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The pulling out of 20th Century Fox World theme park will deter the potential growth but the impact is less severe than the hike in gaming tax as non-gaming revenue (from RWG) accounts only 10-15% of GenM’s 4-8% of GenT’s total revenue. We opine that the theme park will still proceed (possibly under a different brand) as Disney is only the licensor. We upgrade GENM to HOLD with lower SOP-derived TP of RM3.41 (was RM4.01) given the share price plunge. We maintain HOLD on GENT with lower SOP-derived TP of RM7.18 (from RM7.51). Maintain NEUTRAL on the sector.

Walt Disney Co. and 21st Century Fox Inc. were sued by the owners of Genting for pulling out of an agreement to sponsor a 20th Century Fox World theme park in Genting Highlands, Pahang. Genting Malaysia is seeking more than USD1bn (~RM4.2bn) in damages, claiming Disney does not want to be associated with its gambling business (Bloomberg).

Less severe than the hike in gaming tax. Note that non-gaming revenue is estimated to account for about 15-20% of Resorts World Genting’s (RWG) total revenue and that translates to 10-15% of GenM’s total revenue and 4-8% for GenT. Hence, we opine that the impact on earnings will be less significant compared to that of the hike in gaming tax (during Budget 2019). Furthermore, potential theme park revenue is only fractional of non-gaming revenue which now consists of rental, hospitality, F&B, indoor theme park etc.

Supposedly to be a fruit bearing year. The group has been banking on the outdoor theme park as a catalytic crowd puller to further boost visitor arrivals (30m by 2020) which would enhance casino visitations and overall spending for FY19-20. This negative news will deter the potential growth on visitor and spending rate, which the market has been expecting for.

Theme Park will remain in the equation. We are of the view that the theme park will eventually rollout despite the ongoing tussle with Disney as GenM is still the asset owner while Disney is only the licensor. However, this will likely fall out of our forecast horizon. In the worst case scenario, it may involve rebranding exercise (other theme park brand or own brand) and that would incur additional capex on the redesigning of themes and rides.

Potential impairment ahead. So far, GenM has invested more than USD750m in the theme park. While the quantum cannot be ascertained for now, we do not rule out potential eventual impairment from the investment. In additions, the potential impairment on the investment in promissory notes for the tribe casino in Massachusetts worth up to RM1.77bn could be on the cards, in which we have accounted for RM1bn or RM0.18 in our SOP-valuation.

Forecast. Our FY19/20 EBITDA and PATAMI for GENM are reduced by -8%/-10% and -11%/-17%, respectively. Meanwhile, our FY19/20 EBITDA and PATAMI for GENT are Reduced by -3%/-3% and -4%/-5%, Respectively.

Source: Hong Leong Investment Bank Research - 27 Nov 2018

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