Henry Sy's Belle Corp launches casino equity deal

The Philippines' richest man seeks to unlock value through an asset injection and secondary share sale.

SM Investments subsidiary, Belle Corp began pre-marketing a Ps 8.7 billion ($200 million) divestment of stock in its subsidiary, Premium Leisure Corp on Tuesday. The group hopes the deal will ride on the back of strong momentum in Filipino equities and raise the profile of the company's gaming assets ahead of this autumn's opening of its first major project, City of Dreams.

The gaming sector is likely to play an increasingly important role in the Philippines equity story over the next few years due to the scheduled opening of a swathe of integrated casino and resort ventures on the 120 hectare Pagcor Entertainment City site in Manila Bay. Indeed, by 2020 the country hopes to have overtaken both Las Vegas and Singapore to become the world's second largest gaming centre after Macau.

Belle Corp ultimately owns City of Dreams through Philippine Leisure & Amusements (PLAI) and has a co-operation agreement with Melco Crown Philippines. This will see the project's Ebitda split equally between the two groups.

However, in June, Belle Corp announced a plan to inject PLAI into listed entity Sinophil to create a pure play gaming subsidiary. This is being re-named Premium Leisure Corporation.

In return for PLAI and a 34.5% stake in lottery operator, Pacific Online Systems, Sinophil ceded its property assets to Belle Corp. It also boosted Belle Corp's stake to 89.1% via a private placement, which has effectively turned its parent into a mini-holding company for SM Investment's non-core businesses.

Management hope the Sinophil spin-off will unlock more value for the group's gaming assets, which will still be consolidated onto Belle Corp's balance sheet. However, Premium Leisure Corp will now pay out at least 80% of its earnings via dividends, turning it into a quasi-Reit.

Based on analysts' forecasts, this equates to a prospective 2015 yield of 6% to 7% and 2016 yield of 7% to 8%. This payout ratio is likely to be one of the major selling points of the divestment, which was launched yesterday with the aim of improving Premium Leisure Corp's liquidity and free float. 

CLSA is global co-ordinator of the deal, which began pre-marketing in Singapore. Credit Suisse and Macquarie are joint bookrunners.

Pre-marketing will continue today in Singapore before moving to the Philippines on Thursday and then to Hong Kong the following Wednesday. The institutional bookbuild will begin on September 22, with pricing scheduled for the 26 and listing on October 2. 

Terms and valuation

On offer are 3.763 billion secondary shares, with a greenshoe of 564.5 million shares according to a term-sheet seen by FinanceAsia. Pre shoe, Belle Corp is targeting proceeds of roughly Ps 8.7 billion ($200 million).

Sources close to the deal say the syndicate banks have assigned a fair value range of 10 to 12 times on a 2015 EV/Ebitda basis. Parent Belle Corp is currently trading on a 2015 EV/Ebitda ratio of about 11.8 times and is up 4% year-to-date. 

The stock suffered a major drop in late May when it slid 26% in the space of one month after news of the asset injection became known and investors started to apply a holding company discount. Since then, it has recovered somewhat and was up 4.49% yesterday.

Premium Leisure Corp itself is still trading under the Sinophil shell listing and closed on Tuesday at Ps1.86, up 12.05% on the day. News of the asset injection propelled a quadrupling of the stock price from its Ps0.365 close on May 29 through to June 6.

Other listed Filipino gaming stocks include Melco Crown, Bloombery and Travellers International. The three have recently had a mixed performance, with Bloombery significantly outperforming the Philippines Stock Exchange Index (PSEi), while Melco and Travellers have both underperformed it. 

Sinophil's joint-venture partner, Melco Crown, is down 15% year-to-date, as is Travellers International, down 20%. By contrast, the PSEi has been one of Asia's best performing indices, up 20.6% year-to-date, with momentum continuing to hold.

Bloombery is up 34.4% year-to-date and is currently trading at about 12.3 times on a 2015 EV/Ebitda basis. The company owns the Solaire Resort & Casino, which was the first to open in Pagcor Entertainment City in March 2013.

It is also ultimately controlled by one of the country's richest men, Enrique Razon. Earlier this month, it released interim results, which showed a big increase in revenues and a turnaround in profits.

