We maintain our NEUTRAL stance on the gaming sector  following the release  of  3Q14  results,  as  three  out  of  five  companies  under  our coverage  posted  disappointing  numbers  on  the  subpar  luck  factor.  A potential earnings  erosion  upon  implementation  of  the  GST  come  Apr 2015  and  tightening  consumer  spending  amidst  rising  inflationary pressure warrant our cautious stance as we step into 2015. 

Results  review.  The  3Q14  earnings  of  three  out  of  the  five  gaming companies under our coverage fell below expectations due to  the  below average luck factor during the quarter. Genting  Malaysia’s  (GENM MK, NEUTRAL,  TP:  MYR4.21)  9M14  EBITDA  margin  at  its  Malaysian operation would have stood at 37.0% vis-à-vis 34.6% currently, had its VIP  luck  factor  held  up  in  3Q14.  Genting  Singapore’s  (GENS  SP, NEUTRAL,  TP:  SGD1.14)  3Q14  earnings  disappointed  too ,  as  its  VIP luck factor closed below 2.0% (vs theoretical hold of 2.85%).  Meanwhile, despite  the  earnings  disappointment  on  the  higher  prize  payout  ratio, Magnum (MAG MK, NEUTRAL, TP: MYR3.06) declared its third interim DPS of 5.0 sen. Its YTD DPS of 15.0 sen translates into a payout ratio of over  108.7%.  BJ Toto (BST MK, NEUTRAL,  TP: MYR3.49)  declared its second interim DPS of 6.0 sen.  Its  YTD DPS  stands at 11.5 sen  which translates into a 86.8% payout ratio (vs 10.0 sen, at 77.4% in 1HFY14). 

Cautious outlook ahead.  Visitor arrivals to Genting Malaysia’s Genting Highlands  continued  to  decline  in  3Q14,  slipping  3%  YoY  as  foreign tourist  visitations fell  14% YoY. As its  outdoor theme park  will be closed until early  2016 to make way for the MYR1bn 20th Century Fox theme park,  we  expect  the  current  trend  to  persist  in  2015.  Across  the Causeway,  Genting  Singapore’s  3Q14  VIP  rolling  volume  shed  5.0% YoY  to  mark  its  first  decline  over  the  past  two  years,  as  management turned  more  cautious  on  credit  extension.  This,  in  our  view,  could translate  into  slower  VIP  growth  going  forward,  given  the  lack  of  the presence  of  independent  junkets  in  Singapore .  Meanwhile,  although Japanese  Prime  Minister  Shinzo  Abe  and  his  Liberal  Democratic  Party (LDP)-led  ruling  coalition  retained  a  two-thirds  majority  in  the  recently concluded  election,  we  believe  the  casino  bill  will  only  be  re-tabled  for debate in parliamentary session come 2H15.

Maintain  NEUTRAL.  All  in,  we  keep  our  NEUTRAL  stance  on  the sector,  as potential earnings erosion upon implementation of  the goods and services tax (GST) come Apr 2015 and tighter  consumer spending amidst rising inflationary pressure warrant a  cautious stance as  we step into  2015.  While  we  find  comfort  in  Genting  Malaysia’s  proposed MYR5bn capex to rejuvenate its flagship Genting Highlands resorts, the first phase of the proposed facelift will only be completed by  2016.  As or the  number  forecast  operator  (NFO)  segment,  we  believe  industry growth  is  unlikely to be  exciting,  although  share  prices  are  likely to be supported by dividend yields of 6-7% per annum.

3Q14 results review: blame it on the luck factor
Casinos  disappointed.  The  3Q14  earnings  of  three  out  of  the  five   gaming companies under our  coverage  fell  below  expectations,  primarily  due to  the  belowaverage  luck  factor  during  the  quarter.  In the  casinos  segment,  Genting  Malaysia’s 9M14 EBITDA margin at its  Malaysian operation would have stood at 37.0% vis-à-vis 34.6% currently, had its VIP luck factor held up in 3Q14. Genting Singapore’s  3Q14 earnings  also disappointed,  as  its  VIP luck factor closed below 2.0% (vs  theoretical hold  of  2.85%),  while  volume  shed  5.0%  YoY  on  tighter  credit  control.  Genting’s numbers,  however,  came  within  our  expectations  as  weakness  in  its  gaming segments was mitigated by an improved showing  from its plantation division (+17.6% YoY) and  a  maiden  oil & gas  contribution via its 57% interest in  the  Chengdaoxi oil block in Bohai Bay, China.

