We maintain our NEUTRAL stance on the gaming sector  following the release  of  the  4QCY13  results  of  all  four  companies  under  our coverage,  which  posted  earnings  that  were  within  estimates.  The relatively unexciting growth prospects vis-à-vis Macau’s casinos in  the medium  term  and  the  potential  earnings  headwinds  from  GST implementation in April 2015 will likely keep investors at bay for now.

• 4Q13 review.  All four gaming companies under our coverage – Genting (GENT MK, NEUTRAL, FV: MYR10.99), Genting Malaysia  (GENM MK, NEUTRAL,  FV:  MYR4.32),  Berjaya  Sports  Toto  (BST  MK,  NEUTRAL, FV:  MYR4.20)  and  Magnum  (MAG  MK,  NEUTRAL,  FV:  MYR3.24)  –reported  earnings  that  were  within  our  estimates.  Among  the  quarter’s key highlights was the 14% decline in Genting Highlands’ visitor arrivals in  4Q13 following the closure of its outdoor theme park,  while profit also declined  due to higher overhead expenses following the implementation of  minimum  wages  on  1  July  2013.  The  newly-opened  Resorts  World
• Bimini incurred an EBITDA loss of MYR119.0m for the full year, offset by a  better  showing  from  its  New  York  casinos.  In  the  number  forecast operator (NFO) segment, Magnum’s management declared  a  final DPS of 5 sen, bringing  the  FY13 DPS to 20 sen,  for  a payout ratio of  >87% and  decent  full-year  dividend  yield  of 6.6%.  BToto,  on  the  other  hand, announced a 1-for-43 treasury share distribution,  bringing  its YTD DPS to 19.0 sen at an annualized yield of 6.5%.
• Medium  term  outlook.  As  Genting Highlands’ outdoor  theme park will be  closed  for  three  years  to  make  way  for  the  MYR1bn  world’s  first Twentieth Century Fox theme park, we  forecast  flattish visitation growth of  1-2%  for  FY14F-15F  at  this  juncture.  We  note  that  the  recent disappearance of an aircraft may  further impede visitor  growth over the near  to  medium  term.  Meanwhile,  the  management  of  Genting’s Singapore  unit  has  turned  cautious  on  its  FY14  outlook  in  view  of  the Chinese Government’s move to improve  governance. This concurs with our  cautious  view  amidst  China’s  subpar  economic  headline  numbers.For  the  NFO  segment,  we  caution  that  rising  cost  of  living  amidst  the Government’s  move  to  rationalise  subsidies,  coupled  with  increasing competition  from  illegal  NFOs,  would  continue  to  cap  industry  growth, which we forecast at 3-5% annually over the medium term.
• Maintain NEUTRAL.  We forecast  sectorial earnings growth of  5.1% for CY14 and 6.2% for CY15. This pales in comparison with Macau’s casino operators,  for  which  consensus  has  projected  an  average  earnings growth  of  22.0%  for  CY14  and  17.5%  for  CY15.  This  hinges  on  the sturdy growth of  Macau’s gross gaming revenue, which  surged 23.7% to USD8.3bn in the first two months of this year. In view of the relatively flat growth  of  Malaysia’s  gaming  companies,  we  opine  that  the  existing valuation gap of 35-40% between  Malaysian  and Macau  gaming stocks is  likely  to  remain  in  the  near  term.  All  in,  we  maintain  our  NEUTRAL stance on the gaming sector.

Lacking Catalysts For Now

• No major surprises in 4Q13 results
• Genting Highlands could see weaker visitor interest
• Potential headwinds in Singapore unit
• Bimini losses to drag down overall profitability
• NFO’s decent dividend return
• Filing license for Resorts World Jeju
• Hearing on Resorts World Las Vegas’ license application soon
• Miami – go or no go?
• Japan is probably the second largest gaming market in the world
• Sri Lanka offers decent opportunities but unlikely to be significant
• Potential return to Macau
• Not enough clarity on potential GST implementation

Unexciting close for 2013
Largely in line.  All  four  gaming companies under our coverage  –  Genting, Genting Malaysia, BToto  and Magnum –  reported earnings that were within our expectations. Among the quarter’s key highlights was the 14% decline in Genting Highlands’ visitor arrivals  in  4Q13  following  the  closure  of  its  outdoor  theme  park,  while  profit  also declined  owing  to  higher  overhead  expenses  following  the  implementation  of  the minimum  wage  policy  on  1  July  2013.  The  newly-opened  Resorts  World  Bimini,meanwhile,  incurred  an  EBITDA  loss  of  MYR119.0m  for  the  full  year,  offset  by   a better showing from its New York casino.

NFO still a  dividend play. In the NFO segment, Magnum’s management declared  a final DPS of 5 sen, bringing its FY13 DPS to 20 sen , for a  payout ratio of  more than 87%. This implies a decent dividend yield of 6.6% for the full year. Moving forward, we project an 80% payout ratio (being the minimum level committed by management) for  FY14F-15F,  which  will  translate  into  an  annual  dividend  yield  of  6.3%.  BToto’s management,  meanwhile,  declared  a  treasury  share  distribution  of  1-for-43,  which translates into  a DPS of about 9.0 sen based on the stock’s last closing of MYR3.93. This  brings  the  group’s  YTD  DPS  to  19.0  sen,  which  implies  a  decent  annualized yield of 6.5%,  at a close to 90% payout ratio. Moving forward, we are forecasting for BST’s dividend yield to come in at 6.3%-6.6% annually for FY14F-FY16F.

