Written By Stock Fanatic on Wednesday, March 19, 2014

  OUE has won preliminary approval to develop an integrated resort and casino in a JV with Caesars Entertainment and Lippo for a S$1b project at Incheon, South Korea. While we believe that the project could be value-accretive over the long term, the long gestation period (4 years) and capital requirements could be an overhang on the share price. 

Maintain BUY with a reduced target price of S$2.80 (from S$3.04) based on a 30% discount to revised RNAV of S$4.02, mainly adjusted for the special dividend payout.

WHAT' NEW

■ Charging into Korea with Caesars. OUE has announced that a consortium comprising OUE, Lippo Limited and Caesars Entertainment Corporation (Caesars) has been granted pre-approval by the Korea Ministry of Culture, Sports and Tourism to develop the first internationally-branded integrated entertainment resort project in Incheon, South Korea. The project will also feature a foreigners-only casino, which will be operated by Caesars.

■ S$1b (KRW855b) investment for Phase 1 of the project with a total GFA of 150,000 sqm comprising hotel, retail, convention and residential properties on a 4.3-ha plot of land. Phase 1 of the project is expected to be completed by early-18, in time for the Winter Olympics in Pyeongchang, South Korea. OUE has indicated that its participation will focus on the hotel component and convention centre of the project.

■ Total investment for the project could reach KRW2.3t (S$2.7b) which is planned to be built over several phases.

STOCK IMPACT

■ Potential 40% stake in the venture. OUE has indicated that it would take a substantial non-controlling interest in the project, which we believe would be close to 40%. Prior updates by Lippo Limited (Lippo) had indicated that Caesars would take a 40% stake in the project, with Lippo undertaking a 20% stake. We understand that OUE?s participation is still subject to further negotiations and third-party financing.

■ Initial investment of S$200m assuming 50/50 debt/equity funding for the project, and based on OUE?s 40% stake in the project. The capital outlay can be met by current cash holdings of S$731m on OUE?s balance sheet, following the divestment of OUE Bayfront to OUE Commercial REIT.

■ Seoul casinos account for > 80% of GGR, with South Korea?s foreigner-only casino GGR estimated at US$1.3b in 2013, lower than the Philippines at US$2.6b and Singapore at US$6.4b. South Korea?s gaming scene is currently dominated by three players - Paradise Co Ltd, Grand Korea Leisure (both operating the 16 foreigner-only casinos in Seoul and Jeju) and Kangwon Land, whose property in Kangwon province is the sole casino opened to locals.

■ Targeting tourists from China and Japan, especially with the location of the resort at Yeongjong Island, which is near Korea?s main Incheon airport at Seoul. Seoul is also within a two-hours flight time to major cities in China (Shanghai, Beijing) and Japan.

■ Following in the footsteps of Genting Singapore (GENS) which is also exploring a US$2.2b casino and integrated resort in Jeju Island in a JV with a Chinese developer Landing International Development. Our Malaysia research team estimates that GENS could achieve and incremental EBITDA of S$172m for its 50% share. South Korea's Paradise, one of two companies that dominate the country's foreigner-only casino market, has also teamed up with Japan's Sega Sammy Holdings Inc for a casino resort in Incheon.

■ Approval still preliminary and is not a guarantee of a gaming licence as the government may still reserve the right to withdraw the licence if investment conditions are not met. The casino licence is likely to be contingent on a minimum investment amount of US$500m-700m. The consortium?s bid had previously been rejected in mid-13 due to concerns about Caesars? credit rating.

■ Looking to replicate success of integrated entertainment resorts in Singapore. The casino operations would be a non-core component. However, the hotel, retail, convention and residential properties leverages on OUE?s core competency of property development as it seeks to replicate the success of integrated entertainment resorts in Singapore. Recall that both Keppel Land and CapitaLand participated in the tender for the integrated entertainment resorts in Singapore.

■ Overhang from long project gestation period. While we believe that the project could be value-accretive over the long term, the long gestation period (4 years) and capital requirements could be an overhang on the share price.

■ Distribution-in-specie of OUE H-Trust and cash dividend. OUE had announced a 1- for-6 distribution-in-specie of OUE Hospitality Trust (OUE H-Trust) (equivalent to 14.8 S cents dividend) following the divestment of OUE Bayfront to OUE Commercial REIT. OUE will retain 34% of OUE H-Trust post divestment, down from 45% currently. In addition, OUE also announced a final cash dividend of 2 S cents/share, bringing total cash dividend for 2013 to 23 S cents/share. Books closure is on 20 March, with the crediting by 31 March.

Technical Analysis

Daily Chart

EARNINGS REVISION/RISK

■ We maintain our earning forecast. On our estimates, the impact on FY14 earnings would be less than 2% of cash interest forgone, assuming an initial investment of S$200m for the first phase.

VALUATION/RECOMMENDATION

■ Maintain BUY with a reduced target price of S$2.80, pegged at a 30% discount to our lowered RNAV of S$4.02/ share (from S$4.34) mainly adjusting for the special dividend. OUE is trading at a deep 41% discount to its RNAV.

SHARE PRICE CATALYST

■ Successful completion of asset enhancements in commercial and hospitality properties. 

■ Acquisition of under-valued asset with redevelopment potential. (Read Report)

Written By Stock Fanatic on Tuesday, March 18, 2014

OUE has announced a trading halt following newswire reports that LOCZ Korea Corporation, a joint venture between Caesars, Lippo Group and OUE Limited, has received preliminary approval from the South Korean Ministry of Culture, Sport and Tourism to include foreigner-only casino gaming in its planned integrated resort in Incheon, South Korea.

The resort is anticipated to include hotels and resort amenities, live entertainment venues, a standalone convention center and a foreigners-only casino. The consortium aims to open this in time for the 2018 Olympics in Pyeongchang.

We expect to hear more details regarding the project, i.e., OUE?s ownership stake, expected investment outlay and return, from the group ahead. 

 
Technical Analysis

Daily Chart

We have a BUY rating on OUE Ltd, and our fair value estimate of S$3.32 is under review.

 

INTEGRATED ENTERTAINMENT RESORT

Singapore, 18 March 2014 ? SGX Mainboard-listed integrated property developer

OUE Limited (?OUE?) today announced that a consortium consisting of OUE, Lippo

Limited and Caesars Entertainment Corporation (collectively, ?Consortium?) has

been granted pre-approval by the Ministry of Culture, Sports and Tourism of the

Republic of Korea to develop the first internationally branded integrated

entertainment resort in South Korea (?Project?).

The Project will be a world-class entertainment destination consisting of hotel, retail

and convention and residential properties to be developed by the Consortium, which

is expected to be ready in time for the 2018 Winter Olympics in South Korea. The

Project will also feature a foreigners-only casino. Caesars Entertainment

Corporation or one of its affiliated companies will be the investor in the project and

operator of the casino. The Project is expected to involve an estimated total project

cost of approximately Korean Won 855 billion (approximately SGD1 billion) with total

development gross floor area of over 150,000 square metres on a 4.3 hectares site.

OUE will have a significant non-controlling interest in the Project, and its participation



will focus on the hotel component and convention centre of the Project.



  http://infopub.sgx.com/FileOpen/OUE_Press_Release.ashx?App=Announcement& FileID=288978