Dicey times ahead for gaming sector


Recent earnings from Genting Singapore suggest that the resilient gaming industry is facing a slowdown.

KUALA LUMPUR: The gaming story for the Genting group is far from over, although the jackpot remains a tad elusive for now.

The gaming sector, according to analysts, has conventionally offered attractive investment propositions to investors in view of its defensive nature, earnings resiliency and bright growth prospects.

However, recent earnings from Genting Singapore Plc (GenS) suggest that the resilient gaming industry is facing a slowdown. To this, analysts said the steeply lower earnings from the Singapore unit is mainly due to lower VIP visits, particularly from China.

“It is a cyclical weakness rather than a structural one. GenS has been expanding its market share in the VIP segment.

“Genting’s story may not be exciting in the near term. Fundamentally, the group remains strong and its earnings are resilient, but it is going through some challenges,” a bank-backed gaming analyst told StarBiz.

He noted that locally, Genting Malaysia Bhd is still in the midst of expansion in relation to the Genting Integrated Tourism Plan, which includes additional hotel rooms and a theme park.

The group’s current financial year is expected to take a hit due to its expansion.

In fact, there are several reasons to think that Genting’s brightest days may still lie ahead. Analysts are expecting a Genting earnings uptick next year, when it completes some of its new facilities following its expansion.

An analyst said Japan and South Korea would have casinos in the future, but that might not be as early as expected due to regulatory issues.

He said the Genting group’s business in New York was doing well and could be further boosted should it win the bid for upstate New York.

Genting Malaysia, via its wholly-owned subsidiary RW Orange County LLC, has submitted its interest in the hope of winning one of the four casino licences in upstate New York.

Genting Bhd is expected to announce its third-quarter results on Nov 28.

While things seem buoyant for the Genting group, some analysts are suggesting the gaming market could be dampening in Singapore, while Macau’s casino industry saw a record revenue drop in October.

According to Macau’s Gaming Inspection and Co-ordination Bureau, total casino revenue in the world’s biggest gambling hub fell 23.2% to 28 billion patacas (US$3.5bil) last month, facing its longest losing streak. The drop in revenue in October is the fifth consecutive monthly decline this year seen in Macau.

Against this grim backdrop, analysts have said earnings of the casino operator in Macau still hang tough.

“The strengthening of the Singapore dollar against regional currencies could slow down visits from the South-East Asia region, while the economic slowdown in China could also adversely impact trips from China, which constitute the bulk of its VIP segment,” an analyst said on the gaming scene in Singapore.

In addition, JP Morgan, in a report prior to the release of GenS’ results announcement, expected little Singapore market size expansion due to already-high penetration and regional competition might also pose a longer-term threat.

“GenS’ competitor Marina Bay Sands (MBS) is shifting to profitability by grabbing more stable/high-margin, mass-market share from GenS, which has a disadvantageous location. GenS’ business mix is becoming more unfavourable, with more volatile or low-margin VIP and less mass contribution,” JP Morgan pointed out.

Analysts said the ongoing corruption crackdown, protests in Hong Kong and declining tourist numbers combined had given Macau’s casino industry its worst monthly revenue performance on record in October.

They believe there are still significant challenges for the Asian gaming and tourism industry, at least in the very near term, while the developments in China will continue to have an impact.

Meanwhile, Fitch Ratings said that the credit profiles of the casinos in Singapore were likely to remain resilient, even though a decline in international visitor arrivals to the country would see a weakening of gaming growth in Singapore.

“Both GenS and MBS are mature gaming properties that will be able to withstand narrower earnings before interest, tax, depreciation and amortisation margins for the next 12 to 18 months without impairing their underlying credit profiles.

“Longer term, however, the Singapore casinos will face increasing regional competition from new casinos in the Philippines, Macau and, potentially, Japan,” Fitch said.

The rating agency believes the sharp decline in revenue from the VIP segment is temporary and that VIP numbers will improve in the latter part of 2015.

“The lower Chinese inbound visitors also reflects the implementation of new rules in October 2013 that address practices such as coercive shopping trips, and low-price quality tours. They have also been affected by the disappearance of Malaysia Airlines flight MH370, the abduction of Chinese visitors in Sabah and political unrest in Thailand,” it added.

CIMB Research said a casino licence win in New York and expansion in gaming capacity in 2016 were strong re-rating catalysts for Genting Malaysia.

It said that with the US mid-term elections out of the way, CIMB expected an announcement of the winners of the New York upstate casino bids by year-end.

“Despite the stiff competition in Orange County, Catskills region (six bidders), we are confident of Genting Malaysia winning one of the bids. Genting Malaysia has offered the highest licensing fee for Sterling Forest casino and 50%-100% higher salaries for both its casino bids. It has strong lobbyists and has made significant campaign contributions,” it noted.

Genting Malaysia, CIMB said, was paying the highest licensing fee for Sterling Forest (US$450mil one-time fee) and annual commitments to state education. It is also offering almost twice the national average casino annual salary (US$39,000) at Sterling Forest (US$75,000) and more than 50% at RW Hudson Valley (US$60,000).

CIMB has estimated that Resorts World Genting currently has 600 gaming tables and is split 75:25 between mass market and VIP. It said mass market generates about 60% of the casino’s revenue, with the balance 40% from VIPs.

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