There were no much changes in the fundamental of the gaming sector except share prices of casino operators retracing from their recent highs after a good run since the beginning of the year while the NFO players continued to face further selling pressure. Near-term focus for the casino sub-sector remains at 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. Furthermore, the IBR tax claims on MAGNUM also put pressure on BJTOTO. Therefore, the price overhang issue will continue until the tax penalty issue is settled. Overall, we remain NEUTRAL on the gaming sector.

Maintain NEUTRAL. The sector had a lacklustre quarter which saw all four gaming stocks underperformed the FBMKLCI in the past three months. Both share prices of Genting Bhd (GENTING, OP; TP: RM11.30) and Genting Malaysia Bhd (GENM, MP; TP: RM6.00) retreated 6% and 11%, respectively, from their recent highs in May after a good run since the beginning of the year thanks to the Genting Integrated Tourism Plan (GITP) expansion program, where the early phases were already ready by last year-end, as well as the story of new casino market in Japan. Meanwhile, the NFO players continued to see their share prices falling for the past four years as Berjaya Sports Toto Bhd (BJTOTO, OP; TP: RM2.95) and Magnum Bhd (MAGNUM, MP; TP: RM2.17) contracted 13% and 19% in the past three months, respectively. MAGNUM faced further heavy sell-down in end-May after the IRB slammed the NFO player with a RM476m tax penalty claim. Following to that, investors also bashed down BJTOTO on concerns that it may face a similar claim. Nonetheless, we have upgraded BJTOTO to OUTPERFORM from MARKET PERFORM last month as we believe value has re-emerged following the sell-down as it is now trading at CY18 PER of 10.6x, a level last seen almost two decades ago.

Casino: focus remains on GENM and Japan. We were impressed by the GITP program following our on-site visit to Genting Highlands in January. With the new casino floors, non-VIP launched in March and VIP to be launched in this quarter, and additional capacity coming on stream, this is a major earnings kicker for GENM, thus indirectly benefiting GENTING as well. While the Genting Plantation Bhd’s (GENP, MP; TP: RM12.40) Genting Premium Outlet opened earlier than expected in June as opposed to September previously, the launch of the brand new 20th Century Fox World Theme Park is now delayed again to 2Q18 from end-2017. Nonetheless, we do not think this is a major problem to the GITP program. All these will escalate its nongaming business to another new level, making GENM the key focus for gaming stocks in the next 1-2 years. Meanwhile, ever 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. It was reported that a second gambling bill would be unveiled in August with more comprehensive regulatory structure for two casinos. It would likely implement stringent safeguard to combat problem gambling such as entrance fees for the Japanese, which is similar to that of the requirements for Singaporean to enter the casinos in the island state. It was reported that Las Vegas Sands, MGM Resorts, Wynn, Galaxy Entertainment, Melco and Hard Rock have indicated their interests in the project while management of Genting Singapore plc (GENS, Not Rated) has also voiced keen interest of participating with a likely investment size of USD7b-USD12b for an integrated resort project there.

NFO: ticket sales are at new lows. Despite a CNY-led quarter, 1QCY17 data revealed that the declining ticket sales trend has not abated. MAGNUM saw its ticket sales falling 7% YoY in 1Q17 to RM757.7m or 5% on average ticket sales per draw while BJTOTO has been sliding 3% over the year to RM886.8m in 4Q17 or average ticket sales per draw by 1%. Not helping was the luck factors which were still bad at 71.5% for MAGNUM against the theoretical level of 66% while BJTOTO hit 64.3% prize payout ratio in contrast to its theoretical level 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.

Source: Kenanga Research - 6 Jul 2017