The author is an analyst of NH Investment & Securities. She can be reached at email@example.com. -- Ed.
Making cuts to our earnings estimates due to the Covid-19 outbreak, we lower our TP on Paradise to W26,000. However, we maintain a Buy rating, believing that firm will enjoy the fruits of fixed-cost leverage effects (labor costs to rise only slightly this year; ad costs being trimmed down) once the Covid-19 outbreak runs its course.
Fixed-cost leverage to maximize upon passing of Covid-19 fears
We lower our TP on Paradise by 7% from W28,000 to W26,000, reflecting downward adjustments to our earnings estimates in light of the impact of the Covid-19 outbreak. In 1H20, we believe that fears towards the outbreak will: 1) drain the firm’s non-casino earnings (hotel and spa revenue, F&B sales, etc); and 2) restrain hold ratio improvement at the company’s casinos due to a likely decline in mass visitor numbers.
However, we stick to a Buy rating, drawing attention to fixed-cost savings stemming from a voluntary retirement program in 4Q19 and other cuts in expenses. As such, fixed-cost leverage effects should be stronger than we had previously expected, placing Paradise in a good position to benefit from likely higher sales growth once the Covid-19 outbreak runs its course. Thus, viewing Paradise’s current share price as already fully reflecting market concerns towards the outbreak, we believe that the firm’s shares will be primed to rebound sharply upon the fading of Covid-19 fears.
4Q19 review: Strong sales push up annual incentives; one-off expenses reflected
On a consolidated basis, Paradise posted 4Q19 sales of W269.5 (+24.4% y-y) and OP of W12.5bn (TTP y-y). Even if excluding one-off costs (W4.9bn) related to voluntary retirements at Paradise’s Walkerhill casino, OP totaled only W17.4bn, coming in below both our estimates and consensus.
In terms of sales, both casinos and non-casino businesses delivered strong earnings. Looking at costs, however, Paradise’s labor cost items included the booking of W11bn in employee incentives, a level W7.5bn higher than our estimate. We attribute the hike in incentive payments to: 1) rapid sales growth at P-City; and 2) increased staff numbers. Of note, the W11bn in incentive payments recognized in the firm’s 4Q19 results exceeded the accumulated allowances made for them as of end-3Q19 (W8bn).
2020: To enjoy better cost efficiency on both limited increase in labor costs and reduced advertising costs
We estimate that the voluntary retirement last quarter at the Walkerhill casino will reduce Paradise’s non-consolidated labor costs by around W2.5bn (2~3%) pa. With operations at P-City already having been ramped up, there is less need for staff increases this year, and thus any rise in labor costs this year should be limited. In addition, with large-scale ad spending in 1H19 (due to the grand opening of P-City Phase 1 and Phase 2) now in the past, we forecast a 30% y-y drop in the firm’s 2020 ad spending. Given these factors, we now believe that Paradise’s cost efficiency will better this year than previously estimated.