We are maintaining our NEUTRAL stance on the gaming sector. The potential earnings headwinds, amidst tightening consumer spending and China’s continued efforts in tackling corruption, warrant our cautious stance as we step into 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 6-7% per annum.

Results review. The 4Q14 earnings of three out of the five gaming companies under our coverage came within expectations, with the exception being Genting Singapore (GENS SP, NEUTRAL, TP: SGD1.06), which reported another weak quarter as 4Q14 VIP hold closed at a low of 2.2%. Magnum’s (MAG MK, NEUTRAL, TP: MYR2.99) MYR257.3m FY14 net profit (-21.2% YoY) fell short of expectations too, due to a higher-than-expected effective tax rate incurred in 4Q14. Management, however, declared a fourth interim DPS of 5 sen. FY14 DPS stood at a hefty 20 sen, at a payout ratio of over 111.8%.

Visitor arrivals to Genting Highlands to remain flattish. 4Q14 visitor arrivals to Genting Malaysia’s (GENM MK, NEUTRAL, TP: MYR4.17) Genting Highlands resort grew by a marginal 3% YoY as management intensified marketing and promotional activities to entice gamblers. Th at said, we believe visitation interests are likely to remain subdued for the rest of 2015 due to partial closure of its existing entertainment facilities to pave way for the proposed MYR5bn Genting Integrated Tourism Plan (GITP). We understand that its Sky Plaza mall will likely commence operations by mid-2016 while its outdoor theme park is now scheduled to start in late-2016/early-2017 from early-2016 previously. We expect meaningful positive earnings accretion only by late 2016.

Cautious tone on Singapore unit. Across the Causeway, Genting Singapore’s 4Q14 VIP rolling volume shed 15% YoY, marking its second consecutive quarterly decline. We attribute this to management’s increasingly cautious stance on credit extension to contain further pressure on its impairment on receivables, which it booked at SGD262m in FY14 (FY13: SGD184.9m). Management reiterated its cautious 2015 outlook on further weakness under its VIP rolling volume as well as the potential uptick in bad debt provisions, as the group is currently witnessing some slowdown in receivables recovery.

Updates on announced ventures. Genting Singapore is still awaiting the approvals from Jeju Island’s provincial authorities for the official award of an operating license for its recently-proposed USD2.2bn Resorts World Jeju. Genting (GENT MK, NEUTRAL, TP: MYR9.41),meanwhile, has announced its groundbreaking for the USD4bn Resorts World Las Vegas on 5 May. On a separate note, we foresee further delays in Japan’s push for the legalisation of casino gambling, as the Prime Minister Shinzo Abe-led ruling coalition remains divided on the long -debated proposal. It looks increasingly unlikely that the legislation will be enacted by 24 Jun, being the end of current parliamentary session.

4Q14 results review – mixed quarter overall The 4Q14 earnings of three out of the five gaming companies under our coverage came within expectations. Notably, both Genting Malaysia’s and Genting’s numbers came within our expectations, as the weakness in the latter’s Singapore gaming segment was offset by an improved showing from its non-gaming divisions. Berjaya Sports Toto’s (BJ Toto) (BST MK, NEUTRAL, TP: MYR3.49) 9MFY15 (Apr) numbers, meanwhile, were within expectations, as management declared its third interim DPS of 5 sen, with YTD DPS totalling 16.5 sen at an implied payout ratio of 83.8%.On the flip side however, Genting Singapore reported another weak quarter as 4Q14 VIP hold closed at a low of 2.2% (vs the theoretical level of 2.85%) while its rolling volume shed 15% YoY on tighter credit control. Magnum’s FY14 net profit of MYR257.3m (-21.2% YoY) fell short of expectations too, due to a higher-thanexpected effective tax rate incurred in 4Q14. Management, however, declared a fourth interim DPS of 5 sen. FY14 DPS stood at a hefty 20 sen, at a payout ratio of over 111.8%.

