UOB Kay Hian Research analysts have maintained their “overweight” rating for the regional gaming sector as the sector’s companies stand to benefit from China’s reopening.
In their report dated Jan 6, analysts Vincent Khoo, Jack Goh and Ng Jo Yee note that most of the shares of gaming companies have rallied, with gaming stocks from Macau and Singapore rising between 14% and 39% since 3Q2022.
The analysts are maintaining “overweight” on the Singapore and Malaysian gaming sectors and “market weight” on Macau gaming sectors, with Genting Singapore their top sector pick for its 2023 earnings recovery and capital management upside.
Their new target price of $1.15 (from $1.08 previously) for Genting Singapore is conservatively based on a 9.3x 2023 enterprise value-to-ebitda ratio (EV/ebitda), 0.5 standard deviations (s.d.) below the mean. Other picks include Genting Berhad (GENT), Genting Malaysia (GENM) and Sands Macau. The analysts have rated Sands Macau “buy” due to the weakness in the group’s share price.
While the analysts say they expect Macau to post the strongest gross gaming revenue (GGR) and ebitda recoveries through 2023 to 2024 compared with its Asean peers, they add that Macau gaming stocks’ valuations have partially priced in recoveries through 2024.
“Following the past months’ stock rallies, the EV/ebitda valuations of the Macau gaming stocks under our coverage have rebounded significantly to above their pre-pandemic levels, as investors partly price in further GGR recoveries in 2024,” they say.
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According to the analysts, this suggests near-term consolidation as the reopening process, jump-starting of visitation in Macau and coming months’ GGR recoveries may not necessarily be a smooth upswing. “Fundamentally, Macau gaming companies’ 2024 valuation should trade below their pre- pandemic mean given the concessionaires’ capex commitment for non-gaming facilities, which lowers operating cash flows by 19%. Consequently, companies will likely need time to reinstate their pre-pandemic dividend policies,” they explain.
On the other hand, the analysts say they still foresee moderate upside to the Genting Group’s listcos as Mainland Chinese tourists stream back to Asean countries, and expect the Genting listcos to dole out “generous” final quarter dividends.
Asean gaming stock 2023 and 2024 EV/ebitda valuations are still “well below” their respective mean valuations, and are also significantly below their Macau counterparts, say the analysts, who expect Asean gaming stocks to further re-rate as Mainland Chinese tourists stream back to the region.
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Among them, the UOB Kay Hian analysts say that Genting’s Malaysian listco’s, Genting Malaysia and Genting Berhad, are “conspicuous laggards”, held back by Genting Malaysia’s ill-timed related-party transaction and the lack of foreign interest in Malaysian equities.
“We prefer Singapore gaming to its Malaysian counterpart, partly because Genting Singapore has the highest reliance on Mainland China patronage that accounted for an estimated 20% of its pre-pandemic revenue,” they add.
The analysts point out that Mainland Chinese tourists have historically made up 10% to 15% and 19% to 20% of foreign visitors to Malaysia and Singapore respectively. “We believe that the market should sustain its positive sentiments towards Singapore’s gaming sector which includes Genting Singapore in 2023, anchored on the sector’s meaningful core profitability recovery which promises defensiveness amid current market volatility.”
Besides the Genting Group, Malaysian small-cap slot machine operator and distributor RGB International is also expected to stage a strong earnings turnaround in 2023. “RGB’s earnings will continue to gain prominence with the gradual reopening of emerging gaming jurisdictions which were thriving prior to the lockdowns,” say the analysts.
They expect RGB’s net earnings to recover to the pre-pandemic levels of about RM40 million ($12.31 million) by 2023, backed by strong backlog orders for slot machines, implying an 8.4x 2023 price-to-earnings ratio (P/E), 1 s.d. below the historical mean.
As at 3.11pm, shares in Genting Singapore were trading 0.5 cents or 0.52% down at 96.5 cents.