NFOs  report  a  mixed  quarter.  On  the  other  hand,  Magnum  reported  subpar numbers,  having  experienced  a  higher-than-expected  prize  payout  ratio  during  the quarter.  Management,  however,  declared  a  third  interim  DPS  of  5.0  sen.  Its  YTD DPS of 15.0 sen translates into a payout ratio of over 108.7%, which is in line with management’s  commitment  to  a  minimum  80%  level.  BJ  Toto’s  1HFY15  (Apr) earnings,  meanwhile,  were above our estimate,  due to a lower-than-expected prize payout ratio in 2QFY15.  Management declared its second interim DPS of 6.0 sen. Its YTD DPS now stands at 11.5 sen (up from 10.0 sen in 1HFY14). This translates into a generous payout ratio of 86.8% vis-à-vis 77.4% in 1HFY14.

Outlook for existing operations
Genting  Highlands  could  see  further  downside  risk  in  visitor  arrivals.  Visitor arrivals  to  Genting  Malaysia’s  Genting  Highlands  continued  to  decline  in  3Q14,dropping 3% YoY as foreign tourist  visitations fell by  14% YoY.  As its outdoor theme park will be closed until  early  2016 to make way for the MYR1bn  20th Century Fox theme park, we expect the current trend to persist for 2015.Updates  on  expansion  plan.  On the  positive side, its  proposed  MYR5bn  Genting Integrated Tourism Plan (GITP) meanwhile remains largely on track. To recap, Phase 1 of this expansion phase includes:
i)  a 1,300-room 3-star hotel  at  an  investment cost of  MYR500m, of which 500 new  rooms  will  be  available  by  end-2014  with  the  remaining  800 to  come online by mid-2015
ii)  MYR1bn  20th  Century  Fox  theme  park  to  commence  operations  by  early-2016 with target 3m visitors per annum
iii)  the Sky Avenue & Sky Plaza shopping malls with a total floor space of  400k sq ft  scheduled for launch in 2015
iv)  Genting Premium Outlets in Awana Resorts to open by end-2015
v)  refurbishments of existing hotels at a MYR1bn cost
vi)  other  amenities  including  a  10,000-pax  seating  arena,  new  cable  car  line and 3,000 car park bays

Management has also unveiled  Phase 2 of its GITP,  which involves an investment of over MYR1bn to build two new hotels with  an additional 2,300 rooms (1,100 of which will be completed by 2017). Ultimately, management is looking to increase visitations to  30m by  2020  from 20m currently  and,  at  the same  time,  grow  the  number  of  its Genting Rewards Members to 5.8m by 2020 from 3.3m in 2013.

Singapore  unit’s  VIP  segment  shows  weakness.  Across the Causeway,  Genting Singapore’s 3Q14 VIP rolling volume shed 5.0% YoY to mark its first decline over the past two years, as management turned more cautious on credit extension. The move, in our view, would help to contain further pressure on its impairment on receivables, which registered at SGD39.7m in 3Q14 (vs SGD81.6m in 2Q14).  Nonetheless,  this will  likely  translate  into  slower  VIP  growth  going  forward,  given  the  lack  of  the presence of independent junkets in Singapore.

