Since 2Q22, international travel is seeing signs of healthy recovery, which should continue into 2H22 as more countries ease border restrictions and airlines increase their capacities. International visits should spur the next leg of recovery for the casino operators and pave the way for a return to normalcy going into CY23. NFO sales recovery remains healthy on the back of increased mobility and the country’s strong economic growth. Maintain OVERWEIGHT rating on the sector with top picks GenT and SPToto.

Here comes the pent-up traveling demand. International visitations to gaming premises were largely absent since the onset of the pandemic in Mar 2020 till end- 2021. In 1Q22, there were progressive easing in international border restrictions, but traveling demand remained soft impacted by the rising global Omicron cases. However, since 2Q22, international traveling had seen an encouraging pick up. In Malaysia, since the border reopened on 1 Apr until 21 June, tourist arrivals had surpassed the full year target of 2m (c.17% of the tourist arrivals compared to the same period in 2019). In Singapore, where international borders were reopened to fully vaccinated travelers since 1 Apr, it had seen foreign visitor arrivals recovered in Apr and May 2022 to 18.4% and 28.1% compared to same periods in 2019, respectively (see Figure #1 andFigure #2). In Las Vegas, visitor volumes had recovered to close to pre-pandemic level where May 2022 figure is at 93.4% of the same period in 2019 (vs. only 72.5% in Jan) (see Figure #3). We anticipate international traveling volume to pick up further in 2H22 due to (i) more countries easing border restrictions and traveling requirements; (ii) ramp up in airline capacity with more flight schedules; and (iii) lowering air fares once airline capacity starts to normalize.

Shift in consumer spending habits post pandemic should augur well for gaming and leisure demands. In the past 2 years, due to travel restrictions, the wealthy had shifted their spending from traveling to luxury goods, boosting demand in segments such as branded retail, high-end properties and luxury cars. With current easing of traveling restrictions, we expect the reverse to happen as the wealthy unleash their pent-up traveling and leisure spending. Furthermore, as people emerge from the lockdown, spending habits have also shifted from (i) virtual and online experience to physical and in-store experience; and (ii) purchase of physical goods to services. Both of these shifts bode well for the leisure and gaming segments.

Shift in visitors mix. As international traveling started picking up, the regional casino operators in SEA will once again compete to attract international travelers. We believe that RWG in particular has strengthened its competitiveness with the addition of SkyWorlds making it an integrated tourism destination that could capture a more diverse crowd. RWS on the other hand, with Singapore’s rising prominence as a regional financial hub, will likely attract more business travelers post pandemic. As such, GenS is repositioning itself to cater to “bleisure” (business-leisure) travelers. Its renovation work at Festive Hotel, transforming it into a bleisure and workation (work vacation) hotel and facility upgrades at Resorts World Convention Centre are initiatives taken to capture this segment of post-pandemic travelers.

Absence of Chinese visitors and recession fears. As China continues to restrict non-essential outbound travel by Chinese citizens, this will put a lid to a full recovery in international visitations to the casino operators. Conversely, if restrictions were to ease, it will be a huge catalyst for the industry as the Chinese are a key client segment to the industry. Other concerns on the sector include the current global inflationary pressure and risk of economic slowdown, both of which will impact discretionary leisure spending. While these are valid concerns, we believe that it is still too early to be negative on the sector as traveling data and ground checks are still indicating a strong recovery. As borders just reopened and there are still plenty of room to go before achieving pre-pandemic traveling volume, the recovery momentum will most likely outweigh the impact from inflationary pressures and the risk of economic slowdown in the near to medium term.

NFO sales recovery remains on track to achieve pre-pandemic level likely by end CY22 or early CY23. Despite lower mobility in 1Q22 impacted by the rising Omicron cases, SPToto’s NFO sales achieved 99.6% level compared to the same period in 2019 as sales were lifted by the record amount Supreme 6/58 jackpot run in the quarter. As the Omicron wave subsided and as the country progressed into endemicity in 2Q22, Google Mobility report had indicated improvement in mobility (see Figure #9). The improved mobility coupled with the strong economic recovery (HLIB forecast: +5.9% GDP growth) will bolster for the recovery in NFO sales. We maintain our OVERWEIGHT sector rating premised on (i) the resumption of international travels which will spur the next leg of recovery for the casino operators; and (ii) the strong economic recovery and improving mobility which augur well for the recovery in NFO sales. Our top picks are GenT as we believe that it will enjoy an across the board improvement in its major business segments. In addition to the recovery from the gaming segment, the current buoyant commodity prices should continue to benefit the group’s plantation as well as O&G segments. We also like SPToto for its generous projected FY23 dividend yield of 7.7%.

Source: Hong Leong Investment Bank Research - 8 Jul 2022