The continuous growing tourism industry in Singapore would enhance GenS earnings stability. However, the gaming sector in Malaysia was hit by several negative measures and is expected to turn more challenging in FY19. GenT is currently trading at 6.2x forward EV/EBITDA and is our top pick. Besides its undemanding valuation it also acts as a cheaper proxy to buy into GenS’s stability and potential venture into the Japan gaming market.

Recap on the horrendous 2018. In Nov 2018, the Malaysia gaming sector was hit by several negative news, which include (i) the 10% increase on existing casino duties to 35%, (ii) numbers of special draws reduced by half to 12 days for all NFOs, and (iii) withdrawal of 20th Fox Century from Genting’s Theme Park.

Lack of positive catalysts in 2019. We see minimal revenue growth for GenM as upside is capped due to the uncertainty on the opening of the Theme Park, which was expected to generate significant footfall. Despite the roll out of other components of the GITP according to plan in Nov 2018, (which includes the indoor theme park (Skytropolis), Zouk, and VR Centre) we feel it may be insufficient to meet GenM’s expectation of 30m visitors by 2020. Non-gaming revenue (includes hospitality, entertainment, F&B, etc.) is estimated at 10-15% of GenM’s total revenue.

Stabilising Singapore operations. Due to the US-China trade war, we opine that there may be a slight decline in VIPs from China (Chinese customers contribute a sizeable portion to gaming revenue). However, we are confident that the slight decline in the number of VIPs from China will be cushion by the continuous growth in the demand of non-gaming and mass-market tables. We expect GenS to leverage on the growing tourism industry in Singapore (YTD: 7.1% YoY) and is expected to grow further in 2019, from vigorous marketing efforts in 2018.

Japan Integrated Resort to be the next big bet. As many as 3 casinos will be permitted across Japan, with the bidding process beginning between 2019 and 2020. GenS is in the midst of preparation works in anticipation of the passage of the Japan IR execution bill to bid for the gaming license in Japan. If successful, this will act as a new revenue stream to GenS. However, we expect the bidding process to be competitive as various other casino giants (MGM, Wynn, etc.) are also preparing bids.

Slowing NFO headwind. According to our sensitivity analysis, every 1-day reduction in drawing days would reduce Btoto’s forward revenue and earnings by about 0.3% and 0.6% respectively. With that, we expect earnings to decline by ~7% YoY in FY20. In the absence of new catalyst, dividend yield of ~7.5% continues to serve as the support for share price.

Forecast. We maintain BUY with unchanged TP of RM7.12 for GenT. We have previously upgraded GenT to BUY from Hold (Strategy Report dated 19 Dec 2018) as we believe that the sell down (-24% since early-Sept) represents a good entry opportunity given the undemanding valuations. GenT is currently trading at a forward EV/EBITDA of 6.2x as compared to peers’ 9.5x. GenT also acts as a cheaper proxy to GenS’s stability and potential venture into the Japan gaming market.

Maintain NEUTRAL. Despite the hiccups, prices have corrected severely. The sector now offers decent risk to reward with its undemanding valuation at 7.7x forward EV/EBITDA which is at a discount to peers (9.5x). GenT is our top pick.

Source: Hong Leong Investment Bank Research - 16 Jan 2019