Highlights

• After a series of sin tax hikes recently, one left pondering if gaming tax is the next one on the card. The last time of a raise in gaming tax was literally 18 years ago in 1998 (casino) and 6 years ago in 2010 (NFO), since then gaming sector has been largely spared from few rounds of sin tax hikes.

• The absence of gaming tax revision during the budget recalibration earlier in Jan was a relief after absorbing GST last year. However, in recent years, we note that duty/tax revisions for the sin sectors have been mostly done outside the tabling of Budget. With recent excise duty hike for alcoholic beverages by some 10% on 1 Mar and circa 40% for cigarettes in Nov-15, we cannot rule out the possibility of a review in gaming tax up next. Gaming tax contributes circa RM2.8bn or 1.6% to the government’s revenue per annum.

• On a positive note, we opine that the fiscal position is now in better shape after the budget recalibration and potential windfall revenue (spectrum fee, rehiring programme of illegal workers, etc.). Coupled with the recent rally in crude oil prices, a review in gaming tax may not be imminent.

Comments

• Casino Operator. Our estimation shows that for every 1% hike in gaming tax, FY16 bottom line for GenM and GenT will be negatively impacted by circa 3% and 1%, respectively.

• Number Forecast Operators (NFO). A 1% hike on gaming tax/pool betting duties is estimated to negatively affect FY16 bottom line for BJToto by 6.5-7.5%.

• GenT and GenS are safer bets. For GenT (TP: RM10.00), impact of a potential gaming tax hike is less severe on its earnings. We remain optimistic on its long-term catalysts and position to benefit from improvement from its subsidiaries and overseas operations while enjoying risk diversification. We continue to like GenS (TP: SG$0.90) as we expect a less volatile year with cleaner balance sheet and lower bad debt provision. Main downside risks, in our view, are on the regulatory front, luck factor and execution.

Catalysts

• Stronger tourist arrival.

• GITP to start kick by phases from 2H2016 onwards

• GenS's regional expansion into international markets (Japan and South Korea).

• GenT's international expansion into Las Vegas (RWLV) and expansion of power segment.

Risks

• Hike in gaming tax.
• Failure in casino license renewal in Malaysia and Singapore.
• Execution risk

Rating

NEUTRAL

Positives

• (1) Defensive and monopoly industry

Negatives

• (1) Highly regulated industry; (2) Earnings highly dependable on luck factor

Valuation

• We remain NEUTRAL on the sector with top pick on GenT (BUY; TP RM10.00) based on SOP valuations. We also have a BUY call on GenS (TP: SG$0.90) based on EV/EBITDA of 7.1x (15% discount to peers).

Source: Hong Leong Investment Bank Research - 16 Mar 2016