To Successfully Wait It out on Strong Fundamentals
The author is an analyst of NH Investment & Securities. She can be reached at hzl.lee@nhqv.com. -- Ed.
Paradise’s 2Q21 results satisfied consensus, helped by: 1) a rebound in non-casino sales; and 2) a lighter fixed cost structure. The firm’s strong fundamentals are to help it to survive until visitor traffic recovers upon a relaxation in movement restrictions. With investors just needing to sit and wait, we maintain a Buy rating.
To successfully wait it out on strong fundamentals
We stick to a Buy rating on Paradise. Due to the spread of the Covid-19 Delta variant, social distancing and movement restriction rules continue to be strict, in turn delaying a return to normalized casino operations. With the firm’s share price confirmed to have bottomed out following business setbacks, the firm has secured the fundamentals necessary for earnings to normalize via: 1) rebounding non-casino sales; and 2) better cost efficiency at the casino division. Thus, after persevering, investors should see a steep earnings recovery, with their patience being rewarded.
We maintain a TP of W22,000. We view the slowdown in sales growth as having been inevitable due to a delay in the easing of movement restrictions amid a prolonging in the Covid-19 crisis. But, the benefits of the firm’s lightened fixed cost structure are to continue amid limited business operations. Accordingly, we leave our 2022 earnings projections little changed from our previous estimates. In addition, with vaccination programs in progress, expectations that movement restrictions will be eased from 2022 remain intact. Once customer accessibility expands upon an easing in movement restrictions, a sharp sales resurgence should accompany. A V-shaped earnings recovery through the release of pent-up demand is already being confirmed by a strong earnings rebound at a Koreans-only casino.
2Q21 review: Earnings reconfirm lighter cost structure
Paradise’s 2Q21 results satisfied the market projections, with the firm announcing consolidated sales of W84.6bn (+13% y-y) and operating losses of W 27.4bn (RR y-y).
Sales: While casino sales proved sluggish due to the impact of Covid-19, non-casino sales grew thanks to increased domestic leisure demand. This trend is expected to continue in 3Q21, especially on the non-casino sales side, which is expected to benefit from strong seasonal effects.
Costs: Thanks to efforts to improve cost efficiency efforts (including restructuring last year), fixed cost burden has been reduced to 80% of the pre-Covid-19 level. Fixed costs rose q-q due to the booking of a real estate tax payment in 2Q21, but we point out that this was a seasonal factor. The lessened fixed cost burden is to help the company sustain until its casino operations normalize.