A tough year for Crown Resorts

A tough year for Crown Resorts

Crown Resorts (CWN) has had a tough year. The share price is down 8.6% so far, mainly as the result of a sharp decline when it was announced that several of its employees had been detained in China. These events highlight the political risk associated with casinos which is arguably even more significant than business risk for these companies. Recent events involving CWN, whose majority shareholder is James Packer, are a perfect example of political risk and its effects on a company.  

In October this year several CWN employees were detained in China in a series of night raids. The detainees had to wait over four weeks before being formally arrested although details on the charges they face are still scarce. Authorities haven’t provided actual details on the charges other than that they are ‘gambling related’. The promotion of gambling in China is illegal as is organising a trip of ten people or more to a foreign casino. CWN has been treading a fine line by marketing its casino resort without actually marketing the casino itself. This is thought to be legal but is perhaps considered a ‘grey area’. CWN has copped criticism for this since it appears they were pushing the boundaries too far in regard to what is legal. Unfortunately, the employees working in China are the ones who suffer and will now have to spend at least six months in prison.  

The share price plunged on the news, dropping 14% within a day. The price started to recover in mid-November although it didn’t recover all of the losses. To further compound CWN’s pain, on Friday morning last week a rumour circulated that the Chinese government had reduced by half the amount that can be withdrawn from ATM’s in Macau. As a result of this news, the CWN share price dropped almost 5% on the day. The rumour subsequently turned out to not be true but the share price nevertheless failed to recover the losses.

CWN’s share price performance this year has been dominated by political events and it highlights the argument made in the opening paragraph that political risk for a casino owner (especially in China) is substantial. Having said this, not everything has gone badly for CWN this year. In June CWN received approval from the NSW independent Planning Assessment Commission for its new casino at Barangaroo. This isn’t expected to open until 2021 but when it does it should be a good source of growth for the company. Furthermore, the financial performance of the company isn’t too bad. The earnings from Australian operations have been fairly stable for the past five years. The contribution from Melco Crown’s operations in Macau dropped substantially over the past two years which has caused an overall reduction in profit since FY14. Nevertheless, assuming the Australian operations continue to deliver consistent returns, this should provide a base level of income for the company. Investors with a longer term time horizon can look toward the 2021 opening of the new casino to provide a future source of revenue and earnings growth.

This article was written by William O'Loughlin - Local Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via william.oloughlin@rivkin.com.au or by phoning +612 8302 3600.      

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