GGRAsia – Lower VIP play, higher costs hit GKL 4Q results

Lower VIP play, higher costs hit GKL 4Q results

Feb 16, 2016 Newsdesk Latest News, Rest of Asia, Top of the deck

South Korean casino operator Grand Korea Leisure Co Ltd (GKL) reported a 40.6 percent decline in net income for the fourth quarter of 2015, to KRW18.45 billion (US$15.2 million). Revenue for the period was down 17.4 percent year-on-year to KRW123.29 billion, the firm said in a filing to the Korea Exchange on Friday.

The company – which operates three foreigners-only casinos in South Korea under the Seven Luck brand – reported operating income of KRW21.68 billion for the three months to December 31, down by 46.9 percent from the prior-year period.

Morgan Stanley Research said in a note on Friday that GKL’s results in the fourth quarter were “somewhat anticipated by the market”.

“GKL posted weak fourth quarter 2015 results with operating profit coming in at KRW22 billion, below the consensus estimate of KRW27 billion and our estimate of KRW30 billion,” said analysts Jiana Seo, Sam Min and Praveen Choudhary.

“The miss was attributable to year-end costs and miscellaneous cost increase of KRW2 billion during the quarter. Operating profit margin was pressured down to 17.6 percent (versus 23.8 percent in the third quarter of 2015 and 27.3 percent in the fourth quarter of 2014), due to high fixed cost structure,” they added.

GKL’s operation has also been affected by a lower number of Chinese VIPs visiting South Korean casinos. 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.

The number of Chinese VIPs to GKL’s properties fell by 37 percent year-on-year in the fourth quarter, “as a result of the suspension of direct marketing in China,” said Morgan Stanley. The institution said total drop generated by Chinese VIP players at GKL’s casinos fell by an estimated 48 percent year-on-year in the fourth quarter of 2015.

The investment bank had said in a report in January that demand from Chinese VIP players for gambling in South Korea’s foreigners-only casinos would remain “under pressure” as China continues to limit those venues’ direct marketing activities in the People’s Republic.

Revised strategy

For full year 2015, the casino operator reported revenue of KRW505.66 billion, a decline of 6.5 percent from the previous year. Operating profit for the year was down 19.9 percent year-on-year to KRW118.38 billion.

GKL announced a dividend of KRW701 per share for 2015, amounting to a payout of KRW43 billion. When an interim dividend of KRW8 billion is included, the total dividend payout for 2015 amounts to KRW51 billion, down from KRW62 billion in the previous year, according to Morgan Stanley.

Given the fall in VIP visitors, GKL “is likely to focus on the premium mass segment to meet its 2016 revenue target of KRW560 billion,” said brokerage Daiwa Securities Group Inc in a note on Monday. The casino operator is also likely to “enhance marketing channels for casual gamers and non-China markets in Asia,” it added.

“In our view, [GKL’s] management will pursue a more disciplined cost strategy to cope with rising uncertainty relating to the regional casino gaming market,” wrote Daiwa’s analyst Thomas Y. Kwon.

Morgan Stanley estimates that GKL’s total sales in 2016 will fall by 3 percent year-on-year to KRW487 billion, as the institution expects total drop amount at GKL’s casinos to fall by 3 percent year-on-year, with that of Chinese VIPs falling by 25 percent year-on-year.

“We also assume non-Chinese VIP and mass player drop amount will grow by 13 percent and 10 percent, respectively,” it added.

“Even if GKL meets its top line guidance, we believe it would be at the expense of its margin,” said the Morgan Stanley team, adding that it assumes an operating margin of 23 percent for 2016, “with potential downside risk depending on cost control”.