Budget 2024 preview

The tabling of Budget 2024 (on 13 October 2023) is just less than one month away and the market is well aware of this would be another expansionary budget, after taking a hint from the 12th Malaysia Plan mid-term review. It would also be sensible that the market would speculate the source of government tax revenue to finance the increasing government spendings in 2024. Speaking of tax revenue, the prime minister recently talked about broadening the tax base and reducing subsidies given to the rich in Malaysia to plug the loopholes in the tax system. In our opinion, this could possibly mean the gaming sector could stay below the tax radar as the government has set its target on new taxes, e.g.: capital gain tax, to broaden its tax collections in Budget 2024.

Previously, the PH-led government raised the casino duties to 35% and reduced the number of 4-digit special draws by half in Budget 2019, post 14th general election in 2018. However, we believe the situation is different this time around for the unity government to consider another post-election tax-hike as the gaming sector has suffered badly during the Covid-19 period and is in the midst of recovering. The increase would be considered inappropriate, which would derail the earnings recovery process. All in all, we believe Budget 2024 will likely be a non-event for the gaming sector.

Previous budget highlights

Budget 2018 – This Budget was relatively quiet for the gaming industry without changes in gaming tax or duty. That was widely expected as it was an “election” budget.

Budget 2019 – Budget 2019 sprang negative surprises, which affected the profitability of casino and NFO operators in Malaysia, as it included a hike in casino duties to 35% (from 25%) on gross collection, surge in the casino license fee by additional RM30mn to RM150mn per annum, machine dealer’s licence increased from RM10,000 to RM50,000 per annum, gaming machine duties increased from 20% to 30% on gross collection, and the number of special draws was reduced by half.

Budget 2020 – Generally, Budget 2020 was positive to the sector as the government introduced stern penalties to curb illegal gambling, which included a higher minimum mandatory penalty of RM100,000 for illegal gamblers along with a minimum mandatory jail sentence of 6 months.

Budget 2021 – This Budget contained sufficient measures to revitalise the economy and alleviate Rakyat’s burden against the outbreak of Covid-19. As expected, there was no hike in gaming tax as the gaming sector bore the brunt of Covid-19 lockdown.

Budget 2022 – Budget 2022 prepared Malaysia to transition to the endemic phase. The government allocated RM1.6bn to revive the tourism industry, targeting mainly SMEs. For the gaming sector, the extension of RM1,000 individual tax relief for domestic tourism was a small pleasant measure to boost Genting Highland’s visitor arrivals.

Budget 2023 – A tax incentive is announced in Budget 2023 in the form of reinvestment allowance of 60% on qualifying capital expenditure for a period of 5 years consecutively and to be set-off against 70% of statutory income. This incentive is for renovation, expansion and modernisation activities for 1 – 5-star hotels, selected tourism projects.

Worst case scenario

No change to our sector earnings. In our sensitivity analysis, every 1 percentage point increase in gaming tax would lead to 4.6% and 2.6% decline in Genting Malaysia and Genting’s FY24 profit respectively. Meanwhile, Sports Toto’s earnings would decline by roughly 7.5% for every 1 percentage point increase in gaming tax without adjustments made to the prize payout. However, we reiterate our view that this is an unlikely scenario as the hike would derail the earnings recovery process.

Recommendation

We maintain our Overweight stance on the gaming sector with a bet on no gaming tax hike in Budget 2024. We upgrade Genting Malaysia (TP: RM2.71) to Buy (from hold) as the current valuation offers superior return to its peers, in terms of dividend yield and FY24 PE multiple. Top pick is Genting (Buy, TP: RM5.35) as we like the company’s diversified business model and cheap valuation compared to its global peers.

Source: TA Research - 20 Sept 2023