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Korea: Into the Unknown

Thursday, 28 September 2017 15:48
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Despite ongoing concerns over the long-term impact of geopolitical tensions on Korea’s gaming industry, US operators Caesars Entertainment and Mohegan Sun are intent on joining Paradise Co as the country’s first integrated resort operators.

By Ben Blaschke 

Like the popular girl at school left waiting at the altar, Korea’s tremendous international appeal as the next big thing in gaming has seemingly gone AWOL in the space of two short years.

Gaming revenue, which peaked in 3Q14 at US$348 million across its 16 foreigner-only casinos, has endured a steady decline since – reaching US$300 million just once in the nine quarters since 2Q15 and sitting around US$250 million for each of 1Q17 and 2Q17.

A government initiative to boost tourism by offering two new casino licenses for foreigner-only integrated resorts attracted 34 initial expressions of interest after it was announced in January 2015 but only six companies followed through with an application by the November 2015 deadline. Just one of those – a consortium led by US tribal gaming group Mohegan Gaming & Entertainment (also known as Mohegan Sun) – ultimately satisfied the government’s investment requirements.

An outbreak of the deadly Middle East Respiratory Syndrome (MERS) in mid-2015, combined with China’s economic downturn, hit Korea’s gaming industry hard, but unlike Macau – which has staged a remarkable recovery over the past 12 months – there has been no return to the good old days just yet. Instead, Korea finds itself seriously hamstrung by political events around – most notably the relentless conflict with its North Korean neighbor.

On 2 March this year, Beijing announced a ban on all travel groups to South Korea in response to the latter’s decision to deploy a THAAD missile system following increased military activity north of the border. As a result, arrivals from China fell by almost 50% for the first seven months of 2017, according to the Korea Tourism Organization, from 4.7 million in 2016 to just 2.5 million through 31 July.

But that hasn’t stopped Mohegan Sun from pushing ahead with its US$1.6 billion integrated resort in the Korean gateway city of Incheon, with ground set to be broken in November. Nor has it dissuaded another consortium headed by US giant Caesars Entertainment Corp – which was granted its license back in March 2014 – from doing the same, despite its original partners recently pulling out.

“We are still quite excited about the prospects of opening an integrated resort near the Incheon airport,” says Caesars President for International Development, Steve Tight.

“We recognize that there are near term geopolitical conflicts in any opportunity in Asia and we are confident by the time we open there will be a robust flow of international tourists to Korea from throughout Asia, including North Asia.”

The Caesars project will be the last of three new integrated resorts – Korea’s first true IRs – to open in Incheon. The first, Paradise City – run by Korea’s biggest foreigner-only operator Paradise Co in conjunction with Japan’s Sega Sammy – launched in April, with Mohegan Sun and Caesars both targeting 2020.

Originally planned to open in 2018, Caesars’ US$740 million development was delayed when its joint venture partner, Hong Kong-listed real estate developer Lippo, announced in early 2016 its intention to depart citing “the current outlook for the gaming industry in North Asia and the volatility of the global economy.”

“We had to then basically start from scratch with finding the right partner and securing the necessary continuation of entitlements in Korea,” explains Tight. Caesars has since signed a new joint venture agreement with another Hong Kong-listed firm, Guangzhou R&F Properties, and is hoping to break ground before the end of the year.

“We are still convinced that it’s critical to bring Caesars’ form of entertainment to Asia and Korea is a great flagship location given its proximity with Incheon airport and the number of tourists arriving in Korea every year,” Tight adds.

It’s a similar story for Mohegan Sun, whose US$1.6 billion phase one investment is by far the largest of all three Incheon IR projects. Dubbed “Inspire”, it will boast a 20,000 square meter casino with 250 gaming tables and 1,500 gaming machines plus 1,350 hotel rooms, an indoor rainforest and adventure park and a Paramount Studios theme park.

Asked if recent headwinds had given the company cause for revision, newly appointed CEO Mario Kontomerkos told Inside Asian Gaming, “Mohegan Gaming & Entertainment remains confident with our contemplated investment levels and looks forward to a very long term partnership and presence in South Korea.

“These results are due to short-term issues and we don’t foresee these factors making an impact at the time of our opening. We are confident that Inspire’s unique and compelling entertainment offerings will appeal to many and quickly become a highly sought after experience.”

Kontomerkos added that Mohegan Sun was “impressed with South Korea’s resilience in withstanding ups and downs in regional tensions. We are confident in the long-term growth and stability of travel and tourism trends in northern Asia.”

Opinions elsewhere are divided.

“The outlook for foreigner-only casinos is not good and must have the operators worried,” says Shaun McCamley, Partner and Head of Asia Operations at consulting firm Global Market Advisors. “It’s difficult to believe that pre-set revenue forecasts will be met and will more than likely fall short of expectations.” 

Korea’s two leading foreigner-only casino operators at present, Paradise Co and Grand Korea Leisure (GKL), have endured a difficult start to 2017 with GKL reporting a 39.8% year-on-year fall in net income to KRW15.42 billion (US$13.6 million) for the three months to 30 June. 

