Tuesday, March 19

Genting falls as gaming sector shortchanged

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Genting Malaysia will need to sacrifice some margins in the VIP and Premium Mass segment in order to protect its market share, as casinos with lower tax rates are able to offer higher rebates and other complementary services. — Reuters photo

KUCHING: Shares of Genting Malaysia Bhd (Genting), Malaysia’s premier gaming stock, was affected by the spate of casino charges introduced in Budget 2019 last Friday.

At close, Genting Malaysia’s shares dropped by 20.48 per cent to RM3.61 per share with 379.03 million shares traded. It opened at RM3.60 in the morning, a sharp drop of 20.7 per cent from its previous close last Friday of RM4.54 per share.

Among said measures is the casino license to be increased by RM30 million per annum; casino duties to be increased up to 35 per cent from 25; gaming machines duties to be increased to 30 per cent; machines dealer’s license to be increased to RM50,000 per annum; and the number of special draws will be halved.

“We believe that with the increase in gaming tax, Genting Malaysia Bhd (Genting Malaysia) is likely to be less competitive relative to its Asia peers, as Malaysia has the second highest casino duties just behind Macau,” Affin Hwang Investment Bank Bhd (AffinHwang Capital) said in its analysis yesterday.

It also said Genting Malaysia would need to sacrifice some margins in the VIP and Premium Mass segment in order to protect its market share, as casinos with lower tax rates are able to offer higher rebates and other complimentary services.

“We are expecting some gaming volume contraction due to the higher duties,” it added.

“The increase in duties and fee will not only negatively affect gaming companies’ earnings in Malaysia, but also on the valuation of these companies.

As there is no certainty on whether this is a one-off hike or a recurring one in the years ahead – considering the last tax increase on the sector was in 2005 – the risk perception for the gaming sector will no doubt be higher than before.

“Gaming companies might also be reluctant to invest more capex into their current operations, as it might take longer than expected to achieve the desirable returns.”

Boring down to details, AffinHwang Capital saw that competition for VIP clients was intensifying in this region as more casinos are opening up in countries with low tax rate.

“We believe that the impact on the mass-market segment in unlikely to be as severe as the VIP segment, as Genting Malaysia has more leeway in awarding rewards to its customer in this segment. Mass-market segment revenue accounts for around 70 per cent of its casino revenue.

“With more new facilities opening up in the next few months, we expect visitation numbers to continue growing. However, there could be some changes phase 2 of the GITP program, as it had planned to construct additional luxury hotels catering towards the premium-mass and VIP segment.”

In a separate note, Public Investment Bank Bhd’s (Public Invest Research) preliminary estimates see Genting Bhd and Genting Malaysia’s FY19-20F earnings being reduced by about 10 per cent and 30 per cent respectively from these new measures.

Meanwhile, it believed Magnum Bhd and Berjaya Sports Toto Bhd’s FY19-20F earnings will fall by six per cent and 10 per cent respectively.

“We downgrade Genting Malaysia to underperform while maintain Genting at outperform. We feel Genting is oversold and its current valuation of 13 times forward its price earnings ratio is compelling. We retain our neutral rating on Magnum and Berjaya Sports Toto as we believe market has already priced in the impact of fewer special draws, given that this was first announced in August by the Minister of Finance.”