We downgraded our call on Genting Malaysia (GENM) on 27 June from BUY to HOLD due to an increasingly challenging outlook as we believe that the hike in gaming tax is likely to limit GENM’s competitiveness. Competition for volume is likely to intensify in the coming quarters, as demand from China is expected to slow due to the on-going trade tension, while more casinos (supply) are opening up over the next few years. We had also lowered our valuation to factor in the higher risk, which led to a lower TP of RM3.40.

Casinos Are No Longer for the Exclusive Club

We believe that the biggest competition threat for GENM for its mass and premium-mass segment are from the casinos in Cambodia, the Philippines and Vietnam, which are expanding their capacity significantly. Myanmar has also passed a new law in May to legalise gaming, leaving Thailand and Brunei as the only two countries within ASEAN in which casinos are still illegal. Malaysia had previously benefited as one of the few countries in the region that have a legal large-scale casino. However, more countries are starting to embrace gaming as another source of revenue.

Rebates and Complimentary Are a Must

We believe that it would be challenging for GENM to match the rebates and complimentary perks offered by regional casinos in lower tax rate jurisdictions, as it would need to sacrifice a significant margin to do so, given that gaming taxes are charged on the gross gaming revenue. Minor tweaks on the complimentary perks are still largely acceptable to the mass and premium-mass players. However, the reduction in such rebates is unlikely to well accepted by the VIP players, as the rebates are based on a predetermined percentage of the overall bet of the player.

Reiterate HOLD With An Unchanged TP of RM3.40

We reaffirm our HOLD rating and 12-month SOTP-based TP of RM3.40 as we continue to believe that the hike in gaming tax would limit GENM’s option in competing with casinos around the region. Although the new non-gaming facilities have helped to drive up overall visitations for the mass segment, the VIP segment volume has declined significantly after the change in rebates.

Source: Affin Hwang Research - 18 Jul 2019