Highlights

• New game from Magnum… Magnum has launched another game variant on Magnum 4D Jackpot Gold called mGold on 17 May 2017. It is designed as a more affordable option for players to win a smaller amount of money (RM200k for 1st prize) with a minimum bet of RM2. Despite mGold being linked and marketed as a 4D variant game, it is essentially a 6D game with jackpot element in it.

• More competitions in saturated market... Introduction of another new game essentially brings the number of jackpot games to 11 (excl. 4D, 5D and 6D) in a saturated market with declining revenue for NFOs. However, we do not see a direct impact of this new game hurting the existing 4D Jackpot sales (Figure #1) as they are not available in illegal market.

• Negative for BToto… We opine that mGold is a direct competition to existing BToto's 5D and 6D games due to their similarity. Although the combined average sales of Magnum's 4D Jackpot Gold and 4D Powerball of circa RM200k per draw is relatively small compared to BToto’s RM20m per draw, cannibalization effect is observed on its 4D, 5D and 6D sales (Figure #2) from jackpot games.

• Dispute in taxes creates uncertainty… In recent quarters, NFO players have been hit by the difference in interpretation on GST and increase in tax liability due to non-deductible expenses. We understand that operators have asked for reviews on both disputes. However, should both the decisions by Royal Malaysia Customs and Inland Revenue Board stay; we can expect more downside risk in earnings.

• Go online... We believe the government will eventually allow online/mobile betting for other NFO players such as Damacai's mobile app in dmcGo (approval for telephone betting under the provision of the Racing Act, 1961) has been gaining popularity since end of last year. We understand that both BToto and Magnum are seeking MoF’s approval on this new channel to maintain a level playing field.

• ...is the growth catalyst. The top line for NFO has been on a declining trend hampered by weak consumer sentiment and cannibalization from illegal operator. Moving forward, going online is the possible growth strategy for NFO to tap into underserved areas as the number of physical outlets is fixed.

Catalyst

• Allowing online/mobile betting.

Risks

• Hike in gaming tax.

• Slower than expected local consumption growth.

Rating

NEUTRAL ( ↔ )

• For NFO, we opine that it will remain challenging with saturated market and intense competitions among operators as well as illegal operators. The ongoing disputes on the interpretation of GST and non-deductible expenses for taxable income are also among the negative uncertainties.

Valuation

• Maintain HOLD on BToto with unchanged TP of RM2.87 (based on DCF) given the weak gaming operations, intense competition and shrinking dividend. Besides, the ongoing disputes in taxes may further affect their profitability.

Source: Hong Leong Investment Bank Research - 6 Jun 2017