Investment Highlights

• We are upgrading Genting Malaysia (GenM) from SELL to HOLD with a higher RNAV-based fair value of RM5.45/share. We have used GenM’s FY19F earnings to arrive at the group’s fair value instead of FY18F. Our RNAV implies mainly a PE of 18x on GenM’s FY19F leisure and hospitality earnings in Malaysia. We have also assumed a 20% discount to GenM’s RNAV.

• The Ministry of Finance has announced that the GST (goods and services tax) would be zero from 1 June 2018 onwards. There was no announcement on the reinstatement of the sales and service tax. Prior to the implementation of GST on 1 April 2018, gaming and lottery companies have never paid sales tax.

• There are two scenarios here. First, if there is no GST and no sales tax. Second, if the GST of 6% is replaced with a sales tax of 6% or higher.

• The additional earnings risk to GenM is if the government raises the casino gaming tax to cover the shortfall of funds from the abolishment of the GST. We estimate that GenM’s FY19F net profit would decline by 3% to 4% if the casino gaming tax was increased by one percentage point.

• The casino gaming tax has not been revised since November 1998. Currently, GenM pays gaming taxes of 25% on mass market and slot machine wins and 10% on VIP wins.

• The abolishment of the GST without the sales tax is positive for GenM as GenM has been absorbing the cost of the GST. Currently, GenM pays a GST of 6% on net casino wins.

• Based on this, we estimate that GenM’s FY18F net profit would increase by 14%. GenM’s net profit would rise by 20% in FY19F due to the full-year impact of zero GST.

• Based on the second scenario, there would be no changes to GenM’s net profit as the GST of 6% is replaced with the sales tax of 6%.

• We believe that developments are fluid as there would be more announcements from the government going forward. As such, we have left our earnings forecast for GenM unchanged for now.

Source: AmInvest Research - 17 May 2018