20161109-三星证券-How_Paradise_City_resort_opening_will_impact_market_38页_1mb

Sector Update Summary

Core Content

This document provides an in-depth analysis of the impact of the opening of Paradise City resort on the Korean casino market, and offers valuation and sales forecasts for Paradise and Grand Korea Leisure (GKL). The report highlights the potential for growth in the Korean casino sector, driven by the expansion of Paradise City and the broader trends in the region.

Main Points

1. Paradise City Resort Overview

• The first phase of Paradise City, Korea's first integrated resort, is set to open in 2Q17 in Incheon.
• The second phase will open in early 2018.
• The resort will feature Korea's largest casino, a 711-room five-star hotel, and other amenities such as a convention center, spa, and swimming pool.
• The total investment for the first two phases is KRW1.3t (excluding license-acquisition costs), with KRW818b for phase one and KRW305b for phase two.

2. Sales Forecasts and Market Potential

• Paradise City is expected to significantly boost the Korean casino market, which is currently small and underpenetrated.
• The market share of Paradise is projected to rise from 56% in 2015 to 63% in 2018.
• GKL is expected to see a 15% sales decline in 2018, followed by a 30% share of market growth.
• Paradise is projected to deliver KRW1,087 EPS in 2018, 28% higher than the current consensus.

3. Benchmarking with Macau and Singapore

• Macau casinos faced sharp declines in sales due to anti-corruption measures and a slumping property market.
• In contrast, Singapore maintained stable sales, and per-table and per-slot sales in both regions converged in 2015.
• Paradise City is expected to achieve KRW726.7b in annual casino sales if it matches the per-unit sales levels of Macau and Singapore.
• Per-table sales in Macau are KRW4.37b, while in Korea it is KRW2.25b.

4. Cost Efficiency and Operating Leverage

• Paradise City's cost structure is more efficient than that of Macau casinos, with lower capex, casino capacity, and staff numbers.
• Fixed costs dominate, which means that revenue growth will lead to higher operating leverage.
• The resort's location near Incheon International Airport (IIA) is expected to reduce variable costs and increase contribution margin.

5. Market Penetration and Visitor Trends

• Chinese visitors to Korea currently spend KRW30,000 per person on casinos, compared to KRW450,000 in Macau.
• The penetration rate of Chinese visitors in Korea is low (2%), suggesting significant growth potential.
• Mass visitors are expected to drive structural growth, and their spending per table is higher than that of VIPs.
• VIPs may return to Korean casinos as mass visitor numbers grow.

6. Sales Scenarios and Valuation

• The base-case scenario assumes a 20% annual growth in the Korean casino market, leading to 67% upside for Paradise shares.
• The aggressive scenario projects 120% upside for the stock.
• The conservative scenario assumes cannibalization of Walker Hill sales and a rise in non-controlling stake profits, suggesting fair valuation.

7. GKL Forecasts

• GKL is expected to see a 15% sales drop in 2018 due to market competition and the opening of Paradise City.
• The target price for GKL has been reduced by 9% to KRW30,000, reflecting the expected sales decline.
• GKL is seen as a safe short-term bet, while Paradise is expected to gain more traction in 2H17.

Key Information

• Paradise maintains a BUY rating with a target price of KRW22,000.
• GKL also maintains a BUY rating but with a reduced target price of KRW30,000.
• Paradise City is expected to generate KRW314.4b to KRW533.4b in annual casino sales.
• The per-table sales of GKL's Hilton site are KRW3.2b, which is the highest in Korea.
• The per-slot sales in Korea are KRW170m, compared to KRW280m in Macau.
• Mass visitors to Korea are projected to increase, which should boost utilization rates and sales.
• Kangwon Land experienced a surge in VIP sales after adding mass visitor capacity.
• The Korean casino market is undervalued compared to Macau and Singapore, with potential for significant growth.

Conclusion

The report highlights that the opening of Paradise City will significantly impact the Korean casino market, with Paradise expected to increase its market share and generate higher sales than the current consensus. The efficiency of investment and the potential for mass visitor growth are key factors in the positive outlook for the sector. While GKL may face short-term challenges, it remains a safe investment until the end of 1Q17, after which Paradise is expected to outperform.