Operating Profit Up 57%, Yet Target Price Cut 33%—Why Casino Stocks?

[Financial News] Heungkuk Securities lowered its target price for Lotte Tour Development from KRW 30,000 to KRW 20,000, reflecting the burden of the Tourism Promotion and Development Fund despite continued growth in its casino business. The brokerage maintained its Buy rating.
Ji Won Song, an analyst at Heungkuk Securities, said on the 4th, "With improvements in casino productivity confirmed, solid earnings are expected to continue in the second half of the year. Even if the revised Tourism Promotion and Development Fund bill takes effect, the decline in profits will likely be limited compared with the concerns the market had anticipated."
Lotte Tour Development reported second-quarter revenue of KRW 203.3 billion and operating profit of KRW 51.9 billion, up 28.9% and 56.8%, respectively, from a year earlier and in line with market expectations. Casino revenue was the main growth driver, rising 33.7% year on year.
Casino visitor numbers are also increasing rapidly. The number of visitors in the second quarter reached 182,872, up 23.2% from a year earlier. Drop, the total amount customers exchanged for casino chips, rose 13.8% to KRW 760.6 billion. The hold rate, or the percentage of drop retained as actual casino revenue, also increased by 2.9 percentage points to 19.3%.
"Although drop per customer is declining year on year, daily revenue per table rose 16.1% from the previous quarter to KRW 11.63 million," Ji Won Song explained. "Lotte Tour Development has about 45% as many casino tables as the average in the Macau Special Administrative Region, but its annual casino revenue last year was only about 17% of that average, leaving substantial room to improve productivity."
Casino performance also remained solid in July and August. Drop reached KRW 263.5 billion in July and KRW 336.4 billion in August. In August, drop per customer climbed to an all-time high of KRW 5.7 million.
The analyst expects the expansion of casino facilities and an increase in international flights to Jeju to support performance in the second half. The company added 19 gaming machines in the first half and increased the number of poker tables from 13 to 16. In the third quarter, new international routes from Qingdao, Changchun, Wuhan, Changsha, and Chengdu are expected to bring the total number of destination cities to 26.
The burden from the higher tourism fund is expected to be limited. If the proposed revision imposing an additional 5 percentage points on the tourism fund for revenue exceeding KRW 300 billion at each business site is adopted, it would disadvantage Lotte Tour Development because its revenue is concentrated at a single site. Even if the revision takes effect, however, the company’s operating profit is estimated to decline by only about 7.6% next year.
[email protected] Bae Han-geul Reporter