Financial analysts in South Korea have revised their projections for casino earnings downward, attributing the change to proposed increases in required contributions from operators. As reported by EDaily, the government is contemplating raising the contributions to the Tourism Promotion and Development Fund from the current 10% to 15% of casino revenues beginning next year.
Lee Hye-in, an analyst at Samsung Securities, expressed that a decline in operating profits is “inevitable” under this new scheme. If implemented, the forecast suggests that all three casinos which cater exclusively to foreign passport holders will experience significant drops in profitability.
Lee predicted Grand Korea Leisure would see a staggering 30.1% decrease in profits, citing that its operating profit margin is relatively low compared to its revenue. Similarly, Paradise is expected to decline by 17.2% and Lotte Tourism Development by 13.9%.
The government also plans to enhance regulations affecting operators. This will involve replacing the permanent casino license system with a model of five-year renewable contracts, and operators will need approval for any significant changes to their major shareholders.
In the stock market, these anticipated changes have already impacted share prices, leading to a drop of over 30% for Paradise shares in the last month, while Lotte Tourism Development fell by 22% and Grand Korea Leisure by more than 12% during the same timeframe.
Despite the market setbacks, some analysts see reasons for optimism. Following the announcement of the government’s plans, several stocks experienced a rebound, sometimes outperforming the KOSPI index, which increased by just 0.7% last week. At that same time, shares for Grand Korea Leisure and Lotte grew by nearly 3%, while Paradise saw a minor decline of 0.2%.
Lee granted an “overweight” rating to domestic casino stocks, indicating that they are predicted to outshine benchmark indices over the next six to twelve months. The analysis supports the idea that growth in mid-to-long-term earnings remains strong due to rising non-gaming revenues associated with hotels and an increase in foreign tourist arrivals.
Experts also clarified that the new permit structure primarily aims to weed out financially unsound operators, suggesting that state-owned casinos are less likely to fail the renewal process.
Lee identified Lotte Tourism Development as a standout choice for investors, with an expected surge in second-quarter profits by 52% year-over-year. Growth is anticipated for Lotte’s Dream Tower casino-resort, which recorded impressive sales in March. The increasing number of tourists visiting Jeju is expected to further enhance profitability.
Lee noted that although Paradise has been facing rising costs due to staffing, following the acquisition of the Grant Hyatt Incheon West Tower in January, casino drop volumes for the second quarter are predictably set to break records. He stated, “Despite policy risks, we expect continued growth in demand for casinos and hotels, propelled by an influx of foreign tourists. Concerns over profit estimates have already been factored into current valuations, indicating limited potential for further declines in stock prices."
