Tourism Recovery Stimulates Growth in Malaysia's Gaming Sector, Analysts Bullish on Genting Malaysia

Investors are paying close attention to what factors are driving this optimistic outlook.

1. Recovery of the tourism industry: The gradual resumption of global flight capacity and the visa-free travel agreement between China, Malaysia, and Singapore are driving the development of the local tourism industry. According to data from Malaysia Airports Holdings Berhad(MAHB) this week, international passenger traffic in its local airport network is expected to increase by 40% in the first half of 2024, with a total of 45 million passengers in the first half of 2024, reaching 87.9% of pre-pandemic levels in the same period in 2019. MAHB expects this trend to continue to rise in the second half of 2024.

2. Weakening of the Ringgit: The local currency for gaming transactions, the Ringgit, has generally weakened against the Chinese Yuan(CNY) over the past year, falling by 0.54% compared to the same period last year.

3. Supportive laws recently enacted to enhance the stability of gaming company operations: A High Court ruling recently declared that the local government's cessation of licensing renewals for Kedah's gaming operations was unconstitutional. This decision underscores the federal government's jurisdiction over gaming regulations, thus ensuring a stable operating environment. "The court's decision is a critical affirmation of the federal authority over gaming regulations, which will help prevent similar disruptions in other regions," commented a legal expert on the matter, according to The Star.

HLIB Research maintains an "overweight" rating on the gaming industry, with Genting Malaysia Bhd and Sports Toto Bhd as the top picks, both rated as "buy" with target prices of RM3.44 and RM2.27, respectively.

Phillip Capital Research has also rated Malaysia's gaming industry as "overweight" and given Genting Malaysia Bhd a "buy" rating, expecting an increase in the number of foreign tourists to Malaysia and Singapore to drive the growth of total gaming revenue.

HLIB Research expects the profits of Genting Singapore and Genting Malaysia to continue to recover in the second half of 2024 and beyond, driven by the ongoing rebound in tourist numbers. In addition, Chinese tourists are a key customer group for the gaming industry, and Malaysia and Singapore have shown resilience as destinations for Chinese tourists in 2023, but HLIB Research points out that tourist volumes are still at 48% and 47%, respectively, of 2019 levels, indicating further potential for recovery.

Phillip Capital Research also sees potential in Genting's diverse growth opportunities and attractive valuation. Thanks to the increase in foreign and local tourist numbers, Genting Malaysia Bhd is expected to benefit from the recovery of both gaming and non-gaming revenue. In addition, the weakening of the Ringgit provides further upside potential for Genting Malaysia's profits.

Phillip Capital Research also sees benefits from Genting's US business growth. It pointed out that Genting Malaysia's video gaming machine (VGM) business expanded its market share in New York State to 43.3% in the second quarter, with net wins up 5.5% year-on-year, surpassing the state's overall growth rate of 4.3%. "Overall, we expect the performance of the US business to improve, and by 2023, the US business will account for 18% to 20% of Genting Malaysia Group's revenue and EBITDA," the company said.

Phillip Capital Research maintained its "buy" call on GenM, with an unchanged target price of RM3.45. "GenM remains our sector top pick, given the superior 6.8% dividend yield. We continue to advocate investors to accumulate on share price weakness, as GenM trades at an undemanding 6.6 times estimated 2025 enterprise value-to-Ebitda," it explained.

A Bloomberg Intelligence analyst pointed out that although the cash flow prospect of Genting Malaysia seems stable after the domestic business returns to normal, overseas investment projects, especially the bidding for the New York casino project, may significantly increase its financial burden, posing credit rating risks.

The High Court recently ruled that the Kedah state government's decision to stop issuing and renewing business licenses for gaming operators was unconstitutional, as only the federal government has the power to formulate laws and regulations related to gaming.

On January 1, 2020, Sports Toto was forced to close its 19 betting stations in Kedah as its business license was not renewed, and then faced the same dilemma in Perak on July 23 of the same year. This ruling reduces the risk of similar closures in other states and provides more stability for operators such as Sports Toto.

Source: moomoo, Bursa Malaysia, The Edge Malaysia, HLIB Research, The Star