Updates on Malaysia’s Genting Highlands 4Q14 visitor arrivals to Genting Malaysia’s Genting Highlands grew by a marginal 3% YoY as management intensified marketing and promotional activities to entice gamblers. This is evident in the higher volumes under both its VIP (+11% YoY) and mass market (+5% YoY) segments for the full year. That said, we believe visitation interests are likely to remain subdued for the rest of 2015 due to partial closure of its existing entertainment facilities to pave way for the proposed MYR5bn GITP.In our recent visit to the hilltop at end-March, we took a quick tour around its ongoing construction site for the 20thCentury Fox Theme Park and Sky Plaza. We understand that its Sky Plaza mall will likely commence operations by mid-2016 while its outdoor theme park is now scheduled to start in late-2016/early-2017 from early-2016 previously. Management did not reveal the size of the new gaming floor space to be hosted in Sky Plaza, as we understand that the blueprint has yet to be finalised.

We also took a look at its newly opened Tower 2A, located right next to its existing First World Hotel. This new extension will add an additional 1,300 rooms (from 10,000 rooms currently) to the hilltop, out of which 500 rooms are now available for bookings. The remaining 800 rooms will be ready by mid-2015. To our surprise, this new hotel features a relatively young and contemporary design, which we believe could appeal to young adults or young families. Bookings are only open to nonmembers on Monday-Thursday with the remaining days of the week reserved for its Genting WorldCard holders. This is consistent with management’s targeted approach to attract gamblers’ interests.

All in, although we see long term positives in Genting Malaysia’s effort to rejuvenate gamblers’ visitation interests to the hilltop, our cautious stance remains as we do not discount the possibility of further delays to its ongoing construction. We expect meaningful positive earnings accretion only by 2H16.

Resorts World Sentosa could face further headwinds Across the Causeway, Genting Singapore’s 4Q14 VIP rolling volume shed 15% YoY, marking its second consecutive quarterly decline. We attribute this to management’s increasingly cautious stance on credit extension to contain further pressure on its impairment on receivables, which it booked at SGD262m in FY14 vs SGD184.9m in FY13. Management reiterated its cautious 2015 outlook on further weakness under its VIP rolling volume as well as the potential uptick in bad debt provision s, as the group is currently witnessing some slowdown in receivables recovery.

On a side note, we expect China’s ongoing anti-corruption drive led by President Xi Jinping to further affect global gaming’s VIP volume growth. According to the South China Morning Post, the Chinese anti-corruption authorities have recently announced a new campaign named Operation Skynet to uncover corrupt officials that have fled abroad by coordinating with various government departments in a multi-pronged approach. This builds on its highly successful Operation Foxhunt, under which 680 fugitives suspected of economic crimes were repatriated to China in 2H14. Amongst the latest to surrender include Wang Guoqiang, the former chief of the Communist Party of China of Fengcheng City in Liaoning Province, who was accused of illegally smuggling over CNY200m out of China and fleeing to the US three years ago.

Unsurprisingly, Macau’s gaming numbers plunged further in March. Gross gaming revenues for March plunged 40%, thereby marking the 10th consecutive decline and the 6th consecutive double-digit fall. Consensus expects April and May’s numbers to further decline by 30-40% YoY.

Outlook for other existing operations Resorts World Bimini, which was launched in Jul 2013, incurred EBITDA losses of MYR232m in FY14 (vs MYR119m in FY13). Management is looking to allocate capex allocation of USD80m for FY15. This is to complete its proposed 305-room Hilton Hotel. Phase 1 of the luxury marina hotel will open on 20 Apr with a full completion target by end-2015. We continue to expect Resorts World Bimini to break even at the EBITDA level in 2H15.

On the other hand, we expect contribution from Resorts World New York to remain largely stable going forward, given that the “racino” – a combined race track and casino – is gradually entering into mature phase having commenced operations since 2011. Winnings per slot machine closed at USD442 for FY14 vs USD429 in FY13. Although we do not discount the possibility of a cannibalisation impact from the opening of integrated resorts in Upstate New York, we believe it is too early to quantify the earnings impact. This is because we expect those full-fledged casinos to only commence operations in 2017 at best.

