Hello everyone.
I just thought that I should mention that these happy time engines are available with different size casings, drive sprockets, as well as driven sprockets...depending on the size of chain that the importer/vendor chooses to have included with the kit.
If your chain is wearing the casing it is likely a lower quality kit and the engine and sprocket sizing was not matched to the chain size as it should have been.
Otherwise, is it possible that you do not have everything lined up properly for the chain to run true?
There are replacement drive sprockets available that will allow you to make use of 415, 081, or bmx chains. They are inexpensive and would save the trouble of trying to grind the width of your existing sprocket down. When you grind the sprocket, it creates heat...that heat can, and usually does draw the temper out of the steel and will greatly reduce the strength of the teeth on the sprocket.
This is not a good thing...unless you know how to heat-treat steel and can re-do what you've taken away from the strength of the sprocket.
Just thought I'd throw my two cents into the conversation.