Vaccination, Table Earnings and Revenue Cap
The authors are analysts of Shinhan Investment Corp. They can be reached at jwsung79@shinhan.com and hanny.lee@shinhan.com, respectively. -- Ed.
Uptrend in earnings expected given vaccination, table earnings and revenue cap
We expect Kangwon Land to have touched bottom in 1Q21 and see a gradual uptrend in earnings through 2022 for the following reasons. First, casino visitor restrictions for social distancing are highly likely to be eased in steps with the rising vaccination rate. The casino operator currently has about 2,000 daily average visitors. The number stands to increase steadily to the normal 8,000 levels once COVID-19 vaccines prove effective. This should drive steep growth in sales.
Second, Kangwon Land has resumed operation of 20 gaming tables with higher betting limit (KRW300,000) out of 200 in total. High-betting table operations had been suspended from 2018 under stricter regulations, but allowed in July 2020 upon deregulation for pandemic-hit casinos. This has contributed to margin improvement and should provide an additional boost to sales from 2Q21. Third, the gaming revenue cap, which limited earnings growth in 2019, is likely to be raised by 5-7% over a three-year period from 2020 to 2022. Considering abundant demand for gambling, a higher revenue cap along with the easing of visitor restrictions should translate to fast-paced sales growth for Kangwon Land.
2021 outlook for earnings, dividends and foreign ownership
Consolidated net earnings are expected to remain in the red this year (KRW275.9bn loss in 2020, KRW18.6bn loss in 2021F) before recovering to a profit of KRW326.3bn in 2022. Kangwon Land paid no dividends in 2020 as quarterly earnings suffered due to social distancing restrictions. With dividend payment seen unlikely for 2021 as well, foreign investors’ stake in the company declined to 20% as of May 2021 vs. 30% in January 2020. Foreign ownership is highly likely to rise again from the bottom of 20% once losses start to narrow from 2Q21 and customers return to casinos after receiving vaccines.
Retain BUY and raise target price to KRW33,500
We raise our target price for Kangwon Land from KRW28,000 to KRW33,500 on vaccination-sparked hopes for visitor growth and subsequent earnings improvement. Our revised target is based on 2022F EPS of KRW1,525 and a target PER of 22x (average PER of 2012-2016 when expansion of gaming tables improved earnings). We retain BUY as Kangwon Land, which also caters to locals, is highly likely to enjoy faster recovery in sales vs. foreigner-only casinos once social distancing restrictions are relaxed.