Exclusive: Kok Thay’s cruise challenge


  • Corporate News
  • Saturday, 22 Aug 2020

Tan Sri Lim Kok Thay (pic) is responsible for changing the business portfolio of the Genting group to become a global family entertainment and gaming company

FROM a “one-hill wonder” Tan Sri Lim Kok Thay (pic) is responsible for changing the business portfolio of the Genting group to become a global family entertainment and gaming company.

In the course of diversifying the risk away from the flagship hilltop casino resort of Genting Highlands, Kok Thay allocated a substantial sum of resources into the cruise business.

The cruise business is anchored by Genting Hong Kong Ltd, which is listed on the Hong Kong Stock Exchange and owns the fleet of luxury vessels plying the seas from China to Central America.

Kok Thay’s father and founder of Genting, the late Tan Sri Lim Goh Tong didn’t really take a keen interest in the cruise business because it required a new set of rules to serve a different group of audience.

The older Lim’s idea of entertainment and gaming was to create theme parks for the family and a casino for the older crowd in a typical family outing.

As for the 69-year old Kok Thay, he developed a penchant for the cruise business after seeing the success of Carnival Cruise in Central America in the late 1990s. At that time, he saw a missed opportunity for Genting group when it did not take up a stake in Carnival Cruise, which commands a market capitalisation of US$12.13bil today.

In Star Cruises, he built a company that rivalled some of the bigger names in the cruise business. Apart from the Star Cruises brand, Genting Hong Kong has other brands that offer a much better customer experience, which are Dream Cruises and Crystal Cruises.

The cruise business is run by a Colin Au, a long-time associate of Kok Thay, who is just as passionate about the cruise business as the former. To build a strategic lead, the entity acquired three shipyards in Germany to build ships for them in a deal costing RM1.04bil. This was some four years ago when the world cruise industry was seen poised for rapid growth.

Today, the expansion in the cruise business is biting hard on Kok Thay.

Genting Hong Kong, which is 75.5% owned by Kok Thay announced on Thursday that it is suspending payments to creditors as it seeks a debt restructuring, citing Covid-19, which, it said, has had and continues to have a material impact on its financial position and results.

This came after its subsidiary Dream Global Ltd defaulted on a €3.7mil ship construction fees due on Aug 17, triggering a temporary suspension of payment to all creditors. The company said it intends to preserve its liquidity to maintain critical operation services, and is in the midst of negotiation with related parties for debt restructuring proposals. Genting Hong Kong’s outstanding financial indebtedness stood at US$3.37bil as of end-July.

As far as local banks go, Malayan Banking Bhd and RHB Bank Bhd have exposures estimated at RM1.46bil and RM420mil respectively, according to Bloomberg. The influence of the cruise industry is far reaching given that many small island nations rely heavily on the jobs and cash flow that ships provide. But for cruise businesses like Genting Hong Kong, the short-term goal at this point is undoubtedly about survival. In an earlier exchange filing, the company has warned that its 2020 first half unaudited losses are expected to be not less than US$600mil, compared with net losses of US$55.2mil in the similar period in 2019.

Closer to home, Genting Hong Kong’s abrupt suspension of payments to its financial creditors has stoked fears that one of its healthier operating sister companies would be forced to bail it out – sending shares of Genting Bhd and Genting Malaysia Bhd down yesterday after a sell-down in Hong Kong where more than a third of its value was wiped on Thursday.

The Genting group of companies in Malaysia and Singapore have no cross shareholding with the Hong Kong entity except for Kok Thay being a common shareholder in all three companies (see shareholding structure).

“As far as earnings go, there is no impact on the two Genting-related stocks on Bursa. The worry is on whether one of it would be forced to bail out or provide financial help, ” says TA Securities’ Tan Kam Meng.

Recall that Genting Malaysia has a long history of related party transactions (RPTs), with the latest being the acquisition of 49% of loss-generating Empire Resorts in New York for RM661.1mil in 4Q19.