China’s  tackling  of  corruption.  On  a side  note,  we  expect  China’s  ongoing  anticorruption  drive  led  by  President  Xi  Jinping  to  further  affect  global  gaming’s  VIP volume  growth.  According  to  state  newswire  Xinhua,  Chinese  anti-corruption authorities  have  now  placed  Ling  Jihua,  a  top  aide  to  former  president  Hu  Jintao, under investigation for “suspected serious disciplinary violation”  without giving further details.  This  comes  after  the  prosecution  of  Bo  Xilai,  formerly  a  member  of  the Central Politburo of the Communist Party of China, in mid-2013 and the official arrest of  Zhou  Yongkang,  a  former  Politburo  Standing  Committee  member  and  the Secretary of the Central Political and Legal Affairs Commission, earlier this month. Bimini  to  remain  in  the  red  in  the  near  term.  Resorts World  Bimini,  which  was launched in Jul 2013, incurred EBITDA losses of MYR116.0m in 9M14 or MYR62m in 3Q14.  To  return  to  the  black,  management  is  looking  to  increase  its  hotel  room offerings on the island with a capex allocation of USD200m for FY14F and FY15F. The recent completion of its deep-water jetty in Sep 2014 would allow larger ferries to disembark directly on the island.  We currently expect Resorts World Bimini to break even at the EBITDA level by 2H15.

New York Upstate no longer an option. In 3Q14, Genting Malaysia incurred one-off expenses of MYR40m from  the application for casino licences in  upstate New York. Unfortunately,  the  New  York  state  board  has  decided  to  recommend  three  other competing bids, namely by Empire Resorts (NYNY US, NR), Capital Region Gaming, and  Wilmorite  Inc,  for  full-fledged  casino  licenses  in  the  region.  We  note  that Genting’s controlling Lim  family has a majority stake in Empire Resorts with a stake of  over  60%.  Genting  Malaysia  had  earlier  on  submitted two  separate  bids  to build integrated resorts in Orange County.   Local media reported that the board opted not to  recommend  any  casino  proposals  in  Orange  and  Ulster  counties  given  their proximity  to  existing  gambling  sites  near  New  York  city.  Although  we  are disappointed  with  the  decision,  we  believe  the  cannibalisation  impact  on  Genting’s existing New York operations would likely be minimal,  since  the three selected sites are located 2-5 hours’ drive away from Resorts World New York.

Updates on announced ventures
Waiting  for  license  award  in South Korea. Genting Singapore is currently in active discussions with  South Korea’s local authorities  for  the  official award of  an  operating license  for  its  recently-proposed  USD2.2bn  Resorts  World  Jeju  on  Jeju  Island. Management  expects  to  break  ground  on  construction  by  2Q15.  We,  however,caution  for  potential  delays  as  the  governor  of  Jeju  Island,  Won  Hee-ryong,  has indicated his  plans to establish a casino regulatory body modeled after Singapore’s Casino Regulatory Authority  in due course  to  regulate and  improve transparency of the gaming industry.  The implementation, in our view,  could take another 6-9 months before the official award of casino license can take place.

Vegas  license  forthcoming.  In  the  meantime,  Genting’s  proposed  USD4bn integrated  resort  in  Las  Vegas,  US  is  awaiting  the  approval  of  its  application  for  a casino  license .  According to latest  findings from local media, the  first phase  of  the project will comprise  a  315,000  sq  ft  theater to accommodate up to 4,200 attendees, a  rooftop  nightclub,  a retail  area  to  be known  as  Forbidden  City,  and  a Great Wall passageway connecting the site to the Las Vegas Strip. We expect its initial phase to open by 2H16.

Waiting  to  hear  from  Miami.  On  its  proposed  mixed  development  in  Miami,  we gathered that demolition works on the former Miami Herald Building  are  still ongoing. Previously,  local media quoted  City of Miami Commissioner Marc Sarnoff  as  saying that  a  David  Beckham-led  consortium  is  exploring  the  possibility  of  building  a  new Major League Soccer (MLS) stadium on Genting’s current site to host  the recentlyproposed  Miami  MLS  professional  soccer  team.  Nonetheless,  we  understand  that there has  not been much progress since negotiations started some three months ago.

