Casino Sector: Bottom-fishing Opportunity
The author is an analyst of Shinhan Investment Corp. She can be reached at inhae.ji@shinhan.com. -- Ed
Initiate coverage of casino and travel sectors with OVERWEIGHT rating
We initiate our coverage of leisure (casino/travel) sectors with an OVERWEIGHT rating. Key investment points are: bottom-fishing opportunity for the casino sector; and market reshuffle for the travel sector. We recommend accumulating shares in: 1) Kangwon Land, which presents the lowest risk in the near term; and 2) Paradise and Hana Tour Service, which are set to benefit from restructuring efforts and sales growth in the longer term.
Casino sector: Bottom-fishing opportunity
We recommend a bottom-fishing approach on the casino sector. The industry reached its peak in 2015 and has since continued on a downtrend due to China’s anti-corruption policies and restrictions on air travel amid the COVID-19 pandemic. However, we believe the casino sector has now reached bottom and will rebound going forward.
1) Casino operators should be able to recover sales as soon as external conditions return to normal. US-based casinos have seen a sharp increase in visitors and betting amount per visitor upon easing of social-distancing rules, with the total size of the market exceeding pre-pandemic levels. This has sparked a rally in US casino stocks.
2) We positively view recent changes seen at Macau-based casinos. Macau is now shutting down VIP rooms run by junkets to focus on growth of the mass market through introduction of the digital yuan and improvement of its transportation systems. Chinese VIP visitors to Korean casinos are classified as premium mass visitors at Macau-based casinos. Korean casinos should thus see trickle-down benefits from growth of the mass market in Macau, given their geographical proximity to Beijing and Shanghai.
3) Domestic casinos are expected to see strong growth in Japanese VIP visitors. Japanese visitors contributed to 35% of sales at Paradise and 29% at Grand Korea Leisure in 2019, offsetting the absence of Chinese visitors. Unlike China, Japan has no restrictions on cross-border casino trips. As the only market for Japanese VIP visitors outside of Japan based on geographical proximity, Korean casinos are likely to see new demand through active marketing efforts once air travel restrictions are lifted.
4) We believe casino stocks have reached bottom in terms of liquidity, company earnings, and share valuations. The5-year cumulative net selling of casino stocks has reached a peak. Monthly sales at casinos have remained steady for 22 months since the air travel ban was imposed in March 2020, backed by demand from overseas Koreans residing in Korea. Changes in external conditions are unlikely to have further impact. PBR valuations are now at historical lows. Quarterly earnings bottomed out in 4Q21 and should improve from 1Q22 on the lowered break-even point and increased cost control efforts.
Travel sector: Market reshuffle
We focus on the market reshuffle in the travel sector, following a five-year slump brought on by slowing demand for Japan-bound package tours and the COVID-19 pandemic. Japan’s travel industry underwent a reshuffle in the past as a prolonged slump caused the collapse of several travel agencies and led to subsequent market share gains and earnings growth of top-tier survivors. Only the large-size agencies were capable of responding to the surge in demand for flights and accommodation once the market pulled out of a slump.
Korean travel companies should see similar changes in the market. Preference for“expensive but safe”large-size agencies has strengthened further amid the pandemic. Top-tier players stand to enjoy profit leverage effect from the recovery in travel demand, price hikes, restructuring efforts, and cost control.