KUCHING: Regional expansion remains in focus for Malaysia’s gaming sector with research houses downgrading the sector to neutral as corporate results have been relatively weak due to declining visitor arrivals and poor luck factor.
Key focus areas for 2015 are mainly centred around Genting Bhd’s (Genting) progress in winning new casino licenses, said Affin Hwang Investment Bank Bhd’s research division (Affin Hwang Capital).
“Its subsidiary, Genting Singapore, is making good progress in Korea and we understand that Resorts World Jeju could possibly see the light of day in the first half of 2015 (1H15). In addition, it expect further clarity on Genting’s Resorts World Las Vegas in the US.
“However, the casino bill in Japan may have to wait as we believe Prime Minister Shinzo Abe may use the re-election victory to drag Japan out of deflation,” it said in its note on the sector.
Affin Hwang Capital expressed its disappointment in Genting Malaysia’s failed bid for a casino licence in upstate New York, adding potential tax revenue may have played an influence in the award.
“It remains to be seen where Genting Malaysia may make its next move in the US, but we believe Genting Malaysia would need to be selective given rising competition from new casinos amid moderating industry growth.
“At this juncture, we are not aware of potential new casino licences to be issued in the US,” explained the research house.
A potential headwind, however, is the implementation of the six per cent Goods & Services Tax (GST) due in April 2015 that impacts both Genting Malaysia and Berjaya Sports Toto (BToto).
The implementation of the GST is negative for Genting Malaysia, as the research house understands that the casino will absorb the tax.
“Tactically, the sector could however still benefit from a return of capital flows as the gaming sector is seen as generally defensive and is a foreign investor favourite.”
Researchers with Kenanga Investment Bank Bhd (Kenanga Research) said it remains unclear how the GST will be charged by these sector players.
“The key risk is if the industry players are unable to pass on the GST to the consumer as this would impact the bottomline,” it said in another note. “Currently, the players are already being charged with multiple taxes, including gaming tax besides the usual corporate tax.
“As such, the ideal case would be one of the existing taxes being converted or replaced by GST.
“We believe this is the likely case as the impending GST is to replace existing taxes paid for goods purchase/services in certain sectors currently, for instance, the six per cent government tax.
“Another likely positive case for NFO players would be passing the GST to punters by lowering down the prize payout.
“However, the likely implication could be lower ticket sales as punters may opt for illegal operators. Worst case for both casino operators and NFO players is they are unable to pass down the tax to the punters.”
In time of slowdown in the economy, Kenanga Research believed this sector may be spared from the effects of slower discretionary spending, especially for the NFO segment, as punters would continue trying their luck hoping for a windfall during hard times.
“We notice that even during the 2008 financial crisis, both Magnum and Berjaya Sports Toto still registered 5.7 per cent growth in ticket sales while the growth in 2009 was flattish at about 0.2 per cent.
“As such, the outlook for the sector is not that pessimistic compared to other sectors. In all, valuations for both casino operators and NFO players are fairly attractive as current level following the recent market sell down.”
This led the firm to continue its overweight stance on the sector, keeping Genting as its top pick given the exciting new casino market story.