Confidence in Earnings Recovery

The author is an analyst of Shinhan Investment Corp. She can be reached at inhae.ji@shinhan.com. -- Ed.

 

Confidence in earnings recovery

Paradise, Grand Korea Leisure, Hana Tour Service, and Modetour Network all announced their earnings results for June earlier than usual. We believe the speedy settlement of accounts reflects their confidence in earnings improvement. For 2Q22, the four companies are expected to have generated modest earnings exceeding the lowered consensus.

Foreigner-only casinos: Visible upturn on resumption of marketing efforts

Foreigner-only casinos saw significant improvements in June as in the previous month. Grand Korea Leisure and Paradise reported combined sales of KRW37.7bn, up 23% YoY and 7% QoQ. The continuity of growth has been confirmed given that growth in sales was achieved without sharp changes in the hold percentage. It now comes down to which company is seeing the effects of marketing campaigns faster.

Grand Korea Leisure, the second-leading casino operator, delivered stellar results in June, outperforming Paradise in all key indicators. With its monthly break-even point ranging between KRW21bn-23bn, it posted sales of KRW24.5bn for June alone, marking the first monthly profit since the outbreak of COVID-19.

Grand Korea Leisure and Paradise resumed their overseas marketing campaigns from April and May, respectively. Grand Korea Leisure’s earlier move has afforded it to see the effects in just two months. Visitors from South East Asia increased sharply with the resumption of marketing campaigns to attract customers from countries that allow quarantine-free travel on both sides, especially Mongolia, Singapore, Thailand, and the US. In addition, Grand Korea Leisure has expanded its efforts toward Japanese VIP customers from June ahead of the resumption of air travel from Japan. For 2Q22, the company’s disclosed sales alone reaches KRW48.4bn, far exceeding the market consensus of KRW38.5bn. Operating loss should be much lower than expected.

Paradise registered relatively weak sales of KRW13.3bn for June, but its drop amount came in solid at KRW135.2bn. This was attributable to volatility in the hold percentage, which fell below the average in June. As the annual hold percentage tends to converge to long-term average levels, the figure should return to normal levels in July. Paradise resumed active marketing efforts for Japanese VIP customers from May, the key customer base for the company. Although the effects were minimal in June, we can expect a visible recovery in the top line after Japan’s upper house election scheduled in July. The market consensus of a KRW35.4bn loss seems too high. We project a reduction to an operating loss of around KRW18.3bn for 2Q22.

We believe expectations for foreigner-only casinos are too low given the prospect of a gradual improvement in earnings. The market consensus on operating loss of both casino operators appears excessively low, even when fully factoring in increases in labor costs and marketing spend. This presents an opportunity. We retain our BUY rating on Grand Korea Leisure and Paradise with our target prices kept unchanged.

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