The other concern is the substantial amount of shares that Kok Thay has pledged. It has been reported that almost all of Kok Thay’s 76% stake or 6 billion shares in Genting Hong Kong is now committed – up from 5.5 billion shares he pledged in April.Apart from this, according to a research report, Kok Thay’s family has also pledged 32% of its block of shares in Genting in exchange for facilities for Genting Hong Kong.

UOB Kay Hian says Genting Hong Kong’s debt obligations are ring-fenced to only its assets such as cruise ships and the current default does not trigger any cross defaults on the two Bursa-listed Genting stocks as well as Genting Singapore plc.

Based on Genting Hong Kong’s FY19’s accounts, it has over US$5bil worth of assets versus a debt of over US$2bil. Its short-term debt stood at US$200 or about RM835mil.

“In terms of balance sheet, it is mainly a cash flow issue. One option is disposing some of these assets to pay creditors, ” says Tan, who points out that the company’s woes pre-dates the outbreak of Covid-19 and has been loss-making in the last four financial years.

“The cruise business is definitely harder hit because of the huge overhead expenses and fixed costs and at the same time operators still can’t operate.

“For now, investors do not see a turnaround story at Genting Hong Kong given the lack of earnings visibility, ” he adds.

On the other hand, Genting Malaysia has resumed operations and with a large local crowd, it can cover some costs, if not all.

Genting Singapore’s casino resort has also reopened but business is hampered due to its reliance on foreign tourists, which make up 75%-80% of its traffic.

At a time when these Genting companies need to conserve cash to ride out the pandemic, any proposal that will stretch their financial resources will not sit well with investors.

Instead, UOB Kay Hian expects the Hong Kong entity to reach a “pragmatic agreement with its creditors and to secure additional financing to stay afloat in the interim period until a vaccine for the Covid-19 virus is discovered, or until the pandemic is reasonably contained to allow the cruise operator to fully resume its operations”.

It sees Genting Hong Kong being able to eventually issue fresh debt or equity, albeit at high interest costs and significant equity discounts, similar to what other cruise operators in the United States had done in 2Q20. Towards this end, Carnival Cruise of the US issued debt papers costing it almost 10% when risk-free government debt papers yields less than 0.5%.

Moreover, every subsidiary within the Genting group has commitments in place for the cash pile they are sitting on, point out analysts.

Genting Singapore, which has the largest cash hoard, has committed S$4.5bil for the Resorts World Sentosa expansion. Genting Malaysia, meanwhile, is constructing an outdoor theme park, costing RM5bil, while parent Genting needs to spend another US$2.2bil in the next one year to see the completion of its integrated resort, casino and MICE centre in Las Vegas.

Rather to help strengthen the Lim family’s cash flows, UOB Kay Hian foresees Genting Malaysia and Genting Singapore cascading up their surplus reserves as dividends. Similarly, Genting is also seen likely to distribute relatively healthy dividends to shareholders, something that would benefit minorities, besides the Lim family.

While Genting Malaysia has been prone to RPTs in the past, not all were seen as negative for minority shareholders, says Maybank IB Research.

“The acquisition of Genting UK for £340mil in 2010 turned out to be more positive than we expected. Its EBITDA grew from £30.2mil in FY09 to a high of £50mil in FY16, ” said the bank in an Aug 6 report.

Interestingly, Genting Malaysia was once invested in Genting Hong Kong and had disposed of that 17% block for US$415mil in 2016.

From 1998 until that period, the Malaysian company had invested more than US$750mil and impaired more than RM2bil of its investment in the Hong Kong entity, said the research report.

Notwithstanding the above, Maybank IB observed that Genting Malaysia has been a lot more generous with dividends.

Shares of Genting Malaysia fell 8 sen to RM2.22, while parent Genting Bhd was down 23 sen or 6.05% to RM3.57 yesterday.

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