The arrest in China of Crown Resorts employees, including an executive responsible for international VIPs, has focused attention on China’s efforts to stem capital outflows and fight corruption through targeting gambling by mainland Chinese in offshore casinos. Investors are considering the impact Chinese high rollers are having on the bottom line of Australia’s listed casino operators. The upcoming interim reporting season will potentially provide some interesting insights.
While income from high rollers is often the most volatile segment of a casino’s revenue base, with a single VIP able to have a material impact on its overall turnover, revenue derived from wealthy VIP patrons generally represents only a small portion of total casino turnover.
In Australia, Chinese high rollers in particular represent an important source of casino revenue. In the case of Crown, this segment is about 12 per cent of group revenue. Due to the contribution VIPs make to revenue, Australian casinos, like their overseas counterparts, go to great lengths to attract Chinese VIP customers, offering patrons complementary services such as luxury boat cruises and rounds of golf.
With the exception of the special administrative region of Macau, gambling has long been outlawed in China and offshore casino operators are banned from directly marketing gambling in the country.
An anticorruption campaign under way since President Jin Xinping came to power in 2012 has seen VIP gamblers targeted as a measure to prevent government officials laundering money out of China. More recently, China’s government has also pursued VIP gamblers in a bid to stem the flow of capital from the mainland, given overseas casinos provide a potential channel to funnel money offshore.
The government clampdown on VIPs has hurt casino operators in Macau, which attracts millions of mainland Chinese each year and is now the largest gambling centre in the world. As a result of the greater restrictions, which also include limitations on ATM withdrawals, Macau’s casinos are transforming their businesses to ensure they have greater mass market appeal.
While China’s anticorruption measures have largely been focused on Macau’s VIP patrons to date, there is speculation that the Crown arrests signal an extension of these policies to overseas casino operators, including in Australia where the three main listed casino operators derive revenue from Chinese high rollers.
An international gaming entity with businesses including online gaming products, Crown Resorts is Australia’s largest casino operator with the company’s key assets being Crown Melbourne and Crown Perth. While Crown attributes 12 per cent of its group revenues to Chinese VIPs, it has emphasised that the contribution to group profits was substantially less because of the lower margins from this segment. In a trading update to the market in December 2016, Crown reported that for the first 23 weeks of the 2017 financial year, including the period following the arrests, Chinese VIP profits were down 45 per cent. Further, total revenue was down 12 per cent across the Australian resorts.
Crown recently sold down its stake in Melco Crown Entertainment Limited, which holds casino assets in Macau. Together with other steps to restructure the company, Crown is now more focused on its Australian assets, including the development of the new $2 billion Crown Sydney at Barangaroo. With its planned six-star hotel, Crown Sydney has been positioned as an opportunity for Sydney to capitalise on Chinese tourists and the Asian VIP gaming market. Crown reports its half-year results on February 23.
With assets in NSW and Queensland, The Star has successfully attracted a diverse clientele, including VIP and mass market patrons. The Star, which reports its half-year results on February 16, has taken a conservative approach regarding the likely impact on its business of the Crown arrests, observing that information about the situation is still limited. The company has emphasised that its VIP income accounts for less than 30 per cent of revenue and 16 per cent of earnings before interest, tax and depreciation, with “[a]round 80 per cent of this revenue … derived from junkets out of Asia”.
SKYCITY Entertainment Group
The dual ASX/NZX-listed SKYCITY is the owner and operator of casino and entertainment facilities in Australia and New Zealand. With the majority of SKYCITY’s revenue derived from New Zealand, the company has been a beneficiary of the country’s buoyant tourism market which drives traffic to its casinos. SKYCITY caters to niche VIPs and noted following the Crown arrests that about 50 per cent of total group turnover in 2015-16 was derived from Chinese customers. SKYCITY reports its interim results on February 8.
The situation regarding the arrest of the Crown employees remains opaque and a number of questions remain unanswered. At the time of writing, the Crown staff had been formally charged “on suspicion of gambling”. Until further and firm details emerge, any conclusions about the likely impacts of this development remain speculative.