IR oversupply will pressure margins in S. Korea, Morgan Stanley says

The opening of new integrated resorts amidst shrinking Chinese VIP demand will compress margins at foreigner-only casinos in Korea, Morgan Stanley says.

With Korea’s first integrated resort scheduled to open in 2017, Morgan Stanley estimates the supply-demand imbalance to further tip, with table capacity to rise 37 percent year-on-year and the number of Chinese VIPs to fall 23 percent by 2018. There is a possibility that Chinese VIP numbers may decline even further if the Chinese government intensifies its anti-corruption campaign, which will further scrutinize Korean direct marketing activities to the Chinese, as well as increasing regulation on junket operators.

“We would expect the Chinese government’s anti corruption policies to continue (if not intensify) amid its effort to prevent capital outflow, including to casinos in Macau. Our head of Asian gaming research, Praveen Choudhary,expects the Macau government to continue to increase scrutiny and impose more stringent controls on VIP and junket operations.”, the report states.

Rising mass market from inbound traffic will improve the situation slightly, but this will not offset the declining Chinese VIP numbers, according to the research house.

“For 2016, the KTO expects the number of inbound visitors to Korea to rebound and rise 15 percent YoY to 15 million. Chinese visitors are expected to lead this growth, rising by 23 percent to 7.0 million and accounting for roughly 50 percent of visitors. Along with the growth in inbound tourists, we estimate the number of mass players will rise 5 percent YoY to 2.9 million in 2016. Nonetheless, revenue contribution will be limited because drop per mass player stands at only 0.3 percent that of VIPs and total mass drop accounts for 18 percent of total drop amount as of 2015, based on our calculation.”

As a result, Morgan Stanley favors local casinos over foreigner-only casinos, and expects the valuation de-rating for foreigner-only casinos such as Paradise Co and Grand Korea Leisure (GKL)  to continue, with a negative 6-10 percent earnings CAGR estimated for 2015-18. In contrast, Kangwon Land will see an estimated 12 percent earnings growth from 2015-17.