The resumption in air travel bolstered by airline capacity increase and lowering air fares are auguring well for the casino operators’ recoveries. The relaxation of Covid restrictions in China are also reigniting hopes that border reopening could be imminent which would be a great re-rating catalyst for the casino operators especially RWG and RWS due to their proximities to China. Under the current market volatility, NFO business should remain resilient. Maintain OVERWEIGHT rating on the sector with top picks of GenM and SPToto.

China – the final missing puzzle piece. Recent relaxations of China’s Covid restrictions reignite hopes that the nation is pacing closer to its borders reopening. Chinese visitors are a key client segment to the gaming industry. After more than three years of lockdown, there is a sizeable pent-up traveling and gaming demands waiting to be unleashed. We anticipate that once China’s borders reopen, this will greatly benefit RWS and RWG which are in proximities to the country.

Recovery in air travel continues. In 3Q22, we see how the recovery in air travel benefitted RWS with its net profit up +2.1x QoQ and +1.2x YoY. Bucking Singapore’s improving tourist arrival trend (see Figure #1 and Figure #2) coupled with improving capacity in RWS due to increase in hiring, GenS should continue to see an upward earnings trajectory. Similarly, Las Vegas is also registering improving tourist arrivals and hotel occupancy rate (see Figure #3 and #4). Despite inflationary pressures and recessionary woes, Las Vegas Strip, RWNYC and RWC are registering GGR at above pre-pandemic level (see Figure #5-#7) likely due to the strong pent-up traveling demand which outweighed these concerns. We see further upside to recovery in air travel due to (i) increase in airline capacity; (ii) lowering air fares as jet fuel price eases; and (iii) further relaxation of border restrictions.

NFO – resilient business. We expect the recent announcement on the reduction of special draws for NFOs to have minimal impact on earnings due to (i) special draws typically have lower sales compared to normal draws due to its non-routine nature; and (ii) a portion of special draw sales cannibalizes the sales from normal draws, which have a higher margin resulting a net negative impact to earnings. Despite an increasing risk of an economic slowdown, the NFO segment should remain resilient. Historically, the NFOs saw minimal impact to sales volume during the past recessions (AFC in 1998 and GFC in 2008).

We maintain OVERWEIGHT rating on the sector premised on (i) the gradual recovery in international air travel auguring well for the turnaround of the casino operators; (ii) the increasing likelihood of a China border reopening benefitting RWS and RWG; and (iii) the stable and resilient earnings from NFOs. We now tactically prefer GenM (BUY, TP: RM3.44) over GenT (BUY, TP: RM6.45) due to the latter’s exposure to commodities (plantation and O&G) which are susceptible to an economic slowdown risk. On the contrary, GenM which has a more domestically oriented business should fare better as domestic demand is expected to remain firm in FY23 (BNM 2023 GDP projection growth: +4-5%). In addition, under the new administration, the domestic tourism segment may benefit as the government capitalizes on the sector as a lever to support the domestic currency and economy. We also like SPToto (BUY, TP: RM2.27) as the stock offers a good dividend yield play with projected FY23 yield of >8%. This is anchored by the stable earnings from its NFO business. Its jackpot games which gained popularity thanks to the record-run previously also allows it to gain market share.

Source: Hong Leong Investment Bank Research - 20 Dec 2022