Maintain overweight. We continue to see multiple catalysts for the gaming sector. Gaming taxes could rise after the abolishment of the goods and services tax (GST) but the earnings impact would be moderate as the government is aware that sales could further flow out into the illegal market (for number forecasting operators [NFOs]) and regional competitors (for casinos). The gaming sector has seen some selling in casino companies after Malaysia’s general election 14 (GE14), but it still outperformed the FBM KLCI. To date as at May 9, the gaming segment fell only 1.2% versus the FBM KLCI’s 8.4% drop.
Specifically, the long-depressed NFO segment spiked 15% post-GE14 to outshine the casino segment which fell 3% over the same period. With the reduction of the GST rate to 0%, reintroduction of petrol subsidy and promise of a minimum wage increase to address the higher cost of living, the gaming sector is expected to benefit from a recovery in consumer sentiment. Note that our current 2019 net profit forecasts assume zero-rated GST which could boost NFO’s 2019 net profit by 10% to 12%. There are also multiple catalysts ahead, which include Genting Malaysia Bhd’s (GENM) opening of 20th Century Fox theme park by end-2018 after numerous delays, Genting Singapore to see more news flow on Japan IR concession bidding which will benefit parent company Genting Bhd (GENT), and Magnum’s potential monetisation of 6.3%-owned U-Mobile, and the potential reduction of Inland Revenue Board (IRB) penalty.
While gaming companies are beneficiaries of the zero-rated GST, the government will likely increase gaming taxes to lift its revenue (we estimate the sector’s total tax contribution at 1.5% of the government’s total 2017 revenue). However, we expect the impact of gaming duty hikes to be moderate at worst. First, the quantum of the duty hikes would need to be balanced against further outflow into the illegal market, particularly for the NFO segment, and to regional competitors for the casino segment. Additionally, impact on the sector’s bottom line would be mitigated by NFO players’ likely passing on of the duty hikes to punters, which in turn will fan the illegal market and dilute the government’s revenue collection.
While the casino would likely bear the full brunt of the duty hikes as they are unable to change the card games’ payout, Genting Group’s earnings stream is geographically diversified. We prefer casinos over NFOs as the casino segment will benefit from earnings growth and news flow. NFOs’ share price upside should be more gradual after May’s spectacular rally, although the long-speculated potential listing of Magnum’s 6%-owned U-Mobile could provide further uplift to Magnum. We continue to value exposure to GENM in the Genting Group as it directly benefits from the Genting Integrated Tourism Plan project. — UOB Kay Hian, July 11
