We upgrade our call on the sector to OVERWEIGHT in-line with our recent upgrades on GenM and GenT. We believe share prices have overreacted to the increased competition of the VIP segment in the region. We still favour GenS, as valuations are attractive and believe that any favourable news from Japan pertaining to the casino bill this spring will create excitement. We also like GenM for its improved performance of the Malaysian business alongside a dividend yield of at least 5% which will serve as a support to share price. With regards to NFOs, we expect minimal impact from the reduction in special draws as it will reduce earnings by less than 2%. In fact, the stricter enforcement on illegal operators should help to offset this.

GenM stronger than expected. GenM had placed focus on cost rationalisation measures to counteract the higher gaming tax as there is limited control over the topline. To recap, GenM was hit by higher casino duties on GGR of 35% (from 25%) during Budget 2019. The impact of these efforts can be seen in GenM’s 9MFY19 results which performed above expectations, forming 83.7% of ours and consensus full year forecasts, and we expect these efforts to continue moving into FY20.

Soon to open theme park. GenM targets to officially launch the Outdoor Theme Park (OTP) by 3Q20, which we believe to be relatively conservative. The OTP will have a capacity of c.10,000 visitors per day and there will be initiatives to facilitate the crowd to reduce the duration of physical queues (which can take up to several hours). Most of the attractions will likely remain Fox-themed, with other potential IPs to cater to the Asian market. We are positive on the OTP’s potential to attract international tourists, which ultimately contributes to higher casino traffic. Note that the OTP’s opening also coincides with Visit Malaysia Year 2020.

The Japan bid. GenS is currently amongst the remaining 3 entities (from the initial 7) left in the run for the Osaka bid, with MGM Resorts and Galaxy Entertainment as the other two. The request for proposal stage is indicated to be issued within the upcoming months, with the selection of a winner to take place sometime in 2H20. We opine that GenS may stand out among the rest given its strong balance sheet and expertise in running casino in a tightly regulated Singapore.

NFOs to benefit from illegal clampdown. To recap, Budget 2020 introduced the reduction of special draws from 11 days to 8 days alongside stricter penalties and jail time for illegal gamblers and gambling operators which will take effect in Jan 2020. We expect minimal impact from the reduction in special draws as it will reduce earnings by less than 2%. In fact, the stricter enforcement on illegal operators should help to offset this.

Upgrade to OVERWEIGHT. With our recent call upgrades of GenM and GenT to BUY (from Hold) during the previous reporting season (3Q19), our sector call is now upgraded to OVERWEIGHT (from Neutral). We believe share prices have overreacted to the increased competition of the VIP segment in the region. We still favour GenS (BUY, TP: SGD1.14), as valuations are compelling and believe that any favourable news from Japan pertaining to the casino bill this spring will create excitement. Besides, we like its stability leveraging on Singapore’s growing tourism industry (especially from China). We also like GenM (BUY, TP: RM3.64) for its improved performance of the Malaysian business alongside a dividend yield of at least 5% which will serve as a support to share price. In addition, the potential negatives from the acquisition of Empire should be less profound than initially anticipated (Empire targets to achieve positive adjusted EBITDA in FY20).

Source: Hong Leong Investment Bank Research - 7 Jan 2020