Shares Trading at Lower End of Valuation Bands
The author is an analyst of Shinhan Investment Corp. She can be reached at inhae.ji@shinhan.com. -- Ed.
Earnings recovery to outpace peers
Kangwon Land, likely to outpace peers on earnings recovery and dividend payment resumption, now has a smaller market cap vs. 2019. Meanwhile, daily average sales recorded since the lifting of restrictions on May 16 is estimated at KRW3.5bn, pointing towards gradual improvement in earnings. In addition, the company holds net cash of KRW1.7tr and continues to stand out on stability, with limited impact seen from changes in market variables.
Current conditions comparable to 2016 instead of 2019
We believe current conditions are comparable to 2016, not the pre-pandemic levels of 2019. Under a government similar to the current administration, Kangwon Land in 2016 faced similar regulations in all aspects including operating hours, side bets, number of gaming tables, and cap on visitors.
In contrast, the abrupt change in government in 2017 led to the implementation of stricter regulations that reduced operating hours from 20 to 18 and the number of tables from 200 to 180. As a result, Kangwon Land saw its market cap shift to a downtrend through 2019.
Following the reopening from pandemic restrictions, Kangwon Land’s business environment has returned to levels seen in2016, not 2019, with operating hours expanded to 20 hours, side bets allowed, cap on concurrent visitors relaxed to 6,000, and the number of slot machines and gaming tables raised to 1,360 and 200, respectively.
In 2016, the market cap and operating profit of Kangwon Land stood at KRW10tr and KRW618.6bn, respectively. Given its current market cap of KRW5.9tr and operating profit forecast of KRW527bn for 2023, we see ample upside in the company's market cap from current low levels.
The only difference from 2016 is accounting changes regarding contributions to the Abandoned Mine Land Fund. The company previously allocated 25% of pre-tax profit to the fund vs. current contributions of 13% of total sales. The resulting increase in COGS by roughly KRW50bn is reflected in our 2023 operating profit forecast of KRW527bn.
Shares trading at the lower end of valuation bands; Retain BUY
Kangwon Land shares tend to trade within very clear high and low boundaries in valuations, with its PBR fluctuating within 1.5x-3x and dividend yields within 3.3%-2.2%. The company's PBR rose to 3x on three occasions in the past: 1) in 2011 when stocks rallied after the global financial crisis; 2) in 2014 when it received approval for capacity expansion, its first in 8 years and 8 months; and 3) in 2015 when the expansion of capacity drove visible earnings growth. Trading at a 2022F PBR of 1.7x with dividend yield forecast at 3.3% for the year, Kangwon Land shares look attractive at current bottom levels.