We are negative on the multiple increases in taxes and duties on casinos. While the market has long anticipated the hike, the magnitude caught us by surprise with a 10% hike on casino gaming tax to 35%. We tactically downgrade GENM to SELL, GENT to HOLD while maintaining our HOLD call on BTOTO as we adjust the earnings impacts for respective companies. Downgrade to NEUTRAL as the sector is now undermined by the higher gaming tax, margin compression and potential earnings contraction.

NEWSBREAK

Budget 2019 has hit the gaming industry hard with increased taxes, fees and levies, which includes (1) higher casino license of RM150m/annum from RM120m/annum, (2) higher casino duties on GGR of 35% from 25%, (3) higher machine dealer’s license of RM50k/annum from RM10k/annum, (4) higher gaming machine duties on gross collection to 30% from 20% and (5) the number of special draws for NFO to be reduced by half.

HLIB’s VIEW

Detrimental. The market has long anticipated a gaming tax hike, which is in line with the government’s will to increase and diversify its revenue streams via indirect taxes. However, the magnitude caught us by surprise with a 10% hike (to 35% from 25%). This hike essential makes Malaysia’s GGR tax rate higher than her neighbouring peers-ex Macau (Figure #1). The increase in machine dealer’s license fees and gaming machine duties (if applicable) are expected to have minimal impact to bottom line, quantum wise.

Pressure on casino operators. We opine that the additional taxes and duties slapped on GENM would offset the growth from the exponential increase in the visits resulting from the RM10.4bn GITP expansion. Our initial projection of 16.4% 3 years CAGR for EBITDA is now cut to 4.4%, undermined by the worse-than-expected hike in gaming tax. Besides, we are of the view that the casino is now handicapped to run the operations on more restricted resources with lesser perks and rebates available to entice VIP players, not without sacrificing the margin or increase the risk.

No negative surprises to NFO. As expected, the number of special draws for all numbers forecast operators (NFO) will be reduced by half (from 22 days to 12 days) beginning 2019 in order to reduce social problems related to gambling activities.

Forecasts. Our FY19/20 EBITDA and PATAMI for GENM are reduced by -27%/-27% and -34%/-36%, respectively. Meanwhile, our FY19/20 EBITDA and PATAMI for

GENT are reduced by -10%/-11% and -14%/-14%, respectively. For BTOTO, we reduce our FY19/20 EBITDA and PATAMI by -4%/-6% and -4%/-7%, respectively.

We tactically downgrade GENM to SELL (from BUY) with lower SOP-derived TP of RM4.01 (from RM5.80) after factoring in the additional taxes impacts and lower our EV/EBITDA multiple for RWG operations. We downgrade GENT to HOLD with lower SOP-derived TP of RM7.51 (from RM12.27) after consolidating the forecasts and TP changes in GENM as well as expanding the holding discount to 50%. Meanwhile, we maintain HOLD on BTOTO with lower DCF-derived TP of RM2.16 (was RM2.36).

Downgrade to NEUTRAL (from Overweight). We opine that the sector is now facing headwinds with the growth story now undermined by the direct impact on the higher gaming tax. Besides, the extra risk on margin compression and potential earnings contraction would no longer entice the interest from investors.

Source: Hong Leong Investment Bank Research - 5 Nov 2018