Existing operations face near-term headwinds
Genting Highlands could see downside in visitor arrivals. In 4Q13, visitor arrivals to  Genting  Highlands  dropped  14%  y-o-y  while  hotel  occupancy  rates  fell  to  85% (from 96% in 4Q12)  following the closure of its outdoor theme park  from Sept 2013. Given that the theme park will be closed  for  three  years  to  make way for the  first-ofits-kind MYR1bn Twentieth Century Fox theme park, we forecast flat visitation growth of 1-2% for FY14F-15F at this juncture. We note that the recent disappearance of an aircraft  could  potentially  impede  visitor  growth  over  the  near  to  medium  term  as tourists may defer or cancel plans to travel to Malaysia.

Weak  China  numbers  could  hit  Singapore  unit.  Across  the  Causeway,  Genting Singapore  (GENS  SP,  NEUTRAL,  TP:  SGD1.44)  at  its  4QFY13  analyst  briefing turned cautious on its outlook for FY14, in view of the Chinese Government’s move to improve  its  existing  system  of  governance.  This  concurs  with  our  cautious  view amidst  China’s  subpar  economic  headline  numbers.  In  particular,  2014  marked China’s  weakest start to a year  of  investment growth since 2001,  while the nation’s industrial  production  also  unexpectedly  slowed  in  the  first  two  months  of  the  year. This  could  potentially  dampen  cash  liquidity  at  the  company’s  VIP  segment,  since close to half of its VIP gamblers are from China. The continued weakness in regional currencies vs the SGD, meanwhile, may potentially lead to slower growth for its mass market segment, as tourists might defer their plans to travel to Singapore.

Bimini to remain in the red near-term. Genting’s Resorts World Bimini, launched in July 2013, incurred start-up losses amounting to MYR119.0m in FY13. Genting offers cruise  services  between  Miami,  US  and  Resorts World  Bimini in  the  Bahamas,  50 miles off the  coast  of Florida.  Nonetheless, operations were  scaled back  in late Nov 2013  after  US  Customs  and  Border  Protection  officials  ordered  Genting  to  cease using foreign workers in its overnight  cruises. We understand that  management  is  in the  midst  of  appealing  against  this  order  in  federal  court.  Should  the  final  verdict prove to be unfavourable,  we believe  it  would have to resort to hiring locals  -  which will  likely  increase  overhead  expenses.  This  could  potentially  erode  the  group’s profitability over the medium term. We currently expect Resorts World Bimini to break even at the EBITDA level by 2H15.

Unexciting NFO prospects to be compensated  by  yield.  For  the NFO segment, we caution that  the  rising cost of living amidst  the Government’s move to rationalise subsidies,  combined  with intensifying  competition from illegal NFOs, would continue to cap NFO industry growth, which we are  forecasting at 3-5% per annum  over the medium  term.  On  the  flip  side,  however,  both  Magnum  and  BToto  offer  decent dividend yields  of >6% per annum.  This,  we believe,  would continue to support their respective  share  prices  as  risk-averse  investors  continue  to  look  for  dividend-safe havens amidst the uncertainty in the global market.

Updates on announced ventures
To file for operating licence in South Korea.  Meanwhile, Genting Singapore  is in the  midst  of  submitting  an  application  for  an  operating  licence  for  its  recentlyproposed  USD2.2bn  integrated  resort,  to  be known  as  Resorts World Jeju on  Jeju Island,  South Korea. An initial capital outlay of USD300m has been allocated at this juncture. We expect official approval to be awarded by 4Q14 or early-2015.

Vegas  licence  forthcoming.  In the meantime, Genting’s proposed integrated resort project  in Las Vegas, US  is awaiting approval of its  application for  a  casino licence. Management expects  an official award in 12-18 months’  time.  The chairman of  the Nevada  Gaming  Control  Board  A.G.  Burnett  was  quoted  saying  that  the  suitability hearing on Genting’s casino licence application  will be held as soon as May or June this  year.  We  believe  that  construction  of  the  massive  3,500-room,  Asia-themed resort and casino complex will begin  later  this year, with its initial phase to open by 2H16.  Management has earmarked a total investment  of USD3-4bn for the  87-acre site,  which  Genting  bought  from  Boyd  Gaming  Corporation  (BYD  US,  NR)  for USD350m in early 2013.

Waiting  to  hear  from  Miami.  On  its  proposed  partnership  with  racing  operator Gulfstream  Park  to  open  a  casino  facility  in  Miami’s  Biscayne  Bay  offering  2k  slot machines and off-track betting, we do not discount the possibility of further delays in regulatory approvals, as we take into account the fact that Genting’s proposed facility would be the first non-tribal gaming establishment in Florida to offer slots  without the presence  of  a  racing  track.  That  said,  we  gather  that  the  Genting-Gulfstream partnership has spelled out  an expansive  profit-sharing deal  in which proceeds from the  facility  would  be  shared  with  the  state’s  horse  breeders,  trainers  and  owners.