Revenues were up from Ps 4.47 billion ($100 million) in June 2013 to Ps 14.15 billion ($320 million) in the period from January to June 2014. Likewise, the company recorded a net profit of Ps 2.3 billion ($50 million), compared to a loss of Ps 1.033 billion ($20 million) one year earlier. 

Premium Leisure Corp’s syndicate banks are forecasting gross gaming revenues (GGR) of $120 million for the 2015 financial year and $780 million for 2016.

As a result of its agreement with Melco, Premium Leisure Corp will receive 36% of City of Dream's Ebitda. Belle Corp is in line for a further 9% via property rental income, while another SM Investments entity, Leisure & Resorts, will get the remaining 5%.

Will negative sentiment towards Macau weigh on the Philippines?

The Philippine stock market's overall strong performance has lifted the average valuation of its gaming sector and placed stocks such as Bloombery into the same league as bigger players in Macau. Sands China and MGM China, for example, are trading on EV/Ebitda multiples of around 13 times, while the global average is more like 10. 

Most of the Macau stocks have come under selling pressure in recent weeks after the territory reported its first year-on-year drop in GGR for five years this June. While the drop was initially thought to be a one-off, the same happened again in July. 

This negative sentiment may affect international investors’ view of Belle Corp’s deal. Balancing this, much of the stock is likely to be placed with domestic institutions, keen to pick up the yield. 

Pagcor Entertainment City to boost tourism

The management team is likely to argue that the Philippines gaming sector is on the cusp of strong growth benefiting from three key drivers: the novelty factor of Pagcor Entertainment City, combined with favourable domestic demographics and advantageous tax rates.

Where domestic demand is concerned, the Philippines has a long tradition of enjoying gambling and the fastest growing working age population in non-Japan Asia. 

In terms of international visitors, the country is hoping to target the lower end of the VIP market. It also hopes its proximity to China means it will secure increasing numbers of visitors as more and more Mainlanders travel overseas.

This should theoretically be boosted by the country's gaming taxes, which are lower than Macau's.This means local operators are able to offer Asian junket providers higher commission rates (averaging about 1.5% compared to 1.25% in Macau).

Junket promoters recruit affluent Chinese gamblers, often extending loans so they can circumvent China’s limits on the amount of cash, which can be taken out of the country.

As a result, state-owned Pagcor (Philippine Amusement & Gaming Corp) has ambitious plans to achieve GGR of $5 billion to $6 billion by 2020, although this still remains far below Macau’s $40 billion total last year.

The Philippines saw GGR rise 10% in 2013 to $2.2 billion following Solaire’s opening, although the total fell short of the government’s $2.5 billion target.

This shortfall was attributed to deteriorating relations between the Philippines and China because of a territorial spat, not to mention the ongoing argument between the Philippines and Hong Kong over the need for an apology following the botched rescue of a hijacked tour bus in 2010. Analysts believe these two disputes will continue to weigh on Chinese sentiment towards Philippines travel through into 2015.

Investors will also need to decide whether the concentration effect of all the new casinos will collectively boost revenues, or fragment them. When it opens, City of Dreams is scheduled to have 380 gaming tables, 1,700 slot machines and 950 hotel rooms. A key attraction will be its 320 room, Nobu Hotel, the first by the Japanese chef in Asia.

This will make City of Dreams larger than the Solaire, which is scheduled to have 360 gaming tables, 1,620 slot machines and 800 hotel rooms when it completes its phase 1a expansion this autumn. 

Next in line is Universal Entertainment owned by Japanese slot machine manufacturer, Kazuo Okada. Its Pagcor Entertainment City development is scheduled to open in the third quarter of 2015 with 500 gaming tables, 3,000 slot machines and 2,000 hotel rooms. 

Dwarfing them all is Travellers, which had a four-year head start for its Resorts World project. This is not in Pagcor Entertainment City, but close to the international airport.

By the time phases two and three have opened in 2015 to 2017, the group hopes to have 932 gaming tables, 5,572 slot machines and 3,806 hotel rooms in operation. It is part owned by another local tycoon Andrew Tan in a joint-venture with Genting Hong Kong. 

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