While we remain NEUTRAL on the sector, the casino sub-sector will continue to be the focus in the near-term given the Genting Integrated Tourism Plan expansion program at Genting Highlands coupled with the liberalisation of the gambling industry in Japan. All said, GENTING will be the clear beneficiary should a meaningful recovery occur at GENS and further improvement is seen in GENM. On the other hand, NFO operators still experienced declining ticket sales. In fact, ticket sales are at new lows while luck factor remains vulnerable. On the positive note, the amendment of Common Gaming Houses Act 1953 to combat online gambling, which could deter gamblers switching to the black market is greatly positive to the NFO players.

Maintain NEUTRAL. We saw two distinctive share price performances between the casino operators and NFO players. Both share prices of Genting Bhd (GENTING, OP; TP: RM10.19) and Genting Malaysia Bhd (GENM, MP; TP: RM5.66) rallied 22%-26% in the past three months against Berjaya Sports Toto Bhd (BJTOTO, MP; TP: RM3.09) and Magnum Bhd (MAGNUM, MP; TP: RM2.30) of 1%-2% decline, while the FBMKLCI gained 8% over the same period. The strong performance of GENTING was largely attributed to the GENM’s Genting Integrated Tourism Plan (GITP) expansion program where the early phases were already ready by last year end. In addition, Genting Singapore plc (GENS, Not Rated) rose on expectation of business volume recovery coupled with the new of casino liberalisation in Japan while Genting Plantation Bhd (GENP; MP; TP: RM12.40) benefited from higher CPO prices. However, BJTOTO and MAGNUM continued to face selling pressure given the continued declining ticket sales and vulnerable luck factor. In view of relatively less attractive valuation and outlook, we maintain our NEUTRAL stand on the sector.

Casino: focus remains on GENM and Japan. We were impressed with the GITP program following our on-site visit to Genting Highlands in January. With the new casino floors and additional capacity coming on stream, this is a major earnings kicker for GENM, thus indirectly benefiting GENTING as well. Visitor number should increase further when the GENP’s Genting Highlands Premium Outlet opens in 3Q17 and turns the hilltop resort into a world’s class holiday destination while the brand new 20th

Century Fox World Them Park will be ready by year-end. All these will escalate its non-gaming business to another new level, making GENM the key focus for gaming stocks in the next 1-2 years. Meanwhile, even since the Japanese parliament passed the bill to legalise gambling in the country last December, there have been no update in the past three months. Management of GENS had indicated its keen interest of participating with a likely investment size of USD7b-USD12b for an integrated resort project there. On the other hand, the bidding process, if any, is likely to be latest by this year-end as the bill is likely to be tabled in Autumn Session, which is in September and October. Nonetheless, we believe it is too early to get excited about the new casino as it is still at an early stage while there are numerous bids for this project.

NFO: ticket sales are at new lows. Both NFO players continued to register declining ticket sales in 4QCY16, which resulted in declining sequential results. MAGNUM’s 4Q16 profit fell 18% QoQ, owing to a 2% drop in ticket sales, to a new low of RM14.7m per draw while luck factor was maintained at 66%-theoretical level of 65.8%. Meanwhile, BJTOTO’s 3Q17 earnings contracted 23% QoQ as the CNY ticket sales quarter was disappointing and not strong enough to mitigate the deterioration of luck factor to 64.5% from the already high pay-out of 63.6% in 2Q17 against the theoretical pay-out ratio of 60%. With the declining ticket sales coupled with vulnerable luck factor, the earnings outlook for these two operators are at stake. However, there could be some positives for NFO players as the Deputy Prime Minister had stated in the middle of February that the Common Gaming Houses Act 1953 will be amended to combat online gambling. As illegal operators have been taking market share away from the NFO players, any new act is welcomed to deter gamblers switching to the black market.

A better seasonally quarter ahead. In the latest 4QCY16 earnings reporting, the industry players reported satisfactory results with the exception of BJTOTO as its 3Q17 results were disappointing for the 3rd straight quarter despite a CNY ticket sales quarter which was not strong enough to create recovery traction. Generally, casino operators, especially GENTING ended 2016 with a good set of results. All casino operations reported improved earnings except the UK unit due to higher payroll. In fact, GENS’ earnings beat consensus, reporting its first recovery in VIP business volume in more than two years. Going forth, we still expect strong revenue in the upcoming 1QCY17 results due to seasonality for CNY effect. Earnings driver in 2017 for GENTING will be the GENM’s GITP expansion program, stable CPO prices while GENS’ outlook remains challenging. The usual yearly 20- 22 additional special draws will provide a boost to ticket sales for the NFO players. All told, luck factor remains the key determining factor to their bottom lines.

Source: Kenanga Research - 29 Mar 2017