S. Korea loses lustre as foreign investors withdraw

Results for South Korea’s gaming operators improved in 2016, although foreign operators appear to be losing patience, with major projects either stalled or abandoned.

Market watchers say the initial euphoria faded fast when operators were faced with the reality on the ground, including high costs, difficulty in client acquisition, a bad image, changing regulation and no local gambling.

Genting Singapore was the latest to file for the exits, finalizing the sale of its stake in an IR project on Jeju island to joint venture partner Landing International. The company said it was focusing its efforts on its business at home and also positioning for a possible bid for a casino license in Japan.

The company sold its stake for S$596.3 million ($411.1 million), making a gain of about S$96.3 million, just two years after announcing the $2.2 billion project, which it said at the time would be a game changer.

The fate of Bloomberry Resorts’ project, on the island of Jeju is also up in the air. The operator of the Solaire Casino & Resort in Manila had planned to sell the Korean project to Hong Kong-listed Iao Kun Holding, just over a year after having bought it. However, that sale fell through and for the time being, the company has been cited as saying that for now it will continue to operate the resort.

“We had a sale already done but it fell through. But business is starting to pick up so we are not in a rush,” Bloomberry chairman Enrique Razon told local media in an interview.

South Korean foreigner-only operator Paradise Co. has said that its IR, being developed in Incheon along with Japan’s Sega Sammy, is on track to open in April this year. Though another project from Caesars International appears to be stalled.

South Korea had been seen as one of the most promising markets in the region, given its close proximity to northern China and the popularity of Korean culture on the mainland. However, an outbreak of Middle Eastern Respiratory Syndrome in 2015 that caused tourism numbers to slump, coupled with a clampdown on resorts marketing in China, highlighted the vulnerabilities of a market so reliant on foreign visitation.

“Korea market is not as lucrative, considering locals are not allowed to gamble, and recent cases of foreign casino marketing executives being detained in China could cap VIP growth,” Morgan Stanley wrote in a recent note. It added that foreigner-only casinos, such as GKL and Paradise have not seen a recovery in their Chinese business even though it has been more than 12 months since the arrest of their marketing executives on the mainland.

Morgan Stanley also notes that the government still has not ultimately decided how many new casino licenses will be offered “adding uncertainty and potential competition.”

When the government first asked for requests for proposals for new casino licenses it attracted a strong field of foreign contenders. However, those numbers dwindled, with the government in the end awarding just one license to a group led by U.S. tribal operator Mohegan Sun.

Mohegan is convinced it will be able to make a success, planning on a strong non-gaming element to drive revenue. The resort, to be known as Inspire, will be the third major project in Incheon, near to the international airport and in close proximity to the capital Seoul.

“Our business model contemplates that Inspire will generate more non-gaming revenue than gaming revenue which is quite unusual for most gaming resorts outside of Las Vegas,” CEO Bobby Soper told AGB.

Soper says he is “absolutely” convinced Inspire will be able to thrive, even without a locals gaming license. “As the closest gaming jurisdiction to Northern China, including the cities of Shanghai and Beijing, there are over 700 million Chinese residents within a two hour flight to Seoul,” he said.

However, South Korea experts say it’s a difficult sell. China’s VIPs continue to distrust the market due to allegations of cheating at some operations on Jeju, while junket operators demand high rates of commission with no guarantees of clientele.

That has forced attention on the mass and premium mass market, but since the marketing crackdown in China, client acquisition has become even more difficult, keeping volumes low.

Add to that Bank of Korea limitations on credit and changing regulation, it has proved a tough nut for foreign operators to crack. President Park Geun-hye, who backed the promotion of IRs to boost tourism, has also been impeached in a corruption scandal, leaving the country in turmoil.

Results at the foreigner-only casinos have picked up. Paradise Co. reported full-year sales gained 6.2 percent in full-year 2016 to KRW603.13 billion ($505.9 million) compared to KRW567.88 billion in full-year 2015.

Table game revenue rose 7.2 percent in 2016, to KRW567.67 billion. Machine game revenue however fell 7.3 percent to approximately KRW35.94 billion in full-year 2016. Grand Korea Leisure, which operates casinos under the Seven Luck brand, saw Q2 sales gain 5.4 percent. The results compare with a 5.9 percent gain in sales for Kangwon Land.

However, those casinos also benefit from their location often in major metropolitan areas, where they attract  traffic from local Koreans holding overseas passports. The new casino licenses given out in the Incheon zone, which is still under development, don’t tend to have that advantage, and neither does Jeju.

One expert predicted that the Jeju market will eventually consolidate to two to three main properties.