All bets off in China casino crisis for Packer’s Crown Resorts

Australian casino operators are tipped to be reviewing their options after the arrest of Crown Resorts’ staff in China.

Melco Crown’s Lawrence Ho and James Packer. Picture: Bloomberg.

Australian casino operators are tipped to be reviewing their options after the arrest of Crown Resorts’ staff in China — a move that wiped $630 million from James Packer’s stake in the company — with a warning the operating model of domestic resorts will change “irrevocably”.

Australian-listed Crown Resorts, which Mr Packer has a 48.2 per cent interest in, lost $1.3 billion of its market value yesterday after recording its biggest daily fall as a listed company following the arrest of 18 of its staff in China late last week. Shares in the company slid 13.9 per cent to $11.15.

UPDATE: Packer breaks silence

The Crown raids have underlined the danger involved in promoting casinos in China. As a result, an Australian industry insider said, “you can expect a hiatus of six months at least” in such efforts, while all the operators review their options.

GRAPHIC: Casino crisis

The insider said the entire operating model of casinos in Australia would change irrevocably.

“As long as China’s anti-­corruption campaign lasts, the ‘international business’ model is dead.”

The Crown Resorts staff were arrested at their homes four nights ago over an apparent link to gambling promotions, which are illegal in China. They could face jail terms of up to 10 years, depending on the seriousness of any offence committed. Among those arrested was Melbourne executive Jason O’Connor, who is head of Crown’s international VIP programs.

The Crown Resorts board met last night on the crisis and was updated on arrangements to make contact with detained staff and to support their families.

The industry insider, with deep Asia experience, told The Australian yesterday it appeared that Mr Packer went out aggressively to pick up customers that his Macau business partner, Lawrence Ho, could not chase because casino licence renewals in Macau, due in 16 months, require exemplary probity.

Hong Kong-based Vitaly Umansky, an analyst at Bernstein, said the Crown staff employed in China seemed like a large number.

“I spoke to non-Macau operators that use junkets to get VIP business out of China and none of them seem to have anywhere near that number of people,” he said.

“It is surprising, the number of people Crown had in China, which raises a bit of a red flag.”

The arrests severely cloud the prospects for James Packer’s $2bn Barangaroo development in Sydney, which is geared towards high rollers from China and not towards the domestic market, and for Star’s project at Queen’s Wharf in Brisbane. Crown chairman Rob Rankin is expected to face questions on this project at the company’s annual meeting in Perth on Thursday.

Citi analyst Rohan Sundram last night cut his price target on Crown from $15.35 to $15.10, and trimmed its VIP earnings on the back of the arrests. The analyst said the investment bank viewed the arrests as disruptive to Crown’s VIP business over the next 12-18 months.

“As a result, we have lowered our near-term VIP growth outlook for Crown and now forecast an 8 per cent year-on-year decline in VIP revenue 2017, from a previous forecast of a 3.5 per cent ­increase,” he said. CLSA’s Sacha Krien said a greater proportion of Crown’s project pipeline, as opposed to its rivals, was focused on Chinese VIPs, specifically its Sydney casino, Barangaroo.

Mr Packer had pitched his Sydney casino, a long-held dream of his, as a venue for high rollers, and Asian VIPs are the target.

The industry insider said that Chinese high rollers would already be assuming that all the contact details of clients and would-be customers held by the staff arrested would already be in the hands of the Chinese authorities, who may be starting to investigate the gamblers. He said that increased the risks for even being seen to be gambling overseas.

Australian casinos had enjoyed increased VIP interest as gaming revenue out of Asian gaming hub Macau cooled but the Crown arrests could have widespread impacts on high rollers visiting Australian resorts.

Mr Krien said that VIPs might be reluctant to go to Australia given what appears to be a focus on the country.

He added it was unclear if the crackdown would spread to junket operators bringing players to Australia, as opposed to casino staff, but he said it had to be a possibility.

“It may be that the Chinese government wants to funnel all VIP play through junkets, where they potentially have more control,” he said.

The analyst added that another issue was debt collection, saying it could impact the ability of Australia casinos to collect outstanding debts.

Bernstein analyst Mr Umansky said most casino operators around the world that focused on Asian customers had some form of marketing operations in China.

“It’s a big, deep customer base in China and every operator is there scrambling to have their share of that business in an environment where you are operating in a grey area and you are subject to these types of things (arrests) happening.”

The promotion of gambling is illegal in China but operators like Crown are allowed to promote tourism and the resorts where casinos are located.

China’s Ministry of Public Security launched a crackdown in February last year that saw 47 Korean casino staff employed by Grand Korea Leisure and Paradise Co arrested in June for “soliciting and organising Chinese citizens to gamble overseas”. The employees are believed to still be in detention 18 months later. The market value of Paradise is down 50 per cent since the arrests and Grand Korea Leisure is down 40 per cent.

Mr Umansky said the latest arrests could be a “Crown-specific” issue.

“It seems to only be related to Crown ... that is different with the Koreans, when both Korean operators were impacted,” he said.

He added it had been his view for the past 18 months that the Chinese government would do more “crackdowns” against non-Macau casino operators that were marketing in China.

“Macau has been a good child of China, and as a result, the Chinese government wants Macau to be successful. What we have seen over the past three years with the decline in Macau is some of that VIP business going offshore,” he said.

The decline in gaming revenue out of Macau prompted Crown to announce a demerger of its international assets, splitting them from its Australian ­assets, to create a separate listed holding company.

The key reason for the demerger plan was to get a clean valuation of the Australian assets.