Roller-coaster performance

It has been a roller-coaster year for the gaming sector, which started off on a high note to capitalise on China’s reopening early this year. However, it did not take long before the market realise that China’s reopening has muted impact on Genting’s operations in Malaysia, which can be felt in Genting Malaysia’s (GENM) 1H23 results performance. Later, the announcement of Miami land sales from GENM, which could generate a one-off disposal gain of RM4.3bn, has seen the return of buying interest but the subsequent cancelation of land deal erased all the early price gain. Ringgit weakness has been a blessing in disguise so far, which supported sector earnings in terms of attracting tourists from Singapore and Indonesia as well as transaction gains from foreign subsidiaries (i.e., GENS, GENM’s US and UK operations, H.R. Owen). This has helped to alleviate some inflationary and high interest rate pressures in the US and UK. For number forecasting operator, SPToto’s performance was muted in 1H23 but recovered quickly in 2H23 when the 6 states election fear dissipated.

As far as earnings are concerned, 9M23 sector revenue and EBITDA expanded by 18.9% and 19.0% YoY respectively due to sustained earnings recovery post-Covid reopening in 2022. In 3Q23, GENM and Genting Singapore recorded superb earnings performance. SPToto’s 1QFY24 performance was affected by higher prize payout and margin squeeze on the car franchising business.

Overall, in terms of share price performance, GENT and GENM share prices have gone up by 9% and 6% respectively and outperformed the FBMKLCI. Meanwhile, SPToto managed to regain the lost ground with YTD contraction of mere 3%, on par with the FBMKLCI.

For 2024, we reckon that the implementation of visa-free entry in Malaysia would fit well with one of our major investment themes for 2024, i.e.: Tourism Plays. However, the visa-free travel narrative could only boost sector earnings but not share price performance, which would likely be overshadowed by regional competition and cheaper regional casino stocks, in our opinion.

Tourism Plays

Effective 1 December 2023, Malaysia has granted 30-day visa-free entry for visitors from China, India and several countries in the gulf. The government is targeting 5mn Chinese visitors per year upon visa relaxation and we expect this to boost local tourism activities.

Note that Chinese visitors forms the third largest source of foreign tourists in Malaysia, after Singapore and Indonesia, with around 3.1mn tourists in 2019. Likewise, visitor arrivals from China also represent the third largest source of foreign tourists for Resorts World Genting Highlands. According to Genting Malaysia, Malaysia operations have experienced a significant growth in gross gaming revenue in 3Q23, which recovered to 93% of 3Q19 (pre-pandemic) levels. This was mainly supported by strong recovery in the VIP volume, which exceeded 3Q19 by 3%. During this period, foreign guests surged 53% mainly came from Singapore, Indonesia, China and India.

Looking forward, GENM’s GGR would continue be driven by Malaysians day-trippers, who contribute to 70% of the group’s business. The increase in Chinese tourist would play a supporting role to drive 2024 earnings higher. Besides, tourists from Singapore and Indonesia would also serve as major earnings contributors next year, as we believe the current “cheap” Ringgit would bode well for foreign visitations.

Cheaper to “bet” in Hong Kong

GGR in Macau has risen tremendously since China’s reopening early this year. The GGR trend is closing in on its 2019 (pre-pandemic) levels with Nov-23’s GGR (MOP16.0bn) stood at 70% the pre-pandemic levels (Figure 4 & 5). However, despite the strong GGR recovery, Macau stocks generally underperformed its regional peers (dotted line Figure 6), thereby making Macau casino stocks much more appealing to foreign investors.

Elsewhere in Singapore, both Marina Bay Sands (MBS) and GENS reported GGRs that were higher than the pre-pandemic levels (Figure 6). This was on the back of massive capex spends from MBS and GENS, along with the increase in foreign tourists in the country supported by additional flight capacity. Looking forward, GENS has pledged to spend up to $S6.8bn capex as it has obtained provisional permission from the government on its new Waterfront development (Figure 7 & 8). Meanwhile, MBS is also working on the expansion plan, which would comprise a new hotel tower with luxury rooms and convention facilities that may cost more than S$4.5bn. All in all, we expect the massive capex spend to translate to intensifying competition for GENM, which has completed its GITP (Genting Integrated Tourism Plan) last year.

Cautious on 2024 Price Performance

In spite of the positive factors like visa-free entry as mentioned above, we take a cautious stance on the gaming sector on the back of heightened regional competitions. In terms of stock valuation, we observe the share premium of Hong Kong-listed casino stocks has narrowed to less than 2x PE multiples above Malaysia-listed casino stocks (Figure 9), which would be appealing to foreign shareholders, in our opinion. As such, we do not have a strong desire for Malaysian gaming stocks at this juncture, except Genting (TP: RM4.71) given its potential upside of 12.5%. Maintain Neutral

Source: TA Research - 18 Dec 2023