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This article first appeared in The Edge Financial Daily on July 23, 2018

Gaming sector
Maintain overweight:
Based on the latest details provided by the customs department on sales tax and service tax (SST), service tax will be charged on the gaming sector to replace the abolished goods and services tax (GST).

 

We believe that collection of service tax on gaming operators will be similar to the previous GST regime, as the tax will be collected based on net win rather than the gross gaming revenue of the operators.

The operators were taxed at 6/106 instead of the headline 6%, which we believe the new tax regime will follow. We expect more details of the tax and collection formula to be unveiled by the government as the SST bills are being debated in parliament.

We are of the view that the government will not raise the gaming tax in the upcoming budget in November 2018, as a means to improve revenue from the abolishment of GST. The introduction of GST and now the SST is already a form of taxation on the gaming sector, as the cost (or tax) is absorbed by the operators instead of the public.

Gaming was not taxed under the previous SST regime. Our forecast for the gaming companies has assumed a similar formula and tax rate to be levied against the gaming sector.

One of the reasons given by the current government to replace GST is to improve the spending power of the people. Gaming operators could potentially benefit from this, but the impact is rather hard to quantify.

Apart from factoring a higher margin for gaming operators in the second quarter and third quarter of 2018 due to the tax holiday, we have not factored in the potential rise in consumption into our numbers.

We are reaffirming our “overweight” call on the sector, as we believe that the share price performance will likely be dictated by the outcome of several events in the coming months, like the details on the opening date of the 20th Century Fox Theme Park at Genting Highlands and details of the integrated resort bid in Japan.

We expect a positive outcome of these events to have a positive long-term effect on the earnings growth of the sector. Genting Malaysia Bhd (buy; RM5.12) remains our preferred pick for the sector.

Downside risk will be higher-than-expected taxation on the gaming sector. — Affin Hwang Capital Research, July 20

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