The author is an analyst at NH Investment & Securities. She can be contacted at [email protected] — Ed.
Expectations for earnings normalization as casino accessibility resumes amid rampant transition talk are rising. Variables related to Macau’s regulatory tightening still exist, but the decline appears limited as stock prices and earnings bottomed out. We maintain a positive outlook on the industry.
At the crossroads of the transition to endemic status
The number of new Covid-19 cases is the highest on record, but countries are discussing a transition to endemic disease status. The motivation for this change is the fact that Omicron, which has high transmission power but is relatively soft, has established itself as the dominant variant. In addition, the effectiveness of vaccines and medical treatments continues to be demonstrated and vaccination rates have increased dramatically. As a result, expectations for earnings normalization following the recovery of casino customer accessibility are on the rise again. That said, given Macau’s strict regulations, a recovery in Chinese VIP traffic is likely to be slower than expected. We maintain a positive outlook on the industry.
The recovery of Chinese VIP traffic will be slower than expected
Amendments to Macau’s Casino Gaming Operation Law have been more moderate than expected, but regulations on VIP gaming, particularly junkets, have been significantly tightened. A strong commitment to regulation was also confirmed by the fact that the CEOs and presidents of major junket operations (Suncity, Takchun) were arrested for organizing cross-border gambling.
The share of junket sales at foreign-only casinos in Korea is currently in the low single digit range. Although the direct impact on earnings should be minimal, the medium/long term growth drivers are likely to be weakened. In addition, the possibility of a delay in the recovery of sales due to the contraction in demand for overseas games among general VIPs also bodes well.
Sector preferences: Kangwon Land > Paradise > GKL
It should only be a matter of time before access to casinos recovers, given both higher national vaccination rates (February: 86% inoculation completion rate; recall of 54%) and discussions for a transition to endemic status. We believe that the recovery will take place in the following order: 1) relaxation of national social distancing rules (normalization of activities, growth of domestic demand for leisure) → 2) relaxation of movement restrictions between countries (strengthening of high-level demand) → 3) inbound expansion (general VIP and mass demand rebound). Along the same lines, we expect earnings to pick up in the following order: casinos serving domestic visitors > resort-type foreign-only casinos with non-casino facilities open to domestic customers > casinos reserved for foreigners. We introduce Kangwon Land as our first choice of area.