Cambodia poses a growing threat to Malaysia’s gaming industry, says JPMorgan

Casinos in Cambodia enjoy easier rules around online gaming, coupled with less restrictive policies on capacity expansion

by NG MIN SHEN / pic by BLOOMBERG

CAMBODIA’S growing attraction as a tourism and casino hub could pose a real challenge to Malaysia’s gaming giant Genting Malaysia Bhd, said JPMorgan Securities (M) Sdn Bhd.

In a recent note, the international investment bank noted Malaysia is expected to lose its position as the third-largest gaming market in South Asia to Cambodia this year.

“We think this shift accelerates with regional property ramp-up at a time when Genting Malaysia looks to cut promotional spending, driving visitation away from its property. Reiterate ‘Underweight’ on Genting Malaysia,” it said.

Malaysian visitors to Cambodia have increased by a third over the past two years, in line with property openings in late 2017 — a trend that has continued in 2019, as evidenced by a 23% growth in visitors for April 2019.

“We think a large part of these visitors are gamblers, given the correlated growth of gross gaming revenue (GGR) with tourism in Cambodia and our channel checks. We believe Malaysians may be the second-largest contributors of GGR in some of the larger casinos in Cambodia,” JPMorgan stated.

It noted that Cambodian firm NagaCorp Ltd reported 29% to 45% higher volumes year-on-year in the first quarter of 2019 (1Q19), versus a double-digit decline in rolling volume for Genting Malaysia.

These diverging trends warrant close attention, JPMorgan said, particularly as NagaCorp’s further refurbishments will add to capacity.

NagaCorp is a hotel, gaming and leisure operator based in Cambodia, listed on the Hong Kong Stock Exchange since 2006. Its founder and CEO Tan Sri Dr Chen Lip Keong was ranked the sixth-richest Malaysian in the Forbes Malaysia’s 50 Richest List for 2019.

Chen’s wealth rose from US$1.6 billion (RM6.58 billion) in 2017 to US$5 billion this year, making him richer than Genting Malaysia and Genting Bhd chairman and CEO Tan Sri Lim Kok Thay, whose fortune stands at US$4.4 billion.

“We analysed Genting Malaysia’s promotional spending versus Cambodian casinos and found significant gaps which are expected to accelerate market share shifts. We see this trend as structural and don’t expect minor tweaking of spending by Genting Malaysia to tilt the balance,” JPMorgan stated.

The bank believes cuts in spending this year may accentuate these trends. It noted that there is limited space for Genting Malaysia to expand promotional spending without hurting profitability, given elevated tax costs in 2019 such as a higher gaming and income tax.

“High hotel occupancy (96% to 97%) and no new openings at the highlands may further pressure visitation, in our view,” the research firm added.

Recent regulations also play a role in widening Malaysia’s disadvantage. Casinos in Cambodia pay “very low taxes” and enjoy easier rules around online gaming, coupled with less restrictive policies on capacity expansion.

“In Malaysia, only 39% of the population is allowed entry into casinos in a highly penetrated market and major capacity expansion are ‘once-in-adecade’ events entailing large investments,” JPMorgan said.

The Malaysian government’s moves to increase gaming taxes and reduce special draws for number forecast operators also indicate a stricter policy stance on gambling.

Hikes in gaming taxes and licence fees have driven Genting Malaysia to cut variable costs such as promotional spending, widening gaps with competition.

“Cambodia’s largest casino operator, NagaCorp, has a 70-year licence with a 41-year monopoly in areas around the capital, Phnom Penh, while Genting Malaysia’s licence is renewed every three months.

“Longer term, Cambodia’s fastgrowing gaming market in Sihanoukville may emerge as another threat for Genting Malaysia as Belt and Road Initiative-led investments drive Chinese visitation and spending to that region and as the quality of properties improve,” the investment bank said.