China crackdown puts casinos’ VIP trade at peril

It’s possible Beijing has changed the rules on Crown but, either way, the industry’s direct VIP trade looks endangered.

Crown Resorts (CWN) $11.15
Star Entertainment (SGR) $5.50
SkyCity Entertainment (SKC) $4.18

By quirk of timing, Crown’s AGM in Perth on Thursday is a rare opportunity for investors to grill management on what’s going on in China, but at this time the company is unlikely to have too many answers. With Crown yet to contact its 18 detained employees, investors reacted by hammering the shares by 13 per cent.

Unlike many “day one” reactions, the $1.3 billion diminution in value is understandable given the likely profound effect on Crown’s China-centric high-roller business. With on-the-ground marketing in China now the preserve of the foolhardy, the VIP trade now looks to be off-limits outside of commissioned junket operators.

A fine time indeed for Crown to sink $2bn into the high-roller oriented Barangaroo, Sydney’s second casino.

The reasons for the arrests — including that of Melbourne based VIP exec Jason O’Connor — remain opaque. But it looks like Crown was too cute in navigating around China’s ban on casino promotions, which does allow the operators to promote their facilities as resorts (which happen to include gaming tables).

It’s also possible the Chinese authorities changed the rules — or their interpretation thereof — without warning anyone.

There’s a grim precedent in that 47 Korean staff employed by Grand Korea Leisure and Paradise co were arrested in June last year for “soliciting and organising Chinese citizens to gamble overseas”. At least some are believed to be still banged up 18 months later.

The Crown arrests come amid tension between the direct VIP trade and the high rollers sourced through “junket” operators, which are more closely aligned to the government.

Broker CLSA says: “It’s unclear whether the crackdown will eventually spread to junket operators bringing players to Australia, as opposed to casino staff, but it has 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.’’

Shares in Star Entertainment (formerly Echo Entertainment) and SkyCity Entertainment (which runs the Auckland and Adelaide gambling dens) also lost about 4 per cent.

According to CLSA, the VIP trade accounts for 20 per cent of Crown’s overall underlying earnings, compared with 12 per cent for Star. The Crown figure excludes the Macau-based Melco joint venture, which is slated to demerge from the Crown mothership.

CLSA also estimates 30-40 per cent of Crown’s VIP trade is direct (as opposed to sourced through junket operators), compared with Star’s 20 per cent. About 60 per cent of SkyCity’s VIP revenues are direct, but high roller account for only 10 per cent of its earnings.

Pending clarity on China’s stance — and we’re not holding our breath — all three are an avoid but Star looks the safest, er, bet.

Donaco International (DNA) 41c

Shares in the Vietnamese and Cambodian casino operator were also sold down 4 per cent yesterday, but the issue has more to do with the demise of Thailand’s venerated king Bhumibol Adulyadej.

Donaco initially owned the Aristo casino near Vietnam’s northern border with China, catering for folk in Mao’s home province of Hunan keen on a flutter.

But since acquiring the Star Vegas facility in the Cambodian border town of Poipet, Donaco has been far more exposed to Thai ­patronage. As with Chinese citizens, Thais, Vietnamese and Cambodians can’t bet in their own country but are free to do so elsewhere.

If anything, contests Donaco chief Ben Reichel, this will spur mass-market patronage at Poipet, the closest gambling venue to Bangkok. “Our view is it probably going to be a positive.’’

Not everyone agrees, with some analysts expecting black-clad mourners (Thais have entered a one-year mourning period) to spurn the money bins as well.

Another wildcard is Crown Prince Vajiralongkorn’s attitude to gambling, which was vehemently opposed by his old man. Given the prince’s younger racier attitude, the way could be cleared for casinos to operate in Thailand.

However, the Buddhist clergy still hold sway in the country of smiles. As they do in Sri Lanka, which is why Crown failed to ­establish a casino there. Despite yesterday’s violent rerating of the big operators, Donaco still trades at a wide discount of about six times expected current year earnings. The Thai situation is a wildcard. In Vietnam, Donaco is shifting the business mix away from junket-based VIPs to mass-market walk-ups — prudent given China’s crackdown. Spec buy.

Another one to watch is the recently-listed casino manager Silver Heritage (SVH, 25c), which plans to build a facility in its own right in Nepal. You guessed it: Nepalese are banned from gambling and the facility is pitched at the northern Indian middle-class.

The Australian accepts no responsibility for stock recommendations. Readers should contact a licensed financial adviser. The author does not own any of the stocks mentioned.