Investment bank JP Morgan has blamed the post-COVID proliferation of illegal and grey market gambling for a slower than expected recovery at South Korea’s only casino for locals, Kangwon Land.
In a Friday note, analysts DS Kim and Mufan Shi downgraded Kangwon Land stocks from “Overweight” to “Neutral”, observing that demand has now flat-lined for three consecutive quarters with little signs of a turnaround even a year after reopening.
Describing such a slowdown as puzzling given that all other major gaming jurisdictions such as Las Vegas, Singapore, the Philippines and even Korea’s foreigner-only casinos have seen a consistent ramp-up within a year, Kim and Shi believe the answer lies in illegal and grey-market gambling such as cash play at “Hold’em” pubs as well as online casinos.
These avenues, they state, “have proliferated since the pandemic.”
“This makes us less hopeful of an ‘inflection point’ of demand turnaround, at least until we see meaningful results from the crack-down on illegal gambling,” they explain.
The impact on Kangwon Land has been significant, with VIP volumes hovering at only 50% of pre-COVID levels while mass is back to 100% but has not shown any further growth despite the casino adding 10% more mass gaming tables and expanding its operating hours.
“We had initially believed that this was just a matter of time, but we are disappointed to see demand flat-lining for three consecutive quarters,” the analysts wrote. “Our checks indicate traffic levels to Kangwon Land casino were not too different in 2Q vs 1Q, and we no longer expect any inflection point in the near term.”
They also describe Kangwon Land stocks as a potential “value trap”, with gaming revenues tipped to sit at around 95% of pre-COVID levels but profits impacted by an increase in gaming tax in 2021, which could erode profits by around 10%, plus an increase in staff costs of between 10% and 15% versus 2019.
“We expect Kangwon Land’s post-COVID operating profit to be 25% below pre-COVID,” JP Morgan said.
