The outlook for the gaming industry is brightening following the reopening of businesses from NFO and RWG as well as the easing of traveling restrictions in Singapore. After several false starts, we believe that the gaming industry is now on a more sustained recovery path supported by the shift in stance by countries away from a total lockdown approach towards tightening restrictions in response to Covid-19 threats. Thus, we upgrade our sector rating to OVERWEIGHT. Our top pick for the sector is GENT as we believe it is trading at a huge holding discount of >50% to its SOP valuation.

NFO updates. NFO sales for BToto are recovering post business resumption but at a slower pace compared to post-MCO1.0. Separately, we estimate that the NFO ban in Kedah will have a moderate impact on the BToto’s earnings and there is a possibility for the group to reallocate its Kedah licenses to other states. Its luxury car dealership segment continues to record robust growth which should help to cushion the impact of a slower recovery in the NFO segment. We maintain BUY call on BToto with unchanged TP of RM2.26. The stock currently provides a decent dividend yield of 4.9% based on our projected DPS of 9 sen for FY22.

RWG reopening. RWG which traditionally relies heavily on local visitors (>70% of its total visitors) sees a strong recovery from the lifting of inter-state travel ban from 11 Oct in Malaysia. Local visitations surged on the back of pent-up traveling demand and restrictions in traveling abroad. We expect the footfall to RWG to be further boosted by (i) the opening of Genting SkyWorlds theme park; and (ii) upcoming CNY season which should attract more crowds particularly to its gaming segment. Prior to the opening of the theme park, the main attraction in RWG was its casino which tends to attract adult non-Muslim crowds. The commencement of SkyWorlds theme park will complement its gaming attraction and complete RWG’s ensemble of entertainment offerings to become a truly integrated entertainment destination that is suitable for family (including children) and all Malaysian demographic (including Muslims). The increased footfall to the theme park should also have a positive spillover effect to the other venues in RWG. Separately, its regional gaming operations in US and UK are recording exponential recoveries, with 3Q21 EBITDA surpassing their pre-pandemic levels at 176% and 166% of 2019 EBITDA levels (see Figure #1). Overall, we believe that the prospect for GenM is improving with the return of crowd to RWG, SkyWorlds opening and the positive contributions from its US and UK operations. We maintain BUY call on GENM with unchanged TP of RM3.61.

GenT prospects brightening. GenT will benefit from the improvements from all its gaming, leisure and hospitality segments, including GenM, GenS and RWLV. For GenS, Singapore is progressively easing its border restrictions for more countries which will bode well for GenS as it relies heavily on international visitors (historically accounting for c.70-80% of visitations). On the other hand, RWLV was off with a slower start recording revenue of USD175m (RM722.8m) and EBITDA of USD27m (RM110m) in 3Q21, largely impacted by the state’s mask mandate. Nonetheless, we expect it to record sequential EBITDA improvement backed by (i) the robust Las Vegas Strip gaming revenue growth which is now above pre-Covid levels despite the mask mandate (see Figure #2); (ii) the openings of retail, restaurants and entertainment venues (note that non-gaming revenue typically make up half or more of Las Vegas Strip revenues); and (iii) the likely lifting of mask mandate in early 2022. Improved visitations will allow RWLV to achieve better economies-of-scale. We maintain BUY call for GenT with unchanged TP of RM6.20.

Recovery set in motion. The gaming sector was one of the worst hit sectors by the Covid-19 pandemic over the past 2 years. We believe that investors are increasingly developing “immunity” against Covid-19 news that spooked markets, which is in line with the stance of most countries as they move away from a total lockdown approach towards tightening restrictions, recognizing the full lockdown detrimental effect has on the economy. Case in point is when the recent Omicron variant news broke out. In the US, share prices of pandemic beneficiary stocks such as Zoom, Etsy, DoorDash a nd DocuSign were down after news, contrary to what one might expect. While on the local front, pandemic beneficiary glove stocks staged transient rebounds but tumbled shortly after. For gaming stocks, stock prices regained ground soon after they fell following the news. As investors start to turn their attention away from pandemic beneficiary stocks towards recovery stocks with sound fundamentals, the gaming companies which have stood on steadfastly through the pandemic may once again enter the radar of investors.

We upgrade our sector rating to OVERWEIGHT (from Neutral) supported by the improving industry outlook. While investors should be wary that the recovery path for the industry is likely to be a choppy one as Covid-19 will continue to be a lingering risk, nonetheless, we believe that after 2 years of embattling and living with Covid-19, countries are now better equipped to handle it to avoid a reversion to a full lockdown situation. Thus, this will help to pave a more sustained recovery path for the gaming companies compared to 2021 when the industry was plagued with multiple prolonged lockdowns. Our top pick for the sector is GenT, as we believe it is trading at a huge holding discount of >50% to its SOP valuation. We like GenT for its deep expertise and experience in managing the gaming and hospitality businesses and its well spread operations across different regions which help to mitigate regulatory and country risks. Furthermore, GenT provides an exposure to RWLV which we believe to have strong growth potential in the longer term.

Source: Hong Leong Investment Bank Research - 23 Dec 2021