Casino: focus remains on GENM and Japan. Since the start of Genting Integrated Tourism Plan (GITP) in end-2013, many of the projects under Phase 1 for this RM5b 10-year expansion program had been completed including the new SkyCasino for both VIP and non-VIP floors already opened this year. As such, GENM should be able to see impact from this program this year but meaningful impact only from 2018 onwards. On the other hand, although the launch of the brand new 20th Century Fox World Theme Park is only in mid- 2018, we do not think this is a major problem to the GITP program. We expect this will escalate its non-gaming business to another new level, making

Genting Malaysia Bhd (GENM, MP; TP: RM6.00) the key focus for gaming stocks in the next 1-2 years. Meanwhile, the snap Japanese election later this month could likely push the Integrated Resorts Implementation Bill to 2018. From the news reports earlier, It would likely implement stringent safeguard to combat problem gambling such as entrance fees for the Japanese, which is similar to Singapore, which charges an entrant fee to citizens entering 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.

NFO: ticket sales bottoming? Both Berjaya Sports Toto Bhd (BJTOTO, OP; TP: RM2.95) and Magnum Bhd (MAGNUM, OP; TP: RM2.17) reported improved ticket sales on average per draw basis in the past two quarters which is a good sign, although it is still too early to conclude that a recovery is over the horizon. The average ticket sales per draw were flattish for BJTOTO in 1Q18 at RM20.2m while MAGNUM’s 2Q17 ticket sales rose 1% YoY to RM15.7m per draw. On the other hand, luck factor has normalised for both NFO players. With the stabilising ticket sales and normalisation of luck factor, we believe the heavy sell-downs where share prices of both companies contracted >20% YTD were overdone. In addition, these two stocks also offer supernormal dividend yields of 6-8%. On the other hand, 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. So far, there is no update from this yet.

A year-end peak quarter ahead, especially for the casino operators. While NFO may not have year-end peak season for ticket sales, casino operators do enjoy better business volume during year-end festive season. This is especially so for GENM, which may see some volume upside given the launch of non-VIP floor at SkyCasino in March and the VIP floor in end-3QCY17. Meanwhile, GENS has shown improvement of business volumes in the recent quarters. Although this is still far from the peak, it could have bottomed out. All these developments at GENM and GENS should benefit Genting Bhd (GENTING, OP; TP: RM10.95) directly. For the NFO players, while the declining ticket sales trend seems to be abating, luck factor remains a wild card to profitability. Having said that, the usual yearly 20-22 additional special draw will lend support to its overall ticket sales base for the NFO players. Meanwhile, the IBR tax claim for MAGNUM may take time to settle, which would be an overhang to its share price in the immediate term.

Still NEUTRAL for the sector. The sector performed poorly in the past three months except MAGNUM which rebounded 4.62% after contracting 19% in 2QCY17 after the IRB slammed the NFO player with a RM476m tax penalty claim. In addition, the improved operating data in the past 2-3 quarters which led us to upgrade the stock to OUTPERFORM has also convinced investors to relook this heavily bashed down yield stock. On the other hand, GENTING and BJTOTO saw their share prices falling 2.18% and 2.37%, respectively, against FBMKLCI’s -0.46% while GENTING rose slightly by 1.49% in the past three months. Given the lack of convincing catalysts for the sector, we remain NEUTRAL on the gaming sector, as the GITP expansion story has been substantially priced-in for the casino operator while luck factor remains a wild card to the NFO players.

Source: Kenanga Research - 5 Oct 2017