‘Sin stocks’ work wonders amid economic downturn

Bucking the economic downturn, so-called “sin stocks” of alcohol, gambling and tobacco companies are continuing to perform well in Korea and supporting the hypothesis that they are in fact recession-proof.

Shares of domestic alcoholic beverage companies Muhak, Kooksoondang Brewery and Lotte Chilsung were up 14.4 percent, 7.1 percent and 6.3 percent, respectively as of Friday compared to Aug. 1. Shares of domestic tobacco company KT&G increased 1.7 percent over the same period.

Gambling stocks also seem to be benefiting from the collective woes weighing on the heads of the penny-pinched general public amid a slowing economy, highly competitive job market and cooling but still high inflation. The stock prices of Paradise Casino and GKL, which operates the Seven Luck Casino, went up 22.3 percent and 17.2 percent over the cited period.

“The stocks of companies that indulge people’s guilty pleasures have generally outperformed the benchmark Kospi, which rose 1.3 percent this month,” said Lee Jong-guk, a 33-year-old white collar worker who dubs himself a habitual investor in sin stocks.

“When times get tough, Koreans may stop buying new clothes but they don’t stop drinking soju [fermented liquor]. More cash-strapped people tend to hit the casinos in hope of cashing out on good luck, and this leads to increased profits at gambling parlors and higher dividends.”

Market observers also see a correlation between recessed economies and the rising value of sin stocks.

When the U.S. subprime mortgage crisis caused a global financial meltdown in 2008, Merrill Lynch strategist Brian Belski examined the stock price movements of U.S.-based alcohol, casino and tobacco firms during recessions dating back to 1970. He found that, while the Standard & Poor’s 500 fell 1.5 percent on average through each economic rocky patch, vice stocks rose by an average of 11 percent.

“Consumers do not kick their [bad] habits in tough times,” Belski wrote in a report released in November 2008.

Data from Statistics Korea that examined Koreans’ spending habits from April to July this year show that households of two or more people spent an average of 28,000 won ($ 24.6) on cigarettes and liquor per month, up 5.3 percent on-year.

Other market observers suggested that the recent rise in the share prices of liquor and tobacco makers is linked to anticipation of imminent or future price hikes of such products.

The price of a bottle of soju has not changed since 2008, while KT&G’s tobacco products remain considerably cheaper than imported brands - despite the growing cost of raw materials in both cases - fueling the widespread belief that price rises are on the cards.

A rise in inbound Chinese tourists, known for their love of gambling and flashy casinos, has also given the domestic industry a boost. Chinese are forbidden by law from gambling on the Chinese mainland.

“The casino industry is expected to see annual growth of between 10 and 15 percent, buoyed in part by the growing number of Chinese VIP customers at local gambling halls and general growth in the domestic industry,” said Joseph Chung, an analyst at Woori Investment & Securities.

According to Chung, Paradise Casino attracted 175,000 visitors in the second quarter, while the amount of currency exchanged for casino chips - known in the industry as the “drop” - reached 671.6 billion won over the same time frame, up 19.9 percent on-year.

“The total amount dropped by Chinese VIP customers shot up 47.3 percent compared to the previous year, and Chinese now make up 52.5 percent of the total at Paradise Casino,” Chung said.

Meanwhile, almost one in three patrons at GKL’s Seven Luck Casino are Chinese, a proportion that GKL expects to keep growing.

However, this general trend is not always consistent, and related stocks are by no means immune to changing regulations or tastes.

The stock price of Hite-Jinro, which manufactures Cass, one of the most popular domestic beer brands, slipped 7.4 percent on Friday compared to Aug. 1 after it surrendered its ranking as the nation’s favorite beer to OB Brewery earlier this year.

Shares of Kangwon Land, the only casino in the country that permits Korean gamblers to enter, inched up 1 percent over the same period after the government enacted a revised law on Aug. 16 that requires the company to contribute one-quarter of its annual net profit to a regional development fund this year. Previously, it only had to pay 20 percent. The fund is used to improve educational and cultural facilities in Gangwon.

Kangwon Land paid 115.6 billion won into the fund last year and is likely to have to cough up an additional 28.9 billion won this year, experts say.

Lee Woo-seung, an analyst at Eugene Securities, cut his 12-month target price for Kangwon Land to 27,000 won early this month, down from 30,000 won.

By Kim Mi-ju [mijukim@joongang.co.kr]