SINGAPORE (June 16): CIMB is keeping Genting Singapore at “add” with a higher target price of 89 cents on the back of upside from Resorts World Jeju (RWJ), which is due to open progressively from 2017.

The US$1.8 billion ($2.44 billion) development, a 50-50 joint venture between Genting Singapore and Landing International, will sit on 2.5 million sq m of land in southwest Jeju.

RWJ will be the first integrated resort on the South Korean island, and features a 10,000 sq m foreigners-only casino, a 70,000 sq m retail complex, and a Myths & History theme park.

Part of the development costs will be defrayed by proceeds from RWJ’s 1,518 residential units, which is expected to rake in some US$0.9 billion in sales, CIMB said.

Here are 2 reasons why CIMB is betting on Resorts World Jeju to give Genting Singapore a boost.

1) Prime destination to target Chinese tourists

Only a 2-hour flight from major cities in northeast China, including Shanghai and Beijing, Jeju has a unique visa-free policy that allows visitors to stay for 30 days, says CIMB lead analyst Jessalynn Chen in a Tuesday report.

When the South Korean government in 2010 introduced a policy to grant permanent resident status to foreigners who purchase property worth at least 500 million won ($578,000), 98% of the applicants were Chinese.

The Chinese also accounted for 86% of Jeju’s 3.3 million international visitors in 2014.

“The Northern and Eastern regions of China have a combined population of more than 600m, which presents a huge potential target market for RWJ,” says Chen, adding that RWJ will be closer than other gaming destinations, including Macau and Singapore.

2) RWJ could add $145 million per annum to Genting Singapore’s net profit

“Most of the attractions in Jeju are natural sites and RWJ will be the first large-scale IR on the island. While the casino will only be open to foreigners, the rest of the RWJ development will target both local and foreign tourists,” says Chen.

While few details have been released on RWJ, CIMB says its “best-guess estimates” show RWJ is likely to generate some $1.3 billion in net recurring revenue per year, excluding residential sales, when the resort is fully opened in 2020 onwards.

“After applying 35% EBITDA margin, depreciation of $54 million per year (straight line over 45 years) and 25% tax rate, we expect RWJ to generate net profit of $289 million per year in our base-case scenario,” says Chen.

This translates into a potential $145 million in share of results per year, based on Genting Singapore’s 50% stake in the joint venture development.

CIMB’s Chen says that while Genting Singapore’s share price may be negatively affected in the near term by expectations of high bad debt charges at Resorts World Sentosa (RWS) in 2Q16 and concerns about the possible injection of Resorts World Las Vegas into Genting Singapore by its parent company, any share price weakness would provide a buying opportunity ahead of the maiden earnings contributions from RWJ at end-2017.

“We think that the worst is over for RWS in 2H16,” Chen adds.

Genting Singapore are trading at 72 cents.