• Bloomberg reported that China is drafting a proposal to allow gambling on Hainan Island. Government agencies are considering allowing online gaming, lottery or sports betting, which could open the door to physical casinos in the long term.

• We believe that this may be marginally negative for the casino industries in Singapore and Malaysia as the Chinese are a part of their clientele. Still, the impact of a physical casino on Hainan Island may not be as detrimental to Singapore and Malaysia as to Macau. Macau casino stocks took a beating upon the release of the news last Friday.

• It is not known if China would allow foreign companies to bid for a physical casino on Hainan Island.

• VIPs accounted for 36% of Genting Singapore's (GenS) gross gaming revenue in FY16. We believe that Chinese players used to account for a significant portion of GenS' gross gaming revenue in the past.

• However, their contribution may have declined after the crackdown on corruption in China a few years ago. We reckon that a large portion of the industry's gross gaming revenue are now driven by customers from Southeast Asia such as Indonesia and Malaysia.

• In Malaysia, mass market accounted for 60% of gross gaming revenue in 9MFY17. About 73% of the visitors at Resorts World Genting were day-trippers while the balance 27% were hotel guests in 9MFY17.

• Out of the hotel guests, about 7% came from China. GenM is working on growing the Chinese market currently.

• We expect GenS' earnings to be partly hit by the closure of certain non-gaming attractions for refurbishment and renovation in FY18F. Non-gaming attractions accounted for 28.6% of GenS' revenue in FY16. The renovation and refurbishment, which are expected to be completed in FY19F, is estimated to cost about S$1bil.

• In Malaysia, we believe that Genting Malaysia's (GenM) earnings would improve in FY18F after being hit by bad luck factor in the mid-to-premium mass segment in FY17E. However, operating profit margin may still be squeezed by higher operating costs in FY18F.

• We understand that the EBITDA margin of the Malaysia unit would only gravitate to its usual 35% in one to two years' time when operating conditions are stable. Hence, EBITDA margin may still be unexciting between 32% and 33% in FY18F (9MFY17: 29%).

• Maintain SELL on GenM with a fair value of RM4.95/share and HOLD on Genting Bhd with a fair value of RM9.40/share. We have a HOLD on GenS with a fair value of RM1.28/share.

Source: AmInvest Research - 5 Feb 2018