Did Crown get too cute for China?

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

the future of the direct VIP trade looks endangered, with no operator now likely to risk an on-the-ground marketing presence in China. Picture: AAP.

Crown Resorts (CWN) $11.68

Star Entertainment (SGR) $5.44

SkyCity Entertainment (SKC) $4.13

With Crown’s top brass and Canberra reps yet to even contact its 18 employees detained at the Politburo’s pleasure, investor attention has turned to the financial impact on the casino operator’s China based high-roller business.

The market is girding for the worst, with Crown shares tumbling around 10 per cent and Star (formerly Echo Entertainment) stock swooning 5 per cent on the weekend’s news.

Shares in SkyCity, which runs the Auckland and Adelaide gambling dens, lost 5 per cent.

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 a few gaming tables).

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

Either way, the future of the direct VIP trade looks endangered, with no operator now likely to risk an on-the-ground marketing presence in China.

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 government.

Understandably, the casinos have been keen to source their own punters and avoid the hefty junket commissions. In trying to oust these intermediaries, did they misread the political tea leaves? “It would be a pretty dangerous game for them if they were doing that,’’ another casino operator in the region says.

Interestingly, Grand Korea ran a direct-only business.

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.’’

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, compared with Star’s 20 per cent. In other words, the rest is sourced through junkets.

Across the ditch SkyCity is the most vulnerable in that 60 per cent of its VIP revenues are direct, but VIPs account for only 10 per cent of its earnings.

The arrests come at an awkward time for Crown, which holds its AGM in Perth on Thursday.

The incident should attract plenty of questions, but there’s no guarantee Crown will have the answers by then.

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.