This article first appeared in The Edge Financial Daily on January 8, 2020

Gaming sector
Upgrade to overweight: We upgrade our call on the gaming sector to “overweight” from “neutral” in line with our recent call upgrades for Genting Malaysia Bhd and Genting Bhd to “buy” from “hold”. We believe their share prices have overreacted to increased competition in the very important person (VIP) segment of the region. We still favour Genting Singapore Ltd (Genting Singapore; “buy”; target price [TP]: S$1.14 [RM3.46]), as its valuations are attractive, and believe that any favourable news in Japan pertaining to the casino bill this spring will create excitement. We also like Genting Malaysia (TP: RM3.64) for its improved Malaysian business performance alongside a dividend yield of at least 5% supporting its share price. With regard to numbers forecast operators (NFOs), we expect minimal impact from the reduction in special draws as it reduces earnings by less than 2%. In fact, stricter enforcement against illegal operators should help to offset this.

Genting Malaysia has placed its focus on cost-rationalisation measures to counteract the higher gaming tax. The impact of these efforts can be seen in Genting Malaysia’s cumulative nine months ended Sept 30, 2019 (9MFY19) results which were above expectations, forming 83.7% of our and the consensus full-year forecasts respectively.

We expect these efforts to continue moving into FY20.  

Meanwhile, Genting Singapore is currently among the remaining three entities (from the initial seven) left in the run for the Osaka bid, with MGM Resorts and Galaxy Entertainment as the other two.

The selection of a winner will take place sometime in the second half of 2020. We opine that Genting Singapore may stand out given its strong balance sheet and expertise in running a casino in a tightly regulated Singapore.

To recap, Budget 2020 introduced the reduction of special draws from 11 days to eight days alongside stricter penalties and jail time for illegal gamblers and gambling operators from this month.

We like Genting Singapore’ stability in leveraging Singapore’s growing tourism industry.

In addition, the potential negatives from the acquisition of Empire Resorts Inc should be less profound than initially anticipated (Empire targets to achieve positive adjusted earnings before interest, taxes, depreciation and amortisation in 2020). — Hong Leong Investment Bank Research, Jan 7