20140527-高盛-Leveraging_the_emerging_Vladivostok_market__initiate_with_Buy_35页_1mb

Summary of Summit Ascent Holdings Ltd. Investment Report

Core Content

This report provides an investment analysis of Summit Ascent (SA), a company that is positioned as a pure play on the emerging Vladivostok gaming market. The report initiates coverage with a Buy rating and a 12-month target price of HK$15.7, which represents a 33% upside potential from the current price of HK$11.84. The valuation is based on a sum-of-the-parts (SOTP) approach, projecting significant growth in the gaming market and favorable operating conditions.

Main Points

• Market Opportunity: SA is the first mover in the Vladivostok gaming market and will enjoy a 3-year monopoly until 2018. The Integrated Entertainment Zone (IEZ) is expected to grow from US$375 million in 2016E to US$1.7 billion in 2020E.
• Competitive Advantage: SA benefits from established junket relationships through its sister company MPEL and the low effective gaming tax (1%), which allows for attractive player incentives. This is expected to result in 40% EBITDA margins and over 60% ROIC, significantly higher than the 20-30% seen in most Asian markets.
• Project Timeline:
  • Lot 9 (Phase 1) is scheduled for soft opening at the end of 2014.
  • Lot 10 (Phase 2) is expected to open in 2018.
• Catalysts:
  • The 72-hour visa-free policy for foreign air passengers from 20 countries, including China and Japan, is a near-term catalyst.
  • The company is in negotiations with top junkets in Macau to bring in VIP players by mid-2015.
• Valuation:
  • The 12-month target price of HK$15.7 is based on a 10x EV/EBITDA multiple for the projects in their second full year of operation, discounted at a 13.6% WACC.
  • The stock is currently trading at 10.9x EV/EBITDA, 7.8% FCF yield, and 11.9x P/E in 2016E, without considering cash flow from Lot 10.
• Financial Projections:
  • EPS growth is expected to rise from (412.7)% in 2013 to 155.6% in 2016E.
  • EBITDA margin is projected to improve from (1,001.9)% in 2013 to 80.6% in 2016E.
  • ROE is forecasted to increase from (24.6)% in 2013 to 41.3% in 2016E.
• Key Risks:
  • Insufficient direct flights to Vladivostok.
  • Regulatory changes including gaming tax, concessions, and visa policies.
  • Competition from Japan and Korea.
  • Delays and cost overruns in project execution.
  • Political instability in Russia.
  • Unfavorable FX changes.

Financial Highlights

Key Financial Ratios

Investment Profile

• Market Cap (HK$ million): 8,898.4 / 1,147.7
• Foreign Ownership (%): Not specified
• 12-Month Price Target (HK$): 15.70
• Upside Potential: 33%

Market Comparison

The report also compares SA with other gaming operators in Asia, the US, and the Korean market, highlighting its unique position in the Vladivostok market. SA's projected EBITDA margin and ROIC are significantly better than industry averages, making it a compelling investment opportunity.

Analyst Coverage

• Analysts: Janet Lu, Simon Cheung (CFA), Alex Ye
• Contact Information:
  • Janet Lu: +852-2978-1642, janet.lu@gs.com
  • Simon Cheung: +852-2978-6102, simon.cheung@gs.com
  • Alex Ye: +852-2978-6666, alex.ye@gs.com

Conclusion

Summit Ascent is a high-potential investment in the Vladivostok gaming market, with a strong competitive position and projected market growth. Despite the risks associated with regulatory changes, political instability, and market competition, the favorable operating environment and strong shareholder support are expected to drive strong financial performance and value creation. The Buy rating and target price reflect confidence in the company's execution capabilities and future growth prospects.