Gaming sector to benefit from better consumer sentiment
PETALING JAYA: The gaming sector is expected to benefit from a recovery in consumer sentiment, following the reduction of goods and services tax (GST) rate to 0%, reintroduction of petrol subsidy and the promise of a minimum wage increase to address the higher cost of living.
In a sector update report yesterday, UOB KayHian said other multiple catalysts ahead for the gaming sector include Genting Malaysia’s (GENM) opening of 20th Century Fox theme park by year-end after numerous delays.
“Genting Singapore is to see more news flow on Japan IR concession bidding which will benefit parent company Genting Bhd, while there is a potential monetisation of Magnum’s 6.3%-owned U-Mobile as well as the potential reduction of the Inland Revenue Board (IRB) penalty,” said UOB KayHian.
While gaming companies are beneficiaries of the zero-rated GST, the government will likely increase gaming taxes to lift its revenue.
The research house estimates the sector’s tax contribution at 1.5% of the government’s total 2017 revenue.
However, the impact of gaming duty hikes are expected to be moderate at worst.
“First, the quantum of the duty hikes would need to be balanced against further outflow into the illegal market, particularly for the number forecast operator (NFO) segment, and to regional competitors for the casino segment.
“Additionally, impact to the sector’s bottom line would be mitigated by NFO players’ likely passing on of the duty hikes to punters, which in turn fans the illegal market and dilutes the government’s revenue collection.
“While the casino would likely bear the full brunt of the duty hikes as they are unable to change the card games’ payout, the Genting Group’s earnings stream is geographically diversified,” said UOB KayHian.
The potential tax-hike impact would be moderate, considering that a significantly higher tax would reduce Malaysia’s competitiveness against regional peers.
The current gaming taxes for the VIP and mass market segments are 10% and 25%, effectively 5% and 15% in Singapore.
The research house maintains Overweight on the gaming sector, prefering casinos over NFOs as the casino segment will benefit from earnings growth and news flow through the opening of Fox Theme Park.
NFOs’ share price upside should be more gradual after May’s spectacular rally, although the long-speculated potential listing of Magnum’s 6%-owned U-Mobile could provide further uplift to Magnum.
UOB KayHian estimates visitor arrivals for GENM’s Genting Highlands to increase from 23.6 million in 2017 to 28 million in 2019.
Both VIP and mass market gross gaming revenue recorded double-digit year-on-year growth in the first quarter of 2018 (1Q18), reflecting the full impact of capacity expansion undertaken since the 2Q17.
“We expect gaming volumes, particularly in the mass market segment, to improve further towards year-end to 2019, thanks to the opening of an indoor theme park (targeting end-3Q18) and Fox Theme Park (still targeting end-2018).
“All in all, we expect GENM to deliver a two-year earnings before interest, tax, depreciation and amortisation compound annual growth rate of 26% through to 2019,” said UOB KayHian.