Maintain OVERWEIGHT on the sector with growing optimisms on both regional and local fronts along with domestic growth upcycle theme. Positive catalysts include the ‘zerorisation’ of GST, recovery of VIP business, stability in the operating environment and growth from GITP. The negatives are the potential of further delay in the GITP and prolonged foreign outflow. The compelling valuation levels backed by solid growth and potential positive news flow as well as low level of foreign shareholdings present an opportunity to accumulate.

Zerorisation of GST is a positive to both casinos and NFOs as they previously absorbed the GST and were not subjected to SST in the past regime. While the impact to casino players is difficult to estimate due to the diversified income stream; the impacts to NFOs were apparent as both BToto and Magnum (not rated) recorded a CAGR of -10% and -4% from FY14-FY17, respectively. The overall impacts to revenues of NFOs are expected to be minimal at 1-2%, however the impact to bottom lines could be in the teens assuming direct flow through from the top.

GITP is starting to bear fruit with visitors growing by 17% in 2017 to reach 23.6m, well ahead of implied target of 10% CAGR. The faster-than-expected growth was attributable to the introduction of various new amenities such as the new cable car system, new shopping destinations, new casino space and refurbished hotels. New indoor theme park and the long-awaited 20th Century Fox World Theme Park are next in line to be revealed latest by 1Q19 (possibly 2H18).

Domestic growth upcycle theme is expected to bode well for gaming sector, supported by favourable domestic consumption following the higher disposable income and improved consumer sentiment with series of rakyat-friendly policies. Broadly speaking, higher domestic consumption is expected to spur demand of recreational activities, vacations and local spending, benefiting the integrated resorts operated by casino player as well as improving the ticket sales of NFOs.

Foreign shareholding at 6-year low. While we cannot rule out the risk of prolonged foreign outflow, the recent sell down presents an opportunity for investors to accumulate. Notably, the foreign shareholding of GenM is currently at an unprecedented low of 38% (data from 2013) while GenT is hovering around 45% levels (recent low: 44% in 2016). To our comfort, their current foreign shareholdings are even lower than the low period of Bursa foreign shareholding during 2013/2014 “taper tantrum” period and 2015’s oil price slump.

Valuations remain compelling. Valuations of casino operators under our coverage remain at undemanding level of 6-10x forward EV/EBITDA while its peers in Macau are trading at an average of 11-14x. Making the valuations more compelling are the solid growth stories from the recovery of VIP business regionally, improved operation metrics (low bad debt for GenS), new expansion (GITP of GenM) and potential positive news flow (GenS potential venture into Japan).

Maintain forecasts and OVERWEIGHT rating as we believe the captivation of GITP expansions will continue to drive the growth with the reopening of both indoor and outdoor theme parks, supported by the overall domestic growth upcycle theme while international operations continue to show stabilized and improved performances. The return of VIP players seen in the regional markets is the yet another stimulus.

Top Pick. We like GenT (BUY, RM12.27) for its value proposition as a cheaper proxy to bet on the growth from GITP and the stability of GenS as well as the potential Japan venture. It is currently trading at distressed level of forward EV/EBITDA of 6.3x (below historical mean) and historical high holding discount of >40%.

Source: Hong Leong Investment Bank Research - 17 Jul 2018