Political worries weigh on Kangwon Land

Political worries weigh on Kangwon Land

Monday, March 20, 2017 Posted by Scott Longley
South Korean casino operator looks ahead to 2017

Away from the headlines about Japan, the Korean foreigners-only casino sector has been somewhat cast into the shade but analysts at Morgan Stanley suggest that Kangwon Land, the monopoly casino in the country, is worthy of a reappraisal.

The political instability in South Korea, where the former president Park Guen-hye resigned in disgrace earlier this month, has hit the stock which is now down around the same level as it was in 2014.

The M Stanley team suggest the key concerns for the company including regulatory issues (largely around the potential of losing its monopoly and a second local open casino being given the go-ahead), and slowing earnings momentum.

However, they go on to suggest that they see no reason for the company to lose its monopoly at least until 2025 while recent delays to the slot machine upgrade mean the shift will now occur this year.

On the subject of earnings, the company is predicting a return to growth for this year in the region of 3-4 percent compared with a fall of 3.8 percent last year. The analysts reported that up to 30 percent of the 1,300-plus slots to be replaced before June.

A second issue discussed with the team was that of the “donation” Kangwon Land is now likely to have to pay the government as part of the preparations for the winter Olympics which will take place in South Korea in 2018.

Though the company wasn’t specific about the level of cash that will be requested, the M Stanley team have written KRW50bn ($45m) into their forecasts as an outside chance, though the company has hinted the total donation will be between KRW5-20bn.

Say the analysts: “We previously indicated to investors that Lotte Group reportedly donated KRW50bn, and comparing the size of sales and profit of Kangwon Land and Lotte, we think KRW50bn is a reasonable assumption to make for Kangwon Land.”

Morgan Stanley conclude that they still believe the valuation for Kangwon Land is attractive despite the pull of outside events and trading issues. “We expect catalysts to come in the second half of 2017, or as soon as we have a new government, or in 2018 due to events such as the Winter Olympics or waterpark opening.”

Totally Gaming says: Political considerations always have to be the forefront of the mind of the gambling sector and events in South Korea show how tricky the balancing act can be if as with Kangwon Land a company is reliant on the goodwill of the government for its monopoly status. The ‘donation’ to the Olympics fund will be deemed worth it is KL secures its licence until 2025.

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