Brokerage JP Morgan Securities (Asia Pacific) Ltd says profit normalisation for casino firm Kangwon Land Inc “seems unlikely, with no sign of a turnaround” more than a year after the property’s reopening, following restrictions linked to the Covid-19 pandemic.
Kangwon Land Inc is the promoter of Kangwon Land (pictured), the only South Korean casino resort permitted to let locals gamble.
“The pace of recovery has been quite slow since its reopening in May 2022,” wrote analysts DS Kim and Mufan Shi in a Thursday memo.
They added: “VIP trend has been hovering at only 50 percent of pre-Covid levels, and mass recovery – albeit back to circa 100 percent levels – has also been disappointing if we consider [over] 20 percent capacity expansion (i.e., 10 percent bump in both operating hours and mass table count).”
“We had initially believed that this was just a matter of time, but we are disappointed to see demand flatlining for three consecutive quarters,” stated the brokerage. “Our checks indicate traffic levels to Kangwon Land casino were not too different in second quarter versus first quarter,” said the analysts, adding that they did not expect an “inflection point in the near term”.
Kangwon Land Inc reported a net profit attributable to shareholders of KRW101.54 billion (US$80.2 million currently) in the first quarter of 2023, on sales of KRW358.12 billion, the latter up 7.0 percent quarter-on-quarter.
In Thursday’s note, JP Morgan said the slow business recovery pace at Kangwon Land Inc was “puzzling”.
That was because “all other major gaming jurisdictions” that the institution follows – including Las Vegas, Singapore, the Philippines, and the foreigner-only casinos in South Korea – “have seen a consistent ramp-up in demand to 100 percent to 130 percent of pre-Covid levels within about a year of re-opening, even without capacity expansion”.
“We suspect the slower recovery at Kangwon Land had something to do with the illegal/grey-market gambling in [South] Korea (such as cash plays at so-called “hold’em pubs” or online casinos), which seems to have proliferated since the pandemic,” stated Mr Kim and Mr Shi.
They added: “This makes us less hopeful of an ‘inflection point’ of demand turnaround, at least until we see meaningful results from the crack-down on illegal gambling.”
According to the brokerage, the casino firm has recorded “lower revenue”, and it faces higher taxes and operational costs.
“We model gaming revenue to stay at circa 95 percent of pre-Covid levels, which means its earnings power will be much lower than before,” noted the JP Morgan team.
That is because a gaming tax hike from 2021 “could erode” Kangwon Land Inc’s profits “by about 10 percent,” and a “10 percent to 15 percent rise” in staff costs – versus 2019 – “is equivalent to 10-percent-plus of pre-Covid profits”.
JP Morgan estimates Kangwon Land Inc’s second-quarter revenue at circa KRW337.0 billion, down 5.9 percent sequentially. Operating profit would likely be at KRW67.0 billion, a decline of 4.3 percent from the first three months of 2023.
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