Likewise, Paradise Co saw gaming revenue fall 20.7% year-on-year for the first half of 2017 to KRW241.7 billion (US$210.3 million) on the back of a 21.6% decline in table game revenue at its four foreigner-only casinos – despite Paradise City opening its doors on 28 April.

That should come as no surprise, says Union Gaming’s Managing Director and Head of Asia Equity Research, Grant Govertsen, given the enormous power China wields over Korea’s financial fortunes.

“The reality is that they are very dependent on Chinese customers and therefore are very leveraged to the goodwill of the PRC,” Govertsen notes.

With that in mind, he says it would also “make sense to lower the bar in terms of investment levels for Korea … but I don’t expect the government to do something that rational.”

Nevertheless, there remains cause for optimism.

According to a recent survey of 1,000 Chinese gamblers conducted by financial services firm Morgan Stanley, intention to gamble in Korea has increased by three percentage points over the same time last year (24% compared with 21% in 2016) despite overall intention to visit Korea slowing from 34% last year to 25% in 2017 due to ongoing geopolitical tensions and Chinese restrictions on travel.

“We think the survey results strongly support our key thesis that Chinese VIP (casino) recovery is faster than general inbound tourism,” Morgan Stanley surmises – a key factor given the 34.9% decline in VIP revenue at Korea’s foreigner-only casinos between 3Q14 and 1Q17. By comparison, mass fell only 8.0%.

“VIP business has no visa or flight/accommodation reservation constraint – peer pressure on traveling to Korea is the main reason behind soft demand. In addition, the opening of new casinos is now better recognized by Chinese gamblers in Macau and this could be another reason behind the improvement in gambling intention, in our view.”

The upshot is that Morgan Stanley predicts a full-year GGR decline of around 6% to KRW1.2 trillion (US$1.06 billion) for Korea’s foreigner-only casinos in 2017 on the back of flattening results through July and August, followed by 12% growth in 2018, 8% in 2019 and 14% in 2020 (to US$1.46 billion) when both Mohegan Sun and Caesars are due to open their integrated resorts.

Morgan Stanley also predicts massively improved results for Paradise Co over the next 18 months as it continues to ramp up its Paradise City operations. In its research note on Paradise Co’s 2Q17 earnings report, released in August, analysts DS Kim and Shaun Zhang stated that the company’s “big Q2 earnings miss” was offset by July’s results which were “strong across the board – and this is more important.” 

“Drop grew 19% year-on-year to KRW477 billion – nearly ~30% above 2Q17 run-rate – led by accelerated ramp-up at Paradise City (where drop was up 29% over June numbers) and seemingly moderating cannibalization to existing casinos,” they said.

“By segment, drop from China VIP fell only 6% year-on-year in July (vs -36% in Q2), while non-China VIP drop remained solid and up 39%. Though July could have benefited from summer seasonality and some pent-up demand, we think it is reasonable to think the absolute worst is probably behind us.” 

Morgan Stanley is predicting EBITDA growth outlook of 370% year-on-year for Paradise Co in 2018 and 25% in 2019, with Paradise City its key growth driver.

For the newcomers – Mohegan Sun and Caesars – the hope is that critical mass will play its part, with Kontomerkos stating “critical mass is an important factor in transforming Incheon into an international resort destination.”

McCamley isn’t so sure. “Three IRs in Incheon was, in my opinion, two IRs too many,” he says. “There is just not enough critical mass to support three large IR developments. The Paradise Group, together with government-owned GKL, controls about 90% of the foreigneronly market so the question is will Caesars and Mohegan Sun have sufficient regional experience and enough pulling power to get their share of the market and be competitive? 

“It will be a massive fight to get market share. Paradise City has a head start in many areas and as long as they don’t kill the market with overly competitive program offerings the other developments will be playing catch-up.”

Exactly what the emergence of Incheon as an IR hub means for Korea’s holiday island and home to nine of the country’s 16 foreigner-only casinos, Jeju, remains to be seen. Jeju has also been the hardest hit by China’s tourism crackdown with Chinese tourist numbers plummeting by 56.2% in March, 88.1% in April, 89.6% in May and 89.3% in June according to figures from the Jeju provincial government.

Again, that hasn’t stopped Landing International Development investing an extra US$300 million into its ambitious Jeju IR, Jeju Shinhwa World – announcing on 21 September that it now plans to launch casino operations from 8 December 2017 along with Marriott Resort, Landing Hotel, a MICE center, themed restaurants, food streets and a retail mall.

When complete in 2019, Jeju Shinhwa World will also include Four Seasons Resort & Spa and multiple theme parks including a Hollywood inspired outdoor theme park, Lionsgate Movie World.

But for Tight, whose eyes are firmly focused on Incheon, Paradise City provides a unique opportunity to watch and learn before Caesars launches its first major foray into Asia.

“On the Paradise City project, it is too early to judge and I think it won’t really be a fair test until they work through issues between the two countries and travel restrictions are no longer in place as we expect will be the case when we open in 2020,” he offers.

“So we’ll watch the general dynamics in the market, whether it’s Paradise City or in Macau, and try to adjust our program. We’ll take advantage of the benefits of hindsight in watching their development and looking on as the market starts to recover in Macau and think about amenities to target who we think in 2020 will be our target market.”

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