South Korean foreigners-only casino operators Grand Korea Leisure Co Ltd and market rival Paradise Co Ltd are likely to report “weak results” for the fourth quarter of 2015 “due to the ongoing decline” in the number of Chinese VIP players, says Morgan Stanley Research.
“We continue to favour local casino [firm] Kangwon Land [Corp], which we expect to see solid top-line growth with steady mass and VIP demand recovery, over foreigner-only casinos,” analysts Jiana Seo, Sam Min and Praveen K. Choudhary wrote in a report issued on Friday.
Kangwon Land is the operator of the only casino resort in South Korea where the country’s nationals are allowed to gamble. The firm was one of just two major listed casino operators in Asia to record annual share price increases for 2015 – the other was Genting Malaysia Bhd.
In a report issued earlier this month, Morgan Stanley already had warned that the worsening supply-demand imbalance in South Korea’s foreigners-only sector of its casino industry would likely “compress margins over 2015-18”.
It its latest note, the institution said it expected Kangwon Land to record gaming sales worth KRW398 billion (US$331.2 million), up 7 percent in year-on-year terms, supported by a growth of 11 percent in mass revenue and a flat VIP market. “We expect operating profit to come in at KRW129 billion (up 8 percent year-on-year and down 18 percent quarter-on-quarter),” the Morgan Stanley analysts added.
Grand Korea Leisure – which operates three foreigners-only casinos in South Korea under the Seven Luck brand – was forecast to report a sales decline of 18 percent year-on-year for the fourth quarter. Morgan Stanley said that was a product of the number of Chinese VIPs falling by “50 percent year-on-year (versus a decline of 44 percent in the third quarter) as a result of the suspension of direct marketing in China”.
According to the institution, total drop amount of Chinese VIPs at casinos operated by Grand Korea Leisure was likely to have declined by 57 percent year-on-year in the final three months of 2015. “Despite lower VIP revenue, complimentary costs are rising as attracting VIPs is becoming more competitive,” the Morgan Stanley team said.
Several analysts have noted that enforcement action by the Chinese authorities against marketing agents feeding Chinese VIP players to South Korea’s foreigners-only gaming venues have had a negative impact on the market.
In October, Reuters news agency reported – quoting China’s state television – that mainland Chinese police had arrested 13 foreigners and several Chinese agents inside China for activities related to recruitment of Chinese citizens for the purposes of gambling in South Korean casinos.
In August, Chinese media reported that China’s Ministry of Public Security had started an operation aimed at disrupting foreign casinos’ access to money flows from China and those casinos’ links to individuals that scout for gamblers from China.
Looking at Paradise Co’s performance for the fourth quarter, Morgan Stanley said consolidated sales were tracking at KRW188 billion, up 5 percent year-on-year. “The year-on-year growth is largely driven by: abnormally high hold rate, and ongoing consolidation impact from Busan Lotte casino during the quarter,” the institution’s analysts stated.
The trio added: “While the total drop amount is down 25 percent year-on-year, with the Chinese VIP drop amount falling by 39 percent year-on-year, casino revenue is down only 6 percent year-on-year at KRW159 billion thanks to high hold rate.”
Paradise Co currently operates a network of five foreigners-only casinos located in three major cities in South Korea and on the country’s holiday island of Jeju.
Earlier this month, the firm reported its casino sales had fallen 14.7 percent in 2015 compared to the previous year. Such sales amounted to KRW569.9 billion in 2015, compared to nearly KRW668.4 billion in 2014.
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Alex Poon and Praveen Choudhary
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