Paradise: The story of growth will unfold slowly, but it’s worth the wait

The author is an analyst with NH Investment & Securities. She can be reached at hzl.lee@nhqv.com. – Ed.

Paradise’s 2Q21 results satisfied the consensus, helped by: 1) a rebound in non-casino sales; and 2) a leaner fixed cost structure. The strong fundamentals of the business are to help it survive until visitor traffic recovers after movement restrictions are eased. As investors just have to wait, we maintain a buy rating.

To succeed in waiting on solid fundamentals

We stick with a purchase note on Paradise. Due to the spread of the Covid-19 Delta variant, social distancing and movement restriction rules remain strict, in turn delaying the return to normalized casino operations. With the company’s share price confirmed to have bottomed following trade setbacks, the company secured the fundamentals needed to normalize earnings through: 1) rebounding non-casino sales; and 2) improved profitability of the casino division. So, after persevering, investors should see a strong rally in earnings, with their patience paying off.

We maintain a TP of W22,000. We consider slower sales growth to be inevitable due to a delay in easing movement restrictions amid the protracted Covid-19 crisis. But, the benefits of the company’s lean fixed cost structure must continue in a context of limited business operations. As a result, we leave our 2022 profit projections little changed from our previous estimates. Moreover, with the vaccination programs underway, expectations that movement restrictions will be relaxed from 2022 remain intact. Once customer accessibility expands through relaxation of movement restrictions, a strong recovery in sales is expected to accompany. A V-shaped earnings recovery thanks to the release of pent-up demand is already confirmed by a strong profit rebound at a Korean-only casino.

2Q21 review: results confirm a lighter cost structure

Paradise’s 2Q21 results met market projections, with the company reporting consolidated sales of 84.6 billion won (+ 13% yy) and operating losses of 27.4 billion won (RR yy).

Sales: While casino sales have been sluggish due to the impact of Covid-19, non-casino sales have increased thanks to the increase in national demand for entertainment. This trend should continue in 3Q21, in particular for non-casino sales, which should benefit from strong seasonal effects.

Costs: Through efforts to improve profitability (including last year’s restructuring), the fixed cost burden has been reduced to 80% of the pre-Covid-19 level. The fixed costs have increased qq due to the posting of a property tax payment in 2Q21, but we recall that this is a seasonal factor. The reduced fixed cost burden is to help the business sustain itself until its casino operations normalize.