We maintain our Neutral view on the sector. With limited control over the existing lawsuits, GenM is looking to step up and embark some on cost saving measures, which we think may take time for significant results. We remain our optimistic view on GenS as any favourable news from Japan pertaining to the casino bill this spring will create excitement. GenT is lacking of short term positive catalyst, we opine that earnings will be shaken by Malaysia’s operation and its own RWLV project.

GITP progress. Approaching the end of Phase 1 GenM has thus far spent ~RM8.7bn capex on major infrastructures, the remaining ~RM1.7bn is meant for Phase 2’s additional luxury hotel rooms at Resort World Genting (RWG). Number of visitors has grown in tandem with the rollout of Phase 1 of GITP as we saw visitors spike 16.8% YoY to 23.6m visitors in FY17 and is expecting FY18 to break a new record.

Outdoor Theme Park’s pre-opening expenses. We were told that some rides are already running on trial rounds since late 2018. Rides that are ready for operation are not advisable to be left untouched and require continuous maintenance in order to avoid rusting. GenM has to keep the theme park running on an expense and the additional pre-opening expenses are expected to be approximately RM52-60m p.a.

Profit will continue be hit by higher effective tax rate. In Dec 2017 the MOF decided to amend the previous tax incentive agreement with GenM by prolonging the utilisation period of the previously agreed tax exemption amount. This means the effective tax rate moving forward will be higher than the previous years. However, we have already taken this into consideration, estimating an effective tax rate of ~24% in FY18 and onwards vs ~18% in FY17.

GenM is looking to embark on cost saving measures. With limited control over the topline, GenM has plans on (i) reducing marketing expenses (i.e. reduce numbers of complimentary rooms, lower loyalty points and etc), (ii) reducing headcounts (mainly contract staff) and (iii) liquidating some of the non performing casinos in United Kingdom. To recall, the group has a total of 42 operating casinos in the United Kingdom.

Osaka searching for its IR partner this spring. Japan’s first prefecture and city, Osaka had announced that the city will start searching for its integrated resort (IR) partner this spring, which is slightly earlier than the market’s previous expectation of end 2019/early 2020. GenS is watching this development closely to prepare for a bid.

GenT dragged by GenM and prolonged opening of RWLV. Management clarified that it will be changing the design of the RWLV casino (given the now settled dispute with Wynn). We are in the view that this would not impact immediate earnings as the incremental cost is likely to be capitalised (i.e. capex of constructing the property). However, the potential earnings contribution from RWLV will be delayed

Maintain NEUTRAL. Our top pick is GenS (BUY, TP: SGD1.42) as we expect any favourable news from Japan pertaining to the casino bill this spring will create excitement for GenS. Besides, we like its stability leveraging on Singapore’s growing tourism industry. While GenT’s (HOLD, TP: RM7.12) FY19 EV/EBITDA is trading at 6.4x (at a discount to its peers 10.4x), we feel that the discount comes on the back of earnings decline in FY19 following the negative impact from GenM (HOLD, TP: RM3.23) resulting from (i) casino duty increase and (ii) delay in the outdoor theme park opening.

Source: Hong Leong Investment Bank Research - 8 Feb 2019