The GBP200m Resorts World Birmingham, meanwhile, is set to open its doors to visitors come July. This first-of-its-kind integrated resort in the UK will house a 100,000 sq ft retail outlet centre, a 450,000 sq ft movie complex, as well as a variety of food & beverage operators. A majority of its gross floor space has been taken up by major retail brands from the likes of Nike Inc (NKE US, NR) and GAP Inc (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) theatre. 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 its reputation as a global casino operator. We expect Resorts World Birmingham to break even within 12 months upon commencement of commercial operations.

Updates on announced ventures Genting Singapore’s management in its 4Q14 analysts briefing mentioned that the group is still awaiting the approvals from Jeju Island’s provincial authorities for the official award of an operating license for its recently-proposed USD2.2bn Resorts World Jeju. We understand that there have been delays as the local authority is in the midst of establishing a casino regulatory body to regulate and improve transparency of the gaming industry. Local media reported that the resort will open progressively from 2017 and is expected to be completed by 2019. Nonetheless, the timeline in our view appears to be rather optimistic at this juncture. On a separate note, Genting Hong Kong’s (678 HK, NR) 50%-owned unit in Grand Express Koreahas recently completed the renovation of its casino at the Hyatt Regency Jeju Hotel at end-January. The casino now operates under the Genting Jeju brand and currently features 29 gaming tables, including 15 in five VIP rooms, and 16 slot machines.In the meantime, the Las Vegas Review-Journal reported that Genting’s proposed USD4bn integrated resort in Las Vegas is set to break ground on 5 May. According to latest findings from local media, the development will be carried out in stages with the initial phase to include 3,000 hotel rooms and a casino with a combined 3,500 slot machines and table games. Management guided that the first phase of the resorts will now open its door to visitors by end-2017 (from 2H16 previously) due to delays in finalising the architectural design. We note, however, that the company is still waiting for the award of a full gaming license by the Nevada gaming authorities.

On a separate note, we foresee further delays in Japan’s push for the legalisation of casino gambling as the Abe-led ruling coalition remains divided on the long-debated proposal. It looks increasingly unlikely that the legislation will be enacted by 24 Jun, ie the end of current parliamentary session. Genting Singapore had made known its intention to establish a gaming presence in Japan should the country finally passlegislation to allow the setting up of integrated resorts. According to local media reports, the Japanese gaming market is estimated to churn out some USD30bn-40bn in annual revenue – and is likely to be the world’s second largest gaming market after Macau.

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 International(MGM US, NR), Wynn Resorts (WYNN US, NR), Melco Crown Entertainment (MPEL US, NR) and Galaxy Entertainment (0027 HK, NR), all eyeing to grab a piece of the pie, with proposed investments of USD5bn-10bn each.

Unexciting NFO prospects compensated by yield For the number forecast operator (NFO) segment, we believe the rising cost of living amidst the Government’s move to rationalise subsidies, combined with intensifying competition from illegal NFOs, will continue to cap industry growth. We forecast this at 1-3% per annum over the medium term. Although both Magnum and BJ Toto offer decent annual dividend yields of >6%, we caution over potential downside risks to our earnings forecasts should gamblers tighten their belts on inflationary pressure arising from the implementation of goods and services tax (GST) effective 1 Apr.

Cautious stance warranted All in, we are maintaining our NEUTRAL stance on the sector. This is because the potential earnings headwinds, amidst tightening consumer spending and China’s continued efforts in tackling corruption, warrants our cautious stance as we step into 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 6-7% per annum. While we have neutral recommendations on all five counters under our coverage, we like Genting Malaysia the most, given its: i) relatively attractive current valuation, ii) comparatively better earnings defensiveness – especially on the VIP segment, and iii) its GITP will help to rejuvenate visitation interests in the long run.

Source: RHB Research - 7 Apr 2015