Government’s 7th Investment Promotion Act to benefit sector in variety of ways
We believe that the government’s 7th Investment Promotion Act (announced on Jan 18) will benefit the domestic casino and travel industry in a variety of ways going forward. We note that the section related to the promotion of tourism infrastructure development contains plans to add two additional casino IRs, grant four new in-city DFSs (three in Seoul, one in Jeju), and expand hotel facilities (including supporting REITs).
Detailed plans announced for additional casino IRs
- We anticipate that the Korean government’s recently announced (Jan 18) ‘7th Investment Promotion Act’ will benefit the domestic casino and travel industry in a variety of ways going forward. Particularly warranting attention, two integrated resort (IR) casinos will be added through competitive bidding. The related request for concept (RFC) process should be completed within 1H15, and the winning bidders will likely be decided in 2H15. Assuming that plans unfold according to the government’s timetable, construction of the new IRs should be completed by 2020.
- Also under the new Act, the current foreign stakeholder requirement (minimum of 51%) is to be abolished, a positive which should open the door for domestic firms to be involved as the largest stakeholders in IR projects. Thus, the new projects will likely be assessed by business validity rather than investor domicile. Of note, the minimum investment amount is understood to be W1tn (excluding land costs), and the casino floor area will be restricted to 5% of the total facility area.
- Although there have been no restrictions placed on the locations of the planned IRs, we view Youngjong Island as being the most likely candidate (given the attractive feasibility of forming a cluster of tourism facilities on the island).
Inbound tourism facilities to be improved, including addition of business hotels new in-city DFSs
- Licenses for four new in-city duty-free stores (DFSs; three in Seoul, one in Jeju) will also be granted under the Act. In detail, two of the players in Seoul will be selected through general bidding and the other will be picked via restricted bidding (only for SMEs). Meanwhile, bidding for the additional DFS in Jeju will also be restricted to SMEs. Under this procedural framework, the new DFS players are expected to be confirmed by June~July, obtaining business rights for a period of five years.
- Elsewhere, by end-2017, the government is aiming to boost Korea’s overall number of hotel rooms by 5,000 via: 1) additional construction subsidies; 2) increased incentives to transform existing facilities into business hotels; and 3) cultivating hotel real estate investment trusts (REITs). Given that the expansion of hotel room capacity has been lagging the growth rate of inbound tourists, we positively view the government’s plans to develop accommodation infrastructure.
Casino industry (IRs) and travel industry (city DFSs and business hotels) to benefit
- Pointing out that yesterday’s release contains much more detailed plans than those contained in previous announcements, we believe that the Act confirms the government’s strong commitment towards the construction of tourism-related infrastructure.
- We focus investor attention on the likelihood that GKL will be involved in the selection process for the additional casino IRs. Of note, burdened by an absence of long-term growth plans, the firm’s shares have been experiencing a valuation discount (vs those of its peers). However, this discount should dissipate once concrete plans are established for GKL to operate a new IR casino in Youngjong Island (after 2020).
- Meanwhile, we view Hana Tour and Mode Tour as being well positioned to benefit from the new city DFSs and business hotel plans. In detail, Hana Tour is currently participating—as part of a SME consortium—in the bidding process for a DFS at Incheon International Airport (results to be announced at end-January or in February). Moreover, it is our understanding that both Hana Tour and Mode Tour are interested in operating in-city DFSs. Also, greater hotel supply should serve to the benefit of Hana Tour and Mode Tour’s respective hotel arms (both of these players operate business hotels through management contracts).
Source:NH Investment & Securities Co.