According  to  Lonny  Powell,  the  CEO  of  the  Florida  Thoroughbred  Breeders’  and Owners’  Association,  this  is  the  first  partnership  in  which  the  revenue  stream  and investments  would  actually  flow  back  to  the  equestrian  industry.  This,  in  our  view,may prompt Florida’s politicians and regulators to give their blessings to the proposed new establishment.

Potential opportunities ahead
Competition  for  Japan  market  extremely  keen.  Earlier,  Genting  Singapore  had made known its intention to establish a gaming presence in Japan should the country finally  pass  legislation  to  allow  the  setting  up  of  integrated  resorts.  The  Japanese gaming market is estimated to churn out  some USD30-40bn in  annual revenue  -  and is likely to be the  world’s  second largest gaming market  after Macau,  which closed 2013  with  record  revenue  of  USD45.2bn.  Nonetheless,  we  caution  that  the competition  is likely to be extremely stiff, with major casino operators i e  Las Vegas Sands  (LVS  US,  NR),  MGM  Resorts  (MGM  US,  NR),  Wynn  Resorts  (WYNN  US, NR),  Melco  Crown  (MPEL  US,  NR)  and  Galaxy  Entertainment  (0027  HK,  NR)  all eyeing to grab a piece of the pie, with proposed investments of USD5-10bn each. Sri Lanka unlikely to be significant.  Recent local news  reports said  Genting may be  close  to  securing  a  casino  venture  in  Sri  Lanka  soon.  We  understand  that  five casino approvals  were awarded to two Sri Lankan entrepreneurs,  Mr Ravi Wijeratne and Mr Dhammika Perera, in 2010. Mr Wijeratne previously announced a partnership with  Australia’s Crown Ltd  (CWN AU, NR)  to establish a  USD350m  integrated resort in  Colombo.  Mr  Perera,  meanwhile,  was  reported  to  be  looking  to  use  one  of  his approvals  (of  which  he  has  three)  for  Queensbury,  a  USD350m  resort  near  Mr Wijeratne's planned complex, and has committed another to  a proposed USD850m mixed-development project by  John Keells  Holdings  (JKH SL, NR).  Mr Perera is also understood to be looking  for one more US or Asian gaming brand to take up his  third casino approval, and  build  a  500-700 room complex  in Colombo  as well. This  could be the partnership that Genting is eyeing. That said, we gather  that the Sri Lankan gaming market  is  more  centred  around  the  local  market,  and  hence  is  likely  to be relatively  insignificant  vis-à-vis  its  existing  regional  presence  in  the  US  and  UK markets.  

Preparing for Macau. Genting’s 18.7%-owned Genting Hong Kong (0678 HK, NR) is reportedly  back  on  a mission  to set up its own gaming facilities in Macau  in the long run.  The  company  recently  announced  plans  to  establish  a  boutique  hotel  on  a reclaimed  parcel  of  land  opposite  SJM  Holdings’  (880  HK,  NR)  existing  Casino Lisboa. Although the  application to build the project  that was submitted  in Aug 2013 did not include gaming facilities, local media  reports said  Genting is in the midst of discussions  with local regulators as negotiations  on the renewal of the existing three concessions and three sub-concessions  expiring  in 2020 and 2022 respectively, look set to commence soon.  Genting Hong Kong  first made known its intention  to build Resorts World Macau  (a  casino resort)  in 2007  while  riding on  SJM’s  casino licence.However,  the proposal was later  shelved, as the  group  secured a  casino licence in Singapore.  At this juncture, we gather  that  the Genting group already serves some VIP customers in Macau  by  operating VIP rooms in one of the major casinos under profit-sharing service agreements.

GST could potentially erode earnings
Watch  out  for  the  GST.  We  continue  to  hold  the  view  that  the  earnings  of  the country’s existing casino operators and  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   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%.
 

Cautious stance warranted

Maintain NEUTRAL. We  are forecasting sectorial earnings growth of 5.1% for CY14 and  6.2%  for  CY15,  which  pale  in  comparison  with  Macau’s  casino  operators,  for which  consensus  is  projecting  average  earnings  growth  of  22.0%  for  CY14  and 17.5%  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  the  time  being  in  view  of  the  relatively  less exciting  local  growth  prospects.  Although  Macau’s  casino  operators  are  already trading at 30-45% premiums to Malaysia’s gaming stocks, this valuation gap is likely to remain in the near  term.  Hence, we maintain our NEUTRAL stance on the sector. While we find some comfort in Genting’s  proposed MYR5bn capex to rejuvenate its flagship Genting Highlands resorts over the next 1 0 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  2H15.  As  for  the  NFO  segment,  we believe industry growth  is  unlikely to be exciting,  although  share prices  are  likely  to be supported by dividend yields of >6% per annum.

Source: RHB