core gaming business has remained intact and when the novelty factor starts to wear off in Singapore, growth in visitor arrivals is expected to pick up next year.

The affordability factor will also come into play in the long run. While Genting Malaysia may have lost some customers in the southern region to Singapore, affordability will deter Malaysian punters, especially the small-time rollers, from visiting the island republic simply because it costs more to gamble there.

“The two casinos in Singapore are unlikely to appeal to Malaysian mass market punters on a regular basis. We find it very unlikely that a Malaysian mass market player would want to gamble in Singapore dollars,” says the research house.

While Genting Malaysia has so far been able to hold its own despite the opening of two new casinos in Singapore, can it sustain its performance?

Malaysia’s casino performance is said to correspond with the country’s GDP growth.

“Over the past 20 quarters since 2005, casino gaming revenue has shown a strong correlation with GDP. Given the close correlation between gaming revenue and GDP, we see continued upside surprises to consensus and our gaming revenue assumptions,” Nomura says in its report.

Low business volume, weaker luck factor and competition from other casinos were the cause of a drop in performance for both Genting Malaysia and Genting Singapore in 3Q.

Genting Malaysia’s pre-tax profit fell 11.6% to RM416 million from RM470.67 million, while its revenue dropped 9.95% to RM1.2 billion from RM1.34 billion a year ago. For the nine months ended Sept 30, its net profit fell 5.27% to RM914.47 million from RM965.38 million, while revenue rose by 1.57% to RM3.78 billion from RM3.72 billion a year ago.

The RM39.3 million start-up cost of its newly-acquired video lottery facility at the Aqueduct Racetrack in New York also contributed to Genting Malaysia’s weaker results.

On the Singapore front, the opening of Marina Bay Sands is said to have potentially affected RWS.
According to Macquarie Equities Research, Genting’s RWS increased its credit by 40% but VIP turnover remained flat.

“These trends highlight that RWS may be extending credit in order to attract play ... We have seen this strategy play out in Macau and believe it is unsustainable in the longer run. We see the risk for RWS of market share loss in the mass market as well in 4Q,” says the report.

Genting Singapore posted a S$187.83 profit in 3Q, down 52% from S$396.52 million registered in 2Q. For the nine months ended Sept 30, Genting Singapore’s net profit was S$188 million while revenue was S$1.96 billion.

Apart from competition from Marina Bay Sands, Genting Singapore also faces political risk from both Singapore and Malaysia.

The MCA recently remarked that Malaysians gamble away an estimated RM230 million in Singapore monthly. The amount was derived based on the average busloads and carloads of people who made their way to the two casinos which opened their doors in February and June this year.

MCA national organising secretary Datuk Tee Siow Kiong estimates that at least 3,200 people cross over to Singapore in buses or cars daily to gamble and he contends that they spend RM2.76 billion per year, on the assumption that each person spends an average of S$1,000 a day.

Due to the adverse reaction from political parties, RWS has stopped chartering buses to ferry visitors from various points on the outskirts of Singapore to the resort as it did not sit well with the government of the island republic.

Nonetheless, Singapore’s gaming business, which is still in its infancy, gives it a clear advantage over Malaysia, which is a mature operator.  That advantage is reflected in the valuations — Genting Malaysia trades at a PER of less than six times based on current year’s earnings while Genting Singapore commands a valuation of 13 times.

“Singapore is in the early stages of growth while Genting Malaysia has been around for the past 20 years,” says an analyst.

While Singapore is trailing Malaysia for now, he says, the position will change in the years to come as there is plenty of room for Singapore to expand its market.

“Malaysia may have a higher number of visitors but average spending per game in Singapore is higher than Malaysia,” he says.

That said, Genting Malaysia will continue to rule for now as its appeal as a mass market destination will ensure steady income which in turn will allow it to spread its wings elsewhere.

This article appeared in Corporate page of The Edge Malaysia, Issue 835, Dec 6-12, 2010