We  are  neutral  on  its  currently  proposed  mixed  development,  which  will  include  a 500-room  hotel,  two  luxury  residential  towers  and  high-end  retail  shops  and restaurants  as  the  earnings  contribution  will  not  likely  be  significant.  Potential legislation of the gaming industry to allow the setting up of integrated resorts remains the key re-rating catalyst over the medium term.  

Looking forward to opening of Resorts World Birmingham.  Genting’s GBP150m Resorts World Birmingham is set to open its doors to visitors come 2H15. The first-ofits-kind integrated resort  in  the  UK will house a 100k sq ft retail outlet center, a 450k sq ft movie complex, as well as a variety of food and beverage operators. 70%  of its gross floor space has  been taken up  by  major retail brands such as Nike  (NKE US, NR)  and  GAP  (GPS  US,  NR)  while  Cineworld  (CINE  LN,  NR)  will  operate  a  11-screen  cinema  as  well  as  the  UK’s  first  purpose-built  Image  MAXimum  (IMAX)theater. On its  own,  Genting  will  operate the  178-room 4-star  Genting  Hotel.  While contribution to the group’s bottomline would not be meaningful considering its casino size of a maximum of 30 gaming tables and 150 slot machines, this latest UK venture would further enhance  the group’s reputation as a global casino operator.  Although Birmingham’s  population  may  seem  small  at  1.0-1.1m,  we  expect  Resorts  World Birmingham  to break even within 6-12 months upon commencement of commercial operations. This is  given that the city welcomed  a record 34m  visitors in 2013, with foreign tourists  marking a record 32% jump YoY  –  higher  than anywhere else in the UK.

Competition  for  Japan  market  extremely  keen.  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, ie 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.  At  the  macro  level,  although Japanese  Prime  Minister  Shinzo  Abe  and  his  Liberal  Democratic  Party  (LDP)-led ruling  coalition retained  a  two-thirds majority in  the  recently  concluded  election,  we believe the casino bill will only be re-tabled  for debate in parliamentary session come 2H15.

Impact from GST implementation
Earnings  downgrade  across  the  board.  We  revisited  our  earnings  models  and relooked at our assumptions in November  to reflect the  earnings erosion impact on Malaysia’s  gaming  counters  post-implementation  of  GST  come  Apr  2015.  Notably, we  reduced  Genting  Malaysia’s  FY15F-16F  EPS  by  7.1-9.2%  as  we  expect  the EBITDA margin for its Malaysian operation to hover around 32-35% (from the typical 36-38%  that  management  previously  guided  under  a  normalised  VIP  hold  rate  of 2.85%)  post  GST  implementation.  We  also  trimmed  Genting’s  FY15F-16F  EPS  by 5.5-5.7% after cutting contributions  from its Singapore gaming unit in anticipation of a potential  slowdown  in  its  VIP  segment  and  factoring  in  a  higher  opex  under  its Malaysia gaming segment on the GST implementation.  Similarly, we cut  Magnum’s FY15F-16F EPS by 7.1-8.2% and BJ Toto’s FY16F-17F EPS by 5.1-5.4%.

Cautious stance warranted
Maintain  NEUTRAL.  All in, we are maintaining our NEUTRAL stance on the sector as  the  potential  earnings  erosion  upon implementation  of  the  GST  come  Apr  2015 and  tightening  consumer  spending  amidst  rising  inflationary  pressure  warrant  our cautious stance as we step into 2015.  While we find  comfort in Genting’s   proposed MYR5bn capex to rejuvenate its flagship Genting Highlands resorts, 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  2016.  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 6-7% per annum.

Stock  recommendations.  We  have  NEUTRAL  recommendations  on  all  five counters  under  our  coverage.  Of  note,  we  downgraded  our  recommendation  on Genting  in  November  as  we  expect  its  gaming  segment  to  face  further  earnings headwinds.  Although numbers from its non-gaming segment would likely improve as we  move  into 2015 on  a  higher  CPO  price  assumption  of MYR2,500  per  tonne  as well  as  a  maiden  contribution  from  its  oil  and  gas  segment,  these  are  relatively insignificant compared with its core gaming arm.

Source: RHB