Fitch Ratings Inc says it has a “cautious view” on the South Korean casino industry’s foreigners-only venues in the light of likely competition from new or improved overseas properties.
The country has 17 casinos but 16 of them are for foreigners-only. In the judgement of some investment analysts, this puts a brake on their potential earnings. That is because it makes them dependent on tourists from abroad and in particular on visitors from neighbouring China. Such trade can be volatile and affected by factors outside the control of the casino industry, they point out.
On Wednesday, Japanese brokerage Nomura said in a note that an outbreak in South Korea of MERS (Middle East Respiratory Syndrome) had caused investors in that market concern about a possible decline in foreign inbound tourists – especially ones from China.
“From our talks with travel agencies such as Mode Tour and Hana Tour, and airlines such as Korean Air and Asiana, while there have been some inquiries on the safety of Korea, there has been no sharp increase in cancellation of flights and tours to Korea yet,” said the note from analyst Cara Song.
But it added: “Back in late 2002, when the Severe Acute Respiratory Syndrome [SARS] epidemic broke out, Chinese inbound tourists [to South Korea] declined for four consecutive months (April 2003-July 2003), while total foreign tourists declined for eight months straight.”
MERS is said to be from the same coronavirus family that led to the 2003 SARS outbreak.
Nomura’s Wednesday note stated that according to South Korea’s Ministry of Health and Welfare, as of Tuesday, 25 people have been confirmed with MERS, two have died, and 750 have been isolated in quarantine.
Fitch’s report on the South Korean casino market – a document published on Friday before news of the MERS outbreak in that country – nonetheless identifies risk associated with reliance on Chinese tourism.
“Even if the [South Korea] foreigners market can double from the current base, that would equate to less than 10 percent return on investment with approximately US$5 billion of capital in the pipeline.”” said a paper by Fitch analysts Alex Bumazhny, Michael Paladino and Vicky Melbourne.
The latter is a reference to public announcements from four groups of investors that are vying to impress either South Korean regional authorities or the central government – or both – by promising world-class gaming and entertainment facilities to rival those of Macau. The investors are either already building or would like to build resorts each containing a foreigners-only casino.
According to data from the central government’s Korea Tourism Organization (KTO) quoted by Fitch, in the 12 months to January 2015, 43 percent of South Korea’s inbound tourism was from mainland China, with a further 16 percent from Japan. A total of 6.1 million Chinese tourists visited South Korea in 2014, according to KTO.
Even if locals were allowed to play in South Korean casinos, it might not prove the panacea that some in the casino industry predict – especially if the government sought to impose limits on access by locals or on their daily spend while still demanding high levels of capital investment.
South Korea has already created entry barriers of a sort for Kangwon Land – the country’s only casino venue for locals – by putting it in a remote part of the country that is three hours from the nation’s capital Seoul by car. And a mild offshore form of market liberalisation recently proposed by the Ministry of Oceans and Fisheries – whereby a domestic fleet of casino cruise ships would transport Koreans for a flutter in international waters – could seek to impose a maximum betting amount for individuals of below US$100 for a five-day trip, according to a report from the official Yonhap News Agency.
The foreigners-only casino projects currently tabled for South Korea include Resorts World Jeju – a scheme led by Genting Singapore Plc and including mainland China real estate firm Landing International Development Ltd – on Jeju Island. South Korea’s answer to Hawaii is a holiday island where mainland Chinese passport holders can get visa-free access if they fly or sail there direct. Resorts World Jeju broke ground in February and is slated for completion of its first phase in 2017.
There are also foreigners-only casinos mooted for three large schemes close to Incheon – where Seoul’s international airport is located. They are: an as yet unbranded Caesars Entertainment Corp and Lippo Ltd venture; Paradise City, a venture of existing foreigners-only operator Paradise Co Ltd and Japan’s Sega Sammy Holdings Inc that broke ground in November and is scheduled to have a first phase opening in 2017; and the most recently announced collaboration, that of U.S. regional casino operator the Mohegan Tribal Gaming Authority and Incheon International Airport Corp, confirmed in April.
Some investment analysts have pondered whether such high levels of investment are in anticipation of the South Korean market being opened to locals. Other analysts say there is no certainty that will happen.
The recent plan to create a domestic fleet of casino cruise ships has already been attacked by vested interests including Kangwon Land’s management.
“We believe there is minimal chance of [South] Korea expanding gaming to nationals in the medium term,” said Fitch in its Friday report.
The rating agency added: “Competition for northern Chinese players will intensify over the next few years with legalisation looming in Japan and Vladivostok’s first casino due to open this year. In addition, US$20 billion of capital is being deployed in Macau through 2017, along with improving transportation infrastructure.”
The Vladivostok reference is to a Russian casino resort majority-owned by Macau gaming investor Lawrence Ho Yau Lung’s firm Summit Ascent Holdings Ltd. The resort is due to open by August 28, according to a Summit Ascent filing in May.
Praveen Choudhary, managing director of Morgan Stanley Asia Ltd, said during Global Gaming Expo 2015 – a trade show and conference for the casino industry that was held last month in Macau – that he thought there was “a more than 50 percent chance” of Japan passing enabling legislation for casinos during the current session of that country’s parliament.
Fitch said in another paper, also released on Friday and covering the outlook for Japan gaming: “We think there is a better than 50-50 chance that an IR [integrated resort] bill passes this year; however, we do not think an IR can open by the 2020 Tokyo Olympics. We think the most likely scenario is that gaming regulations look similar to Singapore’s, with limited licences and an entrance fee levied on locals.”
Fitch added in its Japan outlook it believed two major integrated resorts in that country could generate more than US$6 billion combined in annual revenues. “This assumes 500 table games and 3,000 slot machines each and respective win per day rates of around US$14,000 and US$600. This is above roughly US$5.5 billion being generated by Singapore’s two IRs,” said the same set of Fitch analysts, referring to Las Vegas Sands Corp’s Marina Bay Sands and Genting Singapore’s Resorts World Sentosa casino resorts in the southeast Asian city-state.
There is little doubt casino industry investors would like to create a few more Kangwon Land-type resorts in South Korea in terms of popularity and profitability.
Kangwon Land still managed – despite its remote setting – to record a near 25-percent rise in net profit in the first quarter thanks to its ability to serve locals.
According to Fitch, Kangwon Land’s exclusive right to serve local gamblers in the land-based casino market is guaranteed until 2025.
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”Assuming that our [Tigre de Cristal] phase two project and the other future operators’ development plans remain on track, we may see the benefits of a ‘cluster’ effect [in the Primorye Integrated Entertainment Zone] as early as 2021”
Summit Ascent, lead developer of Tigre de Cristal