Consumer demand for gambling services by Kangwon Land Inc, operator of South Korea’s only casino allowed to serve local players, is likely to pick up more easily than at foreigner-only venues operated by Paradise Co Ltd now that both firms have their casinos back in action after Covid-19 closures.
But both businesses face uncertainties – including capacity constraints linked to so-called social distancing measures – even if the specific challenges of the two are rather different. So say respective notes on the two firms issued on Wednesday by JP Morgan Securities (Asia Pacific) Ltd.
Kangwon Land Inc’s casino had closed on February 23 on a temporary basis as a precaution locally against the spread of the Covid-19 infection. Due to repeated extensions to the shutdown period, a portion of the casino did not open again until May 8.
The JP Morgan analyst DS Kim said regarding the operator of the locals-permitted venue: “While we’re comfortable projecting a swift recovery in demand when the business returns to normalcy, we can’t help but think that capacity normalisation won’t happen for a couple more quarters (at least).”
Mr Kim and his colleagues Derek Choi and Jeremy An said of Paradise Co: “Demand has been anaemic since there are no ‘inbound gamblers’ due to strict border controls and extremely limited flight options.”
They added: “Its revenues have only been coming from ‘local expats’ since reopening, a trend that should continue until there is a relaxation of border controls” in South Korea.
The analysts referred to several measures still in place, including a 14-day quarantine for those wishing to enter South Korea, a similar arrangement in mainland China for its residents returning from overseas, and a “halt” to South Korea-Japan visas since March “amid escalating political tensions”. Mainland China and Japan are key markets for South Korea’s foreigner-only casino firms, according to respective company filings.
On Tuesday Paradise Co announced its first-quarter loss was KRW2.46 billion (US$2 million), a narrowing from the KRW7.53 billion in the prior-year quarter. The second quarter earnings for Paradise Co were likely to be “much worse”, noted JP Morgan.
The institution assumes Paradise Co will only see demand stabilise “from July” on hope that border-control measures will ease by June-end and that gaming drop volumes could recover to “75 percent” level in third quarter and “85 percent to 90 percent” level in fourth quarter from a year ago.
Paradise Co could only see its revenue to “fully recover” to 2019-level next year, JP Morgan estimated.
In the note on Kangwon Land, which also reported a loss for its first quarter on Tuesday, the JP Morgan team expected that “capacity normalisation” would not happen for at least “a couple more quarters”. This was due to public health precautions implemented on the gaming floors post-relaunch. The VIP gaming floors at Kangwon Land reopened on May 8. The main floor – mass tables and slots – remains closed at least until May 18, according to the brokerage.
“…social distancing measures (especially the 1-metre rule) will have an effect of reducing ‘effective seating capacity’ by about 50 percent (if not more, as standing will likely be banned), which will almost linearly affect gaming revenue from the main floor, in our view (unlike the VIP floor which rarely runs at 50-percent-plus utilisation),” JP Morgan wrote.
“Granted, it’s just a transitory issue as these [saftey] measures can be relaxed when Covid-19 is controlled…perhaps later this year,” the note stated. “But until such time, end-demand recovery will be ‘capped’ by capacity constraints, in our view, which could make this downturn longer than one may think.”
The institution estimated that Kangwon Land’s gaming revenue would decline by 75 percent year-on-year in the second quarter; followed by a decline by 44 percent in the third quarter and eventually by a 21 percent dip year-on-year in the fourth quarter.
“For 2021, we modelled [Kangwon Land’s] gaming revenue to be 5 percent higher than 2019 levels across all segments, based on our hope that both the supply and demand will fully normalise by the end of this year. But it goes without saying that our level of confidence in projecting this is not high, given significant level of uncertainty,” JP Morgan analyst DS Kim stated.
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