Paradise, the End of the Long Tunnel is in Sight

Zero Interest Rate CB Issuance... Institutional Investors Betting on Earnings Improvement Next Year

As the COVID-19 pandemic continues for an extended period, expectations for 'With Corona (gradual return to daily life)' are growing. President Moon Jae-in said, "By the end of next month, the vaccination completion rate will exceed 70%, and at that time, we need to consider 'With Corona,'" adding, "Experts have already started discussing plans on how to restore daily life."

Not only domestically but also in some countries, movement restrictions are being eased, and overseas travel is expected to resume soon. As suppressed consumer sentiment revives due to the impact of COVID-19, demand for fashion and cosmetics is expected to increase. Additionally, if Chinese tourists start visiting Korea again, casino performance is also expected to normalize. Asia Economy examines the current status of listed companies expected to recover their performance with the transition to With Corona, focusing on Paradise and Kangwon Land, and assesses their growth potential.

[Asia Economy Reporter Park Hyung-su] Paradise, which operates foreigner-only casinos, issued convertible bonds (CB) worth 200 billion KRW to domestic institutional investors last month. The coupon rate was 0.0%, meaning no separate interest payments, successfully raising a large amount of funds under favorable conditions. Despite recording losses in the second quarter of this year, Paradise's ability to raise funds under good terms appears to be driven by expectations for With Corona. The institutions that acquired the CB plan to convert the bonds into common stock after August next year to generate profits. The CB conversion price is 16,819 KRW, similar to Paradise's recent stock price. This investment decision reflects the expectation that Paradise's performance will improve with With Corona in a year.

Established in April 1972, Paradise operates foreigner-only casinos in Seoul, Incheon, Busan, and Jeju. Through its subsidiaries, it also runs complex resorts, hotels, and spa businesses. In April 2017, it opened Paradise City, a complex resort in Yeongjongdo, Incheon.

As COVID-19 cases surged worldwide, the number of foreigners visiting Korea sharply declined, leading to poor performance for foreigner-only casino operators. Paradise recorded revenue of 453.9 billion KRW and an operating loss of 86.2 billion KRW last year. Revenue was halved compared to the previous year, and operating profit turned into a loss. In the first half of this year, revenue was 181.3 billion KRW, about 30% less than last year. Operating loss was 39.6 billion KRW, similar to the loss in the first half of last year. Despite the decrease in revenue, the scale of operating loss did not increase. Due to difficulties in operations caused by COVID-19, Paradise conducted two rounds of restructuring last year. In the third quarter, it reduced 20% of staff in the non-casino division of Paradise City, and in the fourth quarter, it reduced personnel through voluntary retirement.

Looking at quarterly performance, revenue in the second quarter was 84.6 billion KRW, a 13% increase compared to the same period last year. Although the casino division remained sluggish due to the impact of COVID-19, hotel sales increased thanks to the recovery of domestic leisure demand. Casino revenue was 44.7 billion KRW, down 13.4% from 51.5 billion KRW in the same period last year. The number of VIP casino visitors in the second quarter was 10,900, a 20.6% decrease from the same period last year. The hotel division recorded 38.5 billion KRW, an 83% increase from 21 billion KRW in the same period last year.

Namsoo Lee, a researcher at Kiwoom Securities, analyzed, "With no foreign VIP arrivals at all, casino performance continues to rely solely on VIPs staying domestically," adding, "Performance fluctuations have continued due to social distancing levels related to COVID-19."

Volatility can be seen even in casino revenue for July and August. July casino revenue decreased by 60% compared to the same period last year. Although expectations for the resumption of overseas travel are growing as vaccination rates increase, it is still difficult to find Chinese tourists visiting Korea. August casino revenue reached 59.5 billion KRW, the highest since COVID-19, a 762% surge compared to the previous month.

It is still too early to consider this a full recovery. Hwajeong Lee, a researcher at NH Investment & Securities, explained, "Casino revenue in July was quite low at 6.9 billion KRW," adding, "With movement restrictions continuing, visitors were limited mainly to some foreigners staying domestically and Korean expatriates, resulting in excessive performance volatility." She advised, "Rather than judging monthly revenue, a long-term perspective on the potential for improving customer accessibility is needed."

As time passes, the possibility of performance improvement is increasing. Although new COVID-19 cases are on the rise, as the vaccinated population grows, governments worldwide are preparing for the With Corona era. In a situation where complete eradication is practically impossible, voices advocating lowering the fatality rate through vaccination and easing restrictions on socioeconomic activities have grown louder. This will lead to easing of movement restrictions and social distancing between countries, and overseas travel is likely to recover.

The U.S. casino industry, where operational restrictions have been lifted, has recovered to pre-COVID-19 levels. According to the American Gaming Association (AGA), U.S. casino revenue in July already returned to the 2019 level before COVID-19. Although the number of visitors still lags behind pre-COVID-19 levels, the increase in per capita spending is the result. Recovery was particularly notable in regional casinos with good customer accessibility.

Based on the U.S. casino case, the domestic foreigner-only casino industry expects performance to improve if quarantine exemptions for overseas travelers are granted. However, since it is unlikely that regulations will be actively eased to attract foreign tourists from the early stages of With Corona, performance is expected to recover after next year.