Sales at Kangwon Land, the only casino in South Korea allowed to cater for local gamblers, are now at “2014 levels”, says a report from banking group Morgan Stanley.
The institution added that the political crisis in the country has had an effect on decision-making connected with the casino resort’s operator, Kangwon Land Inc, which is a public enterprise. Morgan Stanley further stated the business had not been helped by uncertainty as to whether a second casino catering for locals might be allowed in South Korea.
“We are now at levels seen in 2014, with annual sales/net profit [at] 17 percent/27 percent below our current 2017 estimates,” said the report on Kangwon Land from Morgan Stanley analyst Jay Lee in Seoul and his colleagues Praveen Choudhary and Alex Poon based in Hong Kong.
The commentary came following a visit to the property – located in an upland former mining area 150 kilometres (93 miles) from the South Korean capital – and meetings with Kangwon Land’s management.
Morgan Stanley anticipates some improvement for Kangwon Land in 2017, although it revised downwards its full-year estimates. The institution now expects casino sales to reach approximately KRW1.68 trillion (US$1.49 billion), and non-casino sales – representing 4.5 percent of all sales – likely to be KRW79 billion.
Profit at Kangwon Land rose 2.9-percent year-on-year in 2016 according to a filing in February to the Korea Exchange. But profit for the final quarter of the year fell 31.4 percent.
“The stock has not moved as we expected, underperforming by -13 percent versus +3 percent for the Kospi [Korea Composite Stock Price Index] for the past six months,” said Morgan Stanley.
“We think key market concerns were around: regulatory uncertainties (losing monopoly licence amid discussion on the second locals-open casino); and earnings momentum slowing,” wrote the bank’s analysts.
“We maintain our view on Kangwon Land to secure a monopoly licence [extension] by 2025; while slot machine upgrades planned in 2016 have been delayed to 2017, due to the domestic political situation (the administrative office associated with the ongoing political uncertainty is the regulatory authority of Kangwon Land, hence no progress was seen on strategy or plans in second-half 2016),” stated Morgan Stanley.
“Overall we reduce our revenue expectations due to delay in slot machine upgrades… As such, the growth momentum will return in second-half 2017,” said the institution.
“Our expected drop-per-visitor growth is now more conservative given delayed slot machine upgrade and the company being more cautious on the revenue cap (aggregate gambling industry sales cannot exceed 0.54 percent to 0.58 percent of GDP) as suggested by the NGCC (National Gambling Control Commission),” noted Morgan Stanley.
Combined sales in South Korea’s gaming and lottery sector – excluding foreigner-only casinos – increased by 7.7 percent in 2016 to KRW20.3 trillion, according to market data quoted in early March by South Korean news agency Yonhap.
Morgan Stanley said Kangwon Land’s management had changed its guidance regarding the likelihood of the firm being required by the South Korean government to make what was termed a “donation” to the 2018 Winter Olympics to be held nearby at Pyeongchang in February that year.
The institution said it was now including in its forecasting model the possibility of a KRW50-billion donation being required from Kangwon Land, which it said would mean a “nearly 3 percentage point operating profit margin decline versus 2016”.
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”Continued negative coverage of the Abe administration, coupled with political losses for the Liberal Democratic Party ... may reduce support for the gaming agenda, which already has only limited public support”
Analyst at brokerage Sanford C. Bernstein