We maintain our NEUTRAL  stance on the gaming sector  heading  into 2014,  as  we  believe  the  potential  earnings  headwinds  from  GST implementation in April 2015 and relatively unexciting growth prospects vis-à-vis Macau’s casinos in the medium-term will  keep investor  at bay. Among our coverage universe, BST is the only BUY,  given its relatively alluring annual dividend yield of 6.3-6.9%.

• Watch out for the  GST. We continue to  hold the view that the earnings of the country’s  existing casino operators and number forecast operators (NFOs)  could  potentially  be  hit  should  the  6%  goods  and  services  tax (GST)  be  imposed  on  the  sector  when  rolled  out  on  1  April  2015. Although  Malaysia’s  current  gaming-related  taxes  (ie  25%  casino  tax, 8% gaming tax and 8% pool betting duties on NFOs) are already higher than Singapore’s  (ie GST of 7% on top of 5% and 15% taxes on the VIP and  mass  market  segments  respectively),  we  do  not  discount  the possibility  of  more  hikes  in  the  existing  gaming  duties,  as  the Government  seeks ways to beef up  the nation’s tax collection.  The  6% GST, if imposed on top of the existing taxes, could potentially undermine our  earnings forecasts  for  the gaming counters under our coverage by 6.3-13.8%.
• Unexciting growth prospects. We are forecasting for sectorial earnings growth of  5.6% for CY14 and 6.7% for  CY15. This pales in comparison with  those  of  Macau’s  casino  operators,  for  which  consensus  has projected  average  earnings  growth  of  22.4%  for  CY14  and  17.8%  for CY15.  The  sturdier  growth  in  Macau’s  gaming  market,  in  our  view,  is mainly  underpinned  by  the  continued  influx  of  visitors  from  China  in tandem with  the  domestic economy’s  expansion.  That said, we believe that  growth-seeking  investors  are  likely  to  increase  their  exposure  in Macau’s  gaming market while staying away from Malaysia-listed gaming stocks  for  now  in  view  of  the  relatively  less  exciting  local  growth prospects. Although the casino operators in Macau are already trading at 30-45%  premiums  to  Malaysia’s  gaming  stocks,  this  valuation  gap  is likely to remain in the near-term.
• Maintain NEUTRAL.  Given the potential earnings erosion  arising from GST  and  the  relatively  more  muted  growth  prospects  for  Malaysia’s gaming companies vis-à-vis casino operators in Macau, we maintain  our NEUTRAL  stance  on the sector  going into  2014.  Among  the stocks we cover,  Berjaya  Sports  Toto  (BST  MK,  BUY,  FV:  MYR4.46)  is  the  only BUY,  given  its  relatively appealing dividend yield of 6.3-6.9%.  While  we find  some  comfort  in  Genting  Malaysia’s  (GENM  MK,  NEUTRAL,  FV:MYR4.56)  proposed  MYR5bn  capex  to  rejuvenate  its  flagship  Genting Highlands resorts  over the next 10 years, we  hold  the  view that it  is too early to quantify the potential earnings accretion, as the first phase of the proposed facelift will only be completed by 2H2015.

Source: RHB