Kangwon Land slowdown seen as short term

Kangwon Land, whose top-line growth slowed to 3.8 percent last year, is likely to see a recovery in its fortunes driven by an upgrade in its slot machines, strong domestic growth and a potential boost from the Winter Olympics next year, Morgan Stanley says.

The operator, which is the only one in South Korea where locals are permitted to gamble, has been affected by political uncertainty, speculation over a potential second locals license and delays in upgrading its product offering.

“We believe strong domestic demand will continue to support KWL’s stable top-line growth until at least 2025 when its monopoly license is due for renewal,” it says. “Positive catalysts include the slot machine upgrade in June, Winter Olympic traffic in 1Q18 and waterpark opening in summer 2018.”

Morgan Stanley said it sees slot machine upgrades to 387 out of 1,360 slots in June, which will help drop per visitor growth with adding new tables or machines.

“We believe an upgrade of 30 percent of slot machines should have a 21 percent impact on slot machines sales growth and 7 percent casino sales growth in 2H17, all else equal,” it said.

However, on the downside, Morgan Stanley says it is now factoring in a 2017 donation for the Olympics at KRW50 billion ($44.6 million), which is its worst-case scenario. This will result in a near three percentage point decline in the operating margin discount compared with 2016.