Casino operators to gain from overseas expansion

Kuala Lumpur: Casino operators and casino machine suppliers stand to benefit from further liberalisation of the industry in the region, as they could cross sell their services and products through branches set up in different countries.

Several countries, including Thailand and Taiwan, have expressed their intention to legalise casino operations, and if this takes place, it would be positive for the growth of the industry, said RHB Research Institute Sdn Bhd.

It said the Thai government had proposed to set up 10 casinos, while the Taiwanese government has not specified any numbers at this point in time. This will be positive for the growth of the industry, if it goes through, given the fact that most casinos rely on domestic visitors.

„In addition, it will also give casino operators an opportunity to cross sell their services across their various branches, which should lead to more tourist traffic,“ it said.

RHB Research, however, said these proposals would take a while to take off and was not likely to happen in the medium term, given the regulatory issues surrounding the industry.

The research house said the fortunes of Resorts World Bhd and Genting Bhd, being the only licensed casino operators in Malaysia, still depended on domestic private consumption growth.

While foreign tourists currently make up about 15% of its 20 million visitors, with hotel occupancy at 89% in 2007, Resorts is aggressively involved in promotional efforts overseas to attract more tourists.

„Nevertheless, we expect revenue growth from the casino operations to track that of domestic consumer spending growth and expect casino patronage to continue to outpace visitor growth in the years ahead,“ it said.

RHB Research is projecting average casino sales growth for the next three years at 0.9 times average consumer spending growth of 7.5%.

On the risks for casinos, the research house said these included changes in gaming policies in the country, increase in illegal gambling activities and luck factor risks.

Commenting on the election results that saw changes in four state governments, the research house said it would not be an issue to Resorts’ casino, which is located on the Pahang-Selangor border as Pahang remains under Umno rule while Selangor has a coalition government, therefore ruling out implementation of Islamic law as speculated in Kedah and Perak.

On overseas opportunities, RHB Research said Resorts continues to look out for opportunities to expand its gaming operations regionally, given its net cash pile of close to RM3 billion as at end-2007.

„If it is unable to invest outright in a regionally-based casino, management has said it may even look at buying a strategic stake in a casino company overseas first before taking it over eventually. This is similar to what Genting did with London Clubs in 2006,“ it said.

Meanwhile, it said casino machine supplier Dreamgate Corp Bhd would also benefit from an increasing liberalisation of the regional casino industry, given that it is already a major supplier of the machines to various countries in the region.

„Currently, Dreamgate has an estimated market share of between 20% and 60% in various Asian countries like Philippines, Macau, Cambodia, Vietnam, Myanmar, Mongolia, Singapore, Korea. As such, we believe Dreamgate’s reputation and extensive market reach will bode well for it should any new regional country open up its casino sector,“ it said.

RHB Research said it was revising its fair value for the three companies downwards to take into account the revised risk premium of 9% (from 8% previously) applied to its discounted cash flow assumptions, as well as lower target price earnings (PE) multiples.

Our sum-of-parts (SOP) for Resorts have been revised down to RM4.10 (from RM4.40), while our SOP value for Genting has been revised down to RM9.35 (from RM9.75). Our PE-based target price for Dreamgate has been revised down to 66 sen (from 82 sen), after attributing a lower CY08 PE target of 12 times (from 15 times). „We maintain our outperform recommendations for all three stocks,“ it said.