South Korean casino operator Kangwon Land Inc said its net profit for the second quarter of 2017 fell by 10.7 percent from the prior-year period. Such profit was KRW110.4 billion (US$96.9 million) compared to KRW123.7 billion in the second quarter of 2016, the company said in a Wednesday filing to the Korea Exchange.
The firm runs the Kangwon Land casino resort (pictured), the only of South Korea’s 18 casino schemes that is permitted to cater to local players. The property is located in a remote upland area of Kangwon province, 150 kilometres (93 miles) from the capital Seoul.
Revenue from sales for the three months to June 30 totalled KRW387.0 billion – a decline of 6.0 percent on the KRW411.8 billion achieved in the prior-year quarter. Brokerage JP Morgan Securities (Asia Pacific) Ltd said the year-on-year decline was the “worst” result posted by Kangwon Land in more than five years.
“The disappointment came from mass (-9 percent year-on-year) and slots (-7 percent), while VIP (-3 percent) didn’t help either,” wrote analysts DS Kim and Sean Zhuang in a Wednesday note.
Kangwon Land reported gaming sales of KRW375.0 billion for the April to June period, down 6.5 percent from a year earlier. In contrast, non-gaming revenue increased 11.1 percent year-on-year, to KRW12.0 billion.
Quarterly operating income at the firm declined by 15.5 percent year-on-year, to KRW135.5 billion.
“Kangwon Land’s second quarter was weak, with operating profit falling 15 percent year-on-year and missing estimates by [about] 10 percent, dragged by a lower-than-expected top line,” said the JP Morgan analysts.
They added: “In our view, this seemingly reflects Kangwon Land’s efforts to ‘adjust’ revenues lower amid regulatory scrutiny, and the timing of business normalisation remains frustratingly uncertain.”
According to the brokerage, Kangwon Land has in recent months been reducing active capacity on its mass-gaming floor. “Only [about] 130 tables (vs. max capacity of 180) and 1,100-1,200 slots (vs. total 1,360) were opened/activated, well below [circa] 145 tables and [about] 1,300 slots a couple of quarters ago,” said Mr Kim and Mr Zhuang, citing a recent visit to the property.
“Considering its tables and slots are almost always fully occupied, lower active capacity inevitably leads to lower revenues, as seen in first quarter and second quarter trends,” they added.
The brokerage said the decline in capacity reflects Kangwon Land’s “efforts to adjust its revenues to avoid further regulatory scrutiny”. That was a reference to a so-called “revenue cap policy”, where the government “set an acceptable level of demand for various gambling activities”.
“This policy is merely a guideline with no legal sanction, but Kangwon Land seems to feel increased pressure, as it has considerably exceeded the cap in the last three years,” said the JP Morgan analysts.
“Though Kangwon Land is likely to exceed the cap again this year (first half trend is [about] 7 percent above the cap), we think the company will try to narrow the gap, in turn weighing on the second half outlook,” they added.
Daiwa Securities Group Inc analyst Thomas Y. Kwon said in a note on Wednesday that Kangwon Land was likely to return to growth next year. “We forecast Kangwon Land’s revenue and earnings to grow 9.6 percent year-on-year and 12.6 percent year-on-year in 2018,” he said.
The casino operator reported accumulated sales of nearly KRW810.0 billion for the first half of 2017, down 4.5 percent from the prior-year period. Net profit for the six months to June 30 stood at KRW240.2 billion, a decline of 9.9 percent from a year earlier.
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"The demographics of Tokyo, Yokohama, and Osaka (possible Japanese urban gaming resort locations) warrant larger gaming floors [than 15,000 square metres]"
Analyst at investment research firm Morningstar