Time to Climb after Hitting a Bottom
The author is an analyst of NH Investment & Securities. She can be reached at hzl.lee@nhqv.com. -- Ed.
We upgrade our rating on Kangwon Land to Buy. In the short term, the casino should enjoy strong pent-up demand upon a nationwide easing in the Covid-19 crisis. Over the mid/long term, the firm’s shares hold upside potential backed by dividend attractiveness and the possibility of a relaxing of sales regulations.
Having sighted the bottom, it’s time to climb
We upgrade our rating on Kangwon Land to Buy, believing that concerns over uncertainties stemming from the suspension of operations from Feb 23 (when the Covid-19 crisis was intensifying in Korea) are already reflected in its share price. It is expected that the company’s operations will resume when social distancing ends (Apr 20 looks likely). Considering that: 1) customer loyalty is high in the casino industry; 2) as the only domestic casino catering to both foreigners and Koreans, Kangwon Land has no substitutes; and 3) customer defection to overseas casinos has likely been reduced significantly by restrictions on cross-border movement during the outbreak, we expect Kangwon Land to enjoy strong pent-up demand once operations resume.
We lower our TP by 9% from W33,000 to W30,000. As the business environment will likely remain abnormal this year due to Covid-19, we use 2021 as the base year for our calculations. Given financial market uncertainties stemming from Covid-19, we apply a 10% discount to fair value per share—a relatively low discount rate compared to those applied to other sectors, in light of the firm’s sound earnings visibility backed by demand from loyal customers.
Boasts mid/long-term upside thanks to dividend merit and easing business regulations
Active dividend distribution is a part of the firm’s shareholder-friendly policy. As the company determines its dividend amount based on five-year average NP, its 2020 DPS is estimated to fall only 10%, even though NP is likely to tumble around 30% this year. We believe the company’s dividend yield attractiveness remains valid. In addition, although this year’s sales will likely reach only 80% or less of the gambling revenue cap, mid/long-term deregulation momentum (eg, increased betting amounts and hours of operation) remains in play. From 2022, fixed-cost leverage effects are anticipated.
1Q20 preview: Casino was closed for 42% of total business days
Kangwon Land is expected to record consolidated 1Q20 sales of W210.6bn (-44% y-y) and OP of W40.6bn (-68% y-y), with both figures arriving slightly below consensus. We note that earnings deterioration was all but inevitable y-y, as 42% of 1Q20 business days went without sales, and only fixed costs were reflected in the aftermath of business suspension (Feb 23~Apr 20 (expected)).