As the government pushes to revise the law to raise the upper limit of the Tourism Promotion and Development Fund burden rate for foreigners-only casino operators from the current 10% to 15%, concerns are growing in the casino industry. The worry is that if hundreds of billions of won in additional expense arise each year, it could hinder facility and marketing investments needed to compete with the integrated resort in Osaka, Japan, set to open in 2030.
The casino Tourism Promotion and Development Fund was created in 1994 to develop the tourism industry and boost foreign currency earnings through tourism. Because it is imposed based on sales, not operating profit, the additional burden has a large impact on profitability. In the securities market, analysis suggests that if the system is implemented as the government originally proposed, major casino companies' operating profit could fall 20% to 30% from previous forecasts.
According to the industry on the 22nd, the Ministry of Culture, Sports and Tourism is reviewing a plan to raise the maximum burden rate of the Tourism Promotion and Development Fund for domestic casino operators to 15%. The current Tourism Promotion Act requires casino operators to pay the fund within 10% of total sales.
Under the enforcement decree: ▲ annual sales of 1 billion won or less pay 1% of sales ▲ over 1 billion won to 10 billion won pay a base 10 million won plus 5% of the amount over 1 billion won ▲ over 10 billion won pay a base 460 million won plus 10% of the amount over 10 billion won. For most large casinos above a certain scale, the highest bracket effectively applies.
The Ministry of Culture, Sports and Tourism (MCST) sees the burden brackets that have been in place for more than 30 years as failing to reflect the industry's growth. As most business sites fall into the highest bracket and the progressive function has weakened, the aim is to create a new bracket for high-sales operators and return part of casino revenue to tourism infrastructure and workforce development.
The industry is concerned that the burden is heavy because the fund is levied based on sales, not operating profit. To attract customers, casinos spend on "comp" expense such as airfare, lodging, food and beverage, and gaming credits, and they also bear labor and facility operating costs. Even if they post a deficit, the fund must be paid if a certain level of sales occurs, and unlike general industries, it is also difficult to pass on expense by raising prices.
◇ Even when sales rise, profit swings… a fund hike would hit profitability head-on
Casino companies have a characteristic in which profitability fluctuates widely depending on the hold rate (the ratio of funds the casino recovers by winning games), even if the number of customers and the amount wagered increase. According to iM Securities, 파라다이스's drop amount (the amount customers exchanged for chips at the casino) in the second quarter of this year rose 12% year over year, surpassing 2 trillion won for the first time. However, due to a lower hold rate in June and increases in comp expense and labor costs, second-quarter operating profit is estimated to have fallen 5% from a year earlier.
If the fund burden rate is raised by 5 percentage points, profitability will deteriorate significantly. Paradise posted 900.5 billion won in casino sales last year and paid 88.8 billion won into the fund. If the maximum burden rate increases to 15%, the fund would rise to 135.1 billion won, up about 46.3 billion won.
The Jeju Dream Tower of Lotte Tour Development(032350) recorded 476.6 billion won in casino sales and 51.5 billion won in fund payments last year. Although it is subject to separate laws under Jeju Special Self-Governing Province, the industry sees the possibility of a similar level of increase. In that case, the fund payment would rise to 71.4 billion won, up about 20 billion won.
GKL recorded 425.3 billion won in casino sales last year and paid 40.9 billion won into the fund. If the burden rate rises to 15%, the fund would increase to 63.8 billion won, exceeding last year's operating profit of 52.6 billion won.
Shinhan Investment & Securities projected that if the burden rate rises by 5 percentage points, operating profit would fall 29% for Paradise and 37% for GKL compared with previous forecasts. Assuming a similar increase for Lotte Tour Development, it estimated operating profit would decrease 21%.
◇ Osaka in Japan is investing 10 trillion won… domestic investment capacity is set to shrink
The timing of the intensified discussion on raising the burden rate is also a strain on the industry. In the Asian casino market, competition is fierce to attract VIP customers from China and Japan, not only with premium rooms, food and beverage, and entertainment and shopping content, but also by subsidizing airfare and lodging.
Korea's foreigners-only casino industry has only recently begun a full recovery from the shock of COVID-19. The industry says that because facility and service levels determine customer choice, continuous investment is essential.
Japan is building a large integrated resort on Yumeshima in Osaka, aiming to open in fall 2030. The total project cost is about 10 trillion won, more than six times the roughly 1.5 trillion won Paradise invested to develop Paradise City on Yeongjongdo, Incheon.
Choi Yong-hyeon, an analyst at KB証券, said, "Because casinos are a luxury consumer industry where facility and service quality determine customer choice, securing competitiveness is impossible without continuous CAPEX (capital expenditure)."