1H24 Flashback

The gaming division of Genting Malaysia recovered strongly on the back of increase in business volume, which led to higher margins due to improved operational efficiency. However, it failed to outgrew its competitors in Singapore and Macau, which have experienced greater growth in revenue and EBITDA.

1Q24 results performance was generally mixed. Genting beat market expectations due to higher-than-expected performance of Genting Singapore (GENS) while Genting Malaysia’s (GENM) results trailed our forecast due to higher-thanexpected losses from Empire Resorts. Overall, the 1Q24 results performance was

satisfactory with sector revenue and EBITDA expanded by 22.0% and 42.8% YoY respectively due to sustained earnings recovery, which led to higher operational efficiency. The margin improvement was strong enough to provide a buffer against the 2% rise in service tax, effective March-24.

In terms of share price performance, Genting and Sports Toto (SPToto) registered a YTD gain of 2% and 6% respectively, while GENM suffered a 4% decline YTD. However, none of them outperformed the market, where the FBMKLCI grew 9.3% in 1H24.

Looking forward, we expect the following three factors to affect the performance of gaming counters in 2H24:

1. Higher tourist arrivals will be a boon to Genting Group;

2. The threat of new entrants; and

3. Additional service tax and lower spending power.

Higher Tourist Arrivals Will be a Boon to Genting Group

The weakening of ringgit has been a blessing in disguise for the gaming sector as the proliferation of foreign tourists has helped GENM to recover further to its pre-pandemic levels. Besides, the relaxation of entry visa requirement for Chinese tourists along with increased airline capacity also contributed to the earnings recovery, where GENM’s 1Q24 revenue from Genting Highlands was still 8% below the pre-pandemic level (1Q19). Note that GENM’s revenue and adjusted EBITDA increased by 24% and 35% YoY respectively in 1Q24.

Likewise, Singapore has also seen higher tourist arrivals especially from China on the back of visa relaxation and increased flight capacity. 1Q24 total foreign tourists grew 49.8% to 4.36mn, mainly from China and Indonesia. The increase in foreign tourists has boosted Genting Singapore’s (GENS) performance, leading to revenue and EBITDA growth of 73% and 105% YoY respectively.

Looking forward, we expect the Chinese tourist visitation to continue playing out in 2H24. Malaysia and Singapore governments forecast international visitors to grow to 27.3mn and 15-16mn respectively in 2024, representing a YoY growth of 36% and 10-18%. This is expected to continue into 2025 as we expect the tourist factor to remain a relevant catalyst for the gaming sector, casino in particular.

The Threat of New Entrants

On the heels of legalising casino operations in 2018 and the awards of 3 licences in Japan, the construction of the first integrated resort (IR) in Osaka has begun and is target for completion in 2030. Although it does not seem as an immediate threat to regional players, the intensifying competition from new IR has always been one of our investment considerations, which would affect Genting’s longterm profitability. This is especially true that there has been a growing interest from other country leaders in this space, hoping to accelerate the rate of recovery of economy, create new job opportunities and collect higher tax revenue. According to various news sources, the legislation aims at establishing a framework for IRs in Thailand will be read in the parliament in June. The draft bill would outline the process for obtaining a licence, which entails:

• Licensee eligibility: only registered Thai entities with a minimum capital of 10bn baht can apply;
• License duration: The initial license period is 20 years, with a possibility of renewal for five-year terms;
• License type: Initially, only one license type (XL) with a minimum investment of 100bn baht will be available. Smaller licenses (S, M, L) will be considered in the future.
• Location: Initially, complexes can be built within a 100km radius of major airports and in designated tourist and border provinces.

All in all, we do not see any rationale for Genting group not to bid for the licence for its earnings growth and market share. At the same time, we do not think other competitors will miss the party either. If Genting fails to outbid its competitors, it will be a blow to its future profitability, in our opinion.

Additional Service Tax and Lower Spending Power

The impact of the additional 2% service tax on gaming sector earnings was undermined by strong revenue growth led by the increased gaming (casino and NFO) volume in 1Q24 as discussed above. Also, the muted impact was partly due to the timing of the tax hike which began on March 1. Looking forward, the additional tax would be a long-term burden for the gaming sector where our sensitivity analysis shows a respective 4.4% and 8.6% earnings reduction for GENM and SPToto for every 1% increase in gaming tax. As far as Budget 2025 is concerned, we do not think there will be a change in gaming tax as the additional service tax was only introduced in the previous Budget.

Consumer’s spending power would likely be affected if the petrol subsidy on RON95 is removed in 2H24. As Malaysians contributed to 70% of GENM’s total visitations, the reduction in the spending power of M40 group would not bode well for GENM’s casino as well as theme park and hotel businesses. Having said that, the impact would not be apparent as the topline growth would be supported by strong tourist arrivals. We believe the company would sacrifice some profit like enhancing casino comps to encourage players to gamble.

Forecast

No Change to Our FY24-26 Sector Earnings Projections.

Recommendation

In a nutshell, we expect 2H24 earnings recovery to gain further strength on the back of increasing foreign tourist visitations. This is sustainable in 2024-25 as regional airlines are adding capacities to meet the demand. We also expect the return of foreign shareholders to Malaysia. As such, we maintain Genting (Buy, TP: RM5.77) and GENM (Buy, TP: RM3.13) as top picks for the sector for 2H24. Maintain Overweight.

Source: TA Research - 2 Jul 2024