Credit Suisse analysts have commenced coverage of Hong Kong-listed Summit Ascent Holdings by issuing an Outperform rating and a target price almost double its current share price, citing strong growth potential at its majority-owned Russian integrated resort Tigre de Cristal.
The upside rating is based primarily around the presence of Suncity Group – the dominant Asian junket operator whose listed arm owns 69.7% of Summit Ascent, which in turn holds a 67.5% stake in Tigre de Cristal operator Oriental Regent Ltd.
According to a Tuesday note from Kenneth Fong, Lok Kan Chan and Rebecca Law, Tigre de Cristal will grow its GGR by around 349% in 2021 – from HK$270 million to HK$1.21 billion – and another 81% in 2022 to HK$2.20 billion, with Suncity aiding a rapid recovery from the COVID-19 pandemic.
“Summit Ascent will start to build its direct VIP business starting 2021, with its strong balance sheet as a support,” state the analysts, who have set a target price of HK$1.80 per share against the weekend price of HK$0.95. Shares have since risen by 24.2% to HK$1.18, buoyed by news that the company will increase its stake in Oriental Regent Ltd to 77.5% following completion of a shares subscription agreement.
“To better leverage the under-utilized hotel rooms, Suncity has also proposed to help set up a new premium mass area for the casino.
“We forecast its GGR to grow 3.5x/81% in 2021/2022E, which should be achievable accounting for only 2%/4% of Suncity’s pre-COVID level GGR.
“After a series of investments and increase in stake through a rights issue this year and higher commission over Russia, it makes economic sense for Suncity to bring in more of its business to the casino.”
While Tigre de Cristal enjoys a series of competitive advantages over regional peers, including a 2% effective tax on GGR compared with the 39% charged in Macau, Credit Suisse suggests that the influence of Suncity has yet to be fully realized in the company’s share price.
In particular the analysts believe Tigre de Cristal will appeal to the premium gaming segments upon which Suncity is clearly focusing its attention. As such, it is VIP where Credit Suisse expects the majority of growth, namely an 11-fold increase in GGR from HK$62 million in 2020 to HK$706 million in 2021, then up to HK$1.66 billion in 2022.
“We believe that Suncity Group would have higher incentive to bring in business to its Summit Ascent casino in the future,” they state. “This is not only because of the fact that it is a subsidiary of the Group but also due to its higher margin,” tipped at up to 20% compared with 5.5% in Macau due to tax flexibility.
Credit Suisse noted that Summit Ascent should also benefit in the long-term from a 6% convertible bond interest it holds in SunTrust Home Developers Inc, Suncity’s Philippines subsidiary about to develop a US$700 million hotel and casino complex in Manila’s Entertainment City precinct.