Tuesday, October 18, 2016

Sky City: Chinese Invasion?

I don't know whether the latest Chinese foray into foreigners taking business off them by Arresting 18 Aussies in China but the following is Morningstar's reaction to yesterday's news.

Do with it what you will.


Detention of Crown Employees in China Elevates Risks for All Australian and New Zealand Casinos

Chinese authorities' detention of executive vice president VIP International Jason O'Connor and 17 other Crown Resorts employees has clear negative implications for the company, as well as for Star Entertainment and SkyCity Entertainment. Unfortunately, estimating the extent of the impact is almost impossible at this stage, particularly as the reasons for the detention remain unclear.

What is clear is the elevated risk profile for all these operators' exposure to the Chinese high roller market. In fiscal 2016, 27% of Crown's normalised group revenue was generated from the VIP market, 28% for Star and 15% for SkyCity. It is no exaggeration to say that this VIP market is dominated by Chinese patrons. While margins for this segment are lower than the main floor gaming business, VIP is an important driver of all these casino companies' long-term growth plans.

Indeed, Chinese high rollers are a major plank underpinning Crown's AUD 2.0 billion Sydney casino project, Star's AUD 2.2 billion investment (across STAR Sydney, Jupiters Gold Coast, Queen's Wharf Brisbane) and SkyCity's NZD 1.0 billion capital spending (across Auckland and Adelaide).

While the latest development in China vindicates our high uncertainty ratings for the casino companies under our coverage, we have maintained their fair value estimates at this stage (AUD 14.50 for Crown, AUD 4.00 for Star, NZD 4.40 for SkyCity).

We are reluctant to make a snap judgment on the impact of the Crown employee detention on the intrinsic value that we have on all these casino operators. There will clearly be an impact on earnings if there are any tightening restrictions on how their employees can promote Australia's "tourism appeal" to Chinese high rollers without directly marketing the group's casinos. However, much of this is merely conjecture at this point and certainly forms no basis to change our moat ratings for Crown (narrow), Star (none) and SkyCity (narrow).




Sky City Entertainment Group @ Share Investor

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