First Look Corporate: SINO

...from DA Market Securities

We are issuing a BUY for SINO with a target price of P1.95/sh with the target price based on our estimated value of BEL’s injection of gaming assets into SINO, and positive investment points moving forward as a result of SINO’s new structure.

Brief Background

SINO started our as an oil and gas exploration & development company until the Sy’s acquired the company, and in 1997, it shifted its primary purpose from oil and gas exploration & development to investment holding. From then until 2013, BEL, the SM’s property and gaming company, owned 54% of SINO which held dormant assets and has long been planning to turn in profitability. 

Quasi-Reorganization

This 2Q14, SINO’s shot at profitability was effected. It was done through series of business moves which included a reorganization of assets with BEL, SINO, and a change in par value of SINO to reduce retained deficits and, BEL’s 27.5 billion share subscription subcription of 27.5 into SINO.

Reorganization of Assets

1. SINO secured 50,000 PLAI common shares worth P10.84 billion from BEL and 34.5% ownership if LOTO worth P1.525 billion. 

PLAI or Premium Leisure and Amusement Inc is a consortium that holds the gaming license for the City of Dreams Manila whose owner receives 50% of gaming revenue EBITDA split with MCP who will build and operate the gaming business.

LOTO is a publicly traded company that is engaged in the development and management of online computer systems, terminals and systems for the Philippine gaming industry and leases to Philippine Charity Sweepstake Office (PCSO) integrated gaming systems needed for its online lottery operations in the VisMin regions.

2. In turn, BEL acquired the following assets from SINO for an aggregate cost of P806.88 million

    a. Membership shares in Tagaytay Midlands Golf Club

    b. A lot located within the Aseana Business Park at the Manila Bay Reclaimed Area

    c. Several parcels of land in The Parks at Saratoga Hills within the Tagaytay Midlands complex.

    d. An undeveloped land property in Tanauan Batangas

The result of the moves turns BEL into a property & gaming holdings company that holds the non-core businesses of SM. 

Under the reorganization of assets, while BEL has injected its gaming assets to it still retains ownership of the property that the City of Dreams Manila stands on and will collect rental income from the leased spaces of 

the integrated resort including the casino. 

With SINO still consolidated in BEL’s topline, the asset injection will not change the financials outlay of BEL.

Unlocking Gaming Value

With the corporate reorganization, SINO unlocks gaming asset value previously lodged into BEL as it now turns into a pure gaming holdings company with little capital expenditures. 

SINO will now generate income through LOTO dividends and PLAI through its 50-50 EBITDA sharing with MCP. SINO now becomes the primary outlet of gaming revenues.

The reorganization also allows SINO to clean up its balance sheet build its Earnings-per-share (EPS) to enable SINO to declare dividends based on the income that will accrue mainly from PLAI.

SINO Increases Authorized Capital, BEL Subscribes 

Following a capital restructuring which cleaned up SINO’s capital deficit of P3.0 billion and a reduction of par value from P1.00/sh to P0,25/sh, SINO will increase its outstanding shares from 6.9 billion to 31 billion which reflects an increase of SINO’s authorized capital by 27.5 billion shares. This increases BEL’s ownership of SINO from 54% during the date 

Of the 27.5 billion shares, BEL has subscribed 24.7 billion shares at P0.369/sh with the price based on the 30-day volume weighted average price of SINO shares prior to the date of subscription plus a premium of 5%. The subscription to the shares will be paid for in cash. 

The P9.11 billion made from the transaction will be used to pay BEL for the gaming assets on top of the P806.88 million received from the sale of properties to BEL.

BEL to sell SINO shares

With BEL now owning 90% of SINO, it is now looking to sell shares to improve its liquidity and make it attractive to investors. BEL’s subscription reduced the public float to 10% and is relatively small to be an investors choice as a small float makes the stock subject to high volatility. 

Under the plan, BEL looks to sell 20% if SINO’s outstanding shares and reduced their ownership to 67-70% stating that moving forward, there will be no need to issue new shares to raise funds as SINO will not have much capital requirements being an equity and gaming license holdings company.

Details of the sale are still in the works for BEL.

SINO Financials Profile 

Moving forward, SINO will make generate income mainly through PLAI and also through dividends declared by LOTO.

Through PLAI, SINO looks to make 50% of its EBITDA generated from gaming revenues of City of Dreams Manila to be split with MCP. 

Gaming revenues are expected to emulate those of RWM and BLOOM which also have similar EBITDA splits with respective operating partners. What makes SINO unique is that its bottomline is reflective of full gaming profits as it makes money through the gaming license and not through operation which MCP’s side of things.

SINO is also now able to declare dividends from accruing income from PLAI and LOTO and management has stated its intention to do so upon SINO’s turn into profitability. However, no exact details have been mentioned yet.

The company has also changed its primary purpose to “the engagement in and/or investement on gaming related businesses.” Under the new primary purpose and with a strong revenue stream underway, it’s not far to posit that the company may also venture into other gaming investments towards the future.

An Investment Outlook

We think that SINO is a good investment to gain exposure into the Philippine gaming industry, as its earnings profile will be highly reflective of gaming revenues. Our target price of P1.95/sh only accounts for the increased value of SINO through the asset injection and is not yet reflective of future profits to be made once it commences operations this 4Q14. We find that the corporate actions taken by SINO to clean up its balance sheet and enable dividends to be highly positive as an investment. Moreover, while some may take BEL’s prospect sale of 20% of SINO’s outstanding shares to the public as a negative, overall, it’s positive for the stock to be an investment as the move eases volatility caused by a rapid appreciation or depreciation of the stock price on business developments because of a small public float and helps protect investors against market manipulation.

Hence, We are issuing a BUY for SINO with a target price of P1.95/sh with the target price based on our estimated value of BEL’s injection of gaming assets into SINO, and positive investment points moving forward as a result of SINO’s new structure.