Gaming Tax Malaysia
PETALING JAYA: Gaming players are not expected to be hit with a tax hike in the upcoming Budget, but the risk still remains for numbers forecast operators (NFO), according to a report from Alliance DBS Research.
The Malaysian government has not revised casino taxes since 1998, when the rate was altered from a 22% to 25% range, to a flat 25%. The gaming tax rate of 8% has not been changed for 15 years either. Casinos in nearby Macau are taxed at between 38% and 39%, while Singapore imposes a 5% tax rate on the VIP sector and 15% on the mass market segment. Corporate Income Tax. In Malaysia, corporations are subject to corporate income tax, real property gains tax, goods and services tax (GST) and etc taxes. In other words, resident and non-resident organisations doing business and generating taxable income in Malaysia will be taxed on income accrued in or derived from Malaysia.
The research house said it believed hiking the tax for this segment could be counter-productive as this could indirectly induce more illegal NFO activities, should NFOs decide to pass on the higher tax to the punters.
“[NFO] players are on a stronger financial footing since late last year on the back of more stringent enforcement by the authorities in curbing illegal NFO activities. Furthermore, a considerable time has passed since the authorities last implemented a tax hike for the NFO sector,” it said.
To recap, the government increased the gaming tax for NFOs to 8% back in 1998, while the pool betting duty for NFOs was increased to 8% in 2010.
There are however, rising concerns from investors, given the measures introduced in Budget 2019, namely: raising the casino licence fees from RM120 million to RM150 million per annum, the hike in casino duty from 25% to 35% of gross gaming income, the machine dealer’s licence fee being increased from RM10,000 to RM50,000 per annum, the gaming machine duties being increased from 20% to 30% of gross collection, and the reduction of special draws for NFOS by half to 11 draws.
The research house said that should the government decide to raise taxes, its sensitivity analysis shows that a 1% increase in casino duty will lower Genting Bhd and Genting Malaysia Bhd’s forward earnings by about 1% and 3% respectively.
“On the other hand, a 1% increase in gaming tax/betting duty could reduce Berjaya Sports Toto (BToto) and Magnum’s forward earnings by about 7% and 8% respectively. Nevertheless, we believe that the NFOs would likely to revise its prize structure to maintain its profit margins,” the report said.
Alliance DBS is maintaining its positive call on the sector, with Magnum Bhd its top pick.
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We are negative on the multiple increases in taxes and duties on casinos. While the market has long anticipated the hike, the magnitude caught us by surprise with a 10% hike on casino gaming tax to 35%. We tactically downgrade GENM to SELL, GENT to HOLD while maintaining our HOLD call on BTOTO as we adjust the earnings impacts for respective companies. Downgrade to NEUTRAL as the sector is now undermined by the higher gaming tax, margin compression and potential earnings contraction.
NEWSBREAK
Budget 2019 has hit the gaming industry hard with increased taxes, fees and levies, which includes (1) higher casino license of RM150m/annum from RM120m/annum, (2) higher casino duties on GGR of 35% from 25%, (3) higher machine dealer’s license of RM50k/annum from RM10k/annum, (4) higher gaming machine duties on gross collection to 30% from 20% and (5) the number of special draws for NFO to be reduced by half.
HLIB’s VIEW
Detrimental. The market has long anticipated a gaming tax hike, which is in line with the government’s will to increase and diversify its revenue streams via indirect taxes. However, the magnitude caught us by surprise with a 10% hike (to 35% from 25%). This hike essential makes Malaysia’s GGR tax rate higher than her neighbouring peers-ex Macau (Figure #1). The increase in machine dealer’s license fees and gaming machine duties (if applicable) are expected to have minimal impact to bottom line, quantum wise.
Pressure on casino operators. We opine that the additional taxes and duties slapped on GENM would offset the growth from the exponential increase in the visits resulting from the RM10.4bn GITP expansion. Our initial projection of 16.4% 3 years CAGR for EBITDA is now cut to 4.4%, undermined by the worse-than-expected hike in gaming tax. Besides, we are of the view that the casino is now handicapped to run the operations on more restricted resources with lesser perks and rebates available to entice VIP players, not without sacrificing the margin or increase the risk.
No negative surprises to NFO. As expected, the number of special draws for all numbers forecast operators (NFO) will be reduced by half (from 22 days to 12 days) beginning 2019 in order to reduce social problems related to gambling activities.
Forecasts. Our FY19/20 EBITDA and PATAMI for GENM are reduced by -27%/-27% and -34%/-36%, respectively. Meanwhile, our FY19/20 EBITDA and PATAMI for
GENT are reduced by -10%/-11% and -14%/-14%, respectively. For BTOTO, we reduce our FY19/20 EBITDA and PATAMI by -4%/-6% and -4%/-7%, respectively.
We tactically downgrade GENM to SELL (from BUY) with lower SOP-derived TP of RM4.01 (from RM5.80) after factoring in the additional taxes impacts and lower our EV/EBITDA multiple for RWG operations. We downgrade GENT to HOLD with lower SOP-derived TP of RM7.51 (from RM12.27) after consolidating the forecasts and TP changes in GENM as well as expanding the holding discount to 50%. Meanwhile, we maintain HOLD on BTOTO with lower DCF-derived TP of RM2.16 (was RM2.36).
Gaming Tax Hike Malaysia
Downgrade to NEUTRAL (from Overweight). We opine that the sector is now facing headwinds with the growth story now undermined by the direct impact on the higher gaming tax. Besides, the extra risk on margin compression and potential earnings contraction would no longer entice the interest from investors.
Gaming Tax Malaysia 2020
Source: Hong Leong Investment Bank Research - 5 Nov 2018