Australia | Dec 03 2014
-Changes add to Macau volatility
-China's rate cut a positive
-Crown well placed domestically
By Eva Brocklehurst
When reports from gambling haven Macau suggest a downturn in the sector, anxious eyes turn to Australia's Crown Resorts ((CWN)). The company's profitability is significantly driven by its Macau joint venture with Melco, MPEL. Moreover, VIPs at Crown's Australian properties now account for 26% of Australian revenue and high value player visits are notably more volatile.
In November, Macau's gross gaming revenue fell by 19.6%, while year-to-date revenue is now up just 0.3%. Moreover, Deutsche Bank expects December revenue to fall 25-30%. Nevertheless, the broker takes heart in signs VIP revenue has stabilised. Mass market revenue has borne the brunt of the decline as several factors are affecting Macau's market. Classifications have changed some tables to VIP from mass market, which accounts for around one third of the revenue decline in November. The other cause is centred on premium mass players who are frequenting less often, or they are switching to VIP rooms in order to smoke. The smoking ban is envisaged having a much worse impact on mass gambling than was previously expected.
Deutsche Bank suspects the pressures will continue to weigh on Crown's share price, but recommends investors buy gaming stocks if they fall after the mass data from Macau comes out later this week. This is ahead of an expected recovery in VIP attendance, given the positive impact on junket activity that is expected to come after China's recent interest rate cuts.
Macquarie, too, favours MPEL above its Macau peers. The broker finds that the slowing down in Macau is not driven by the much publicised corruption crackdown but rather by a structural tightening in shadow bank lending. This restricts the liquidity that is available to small and medium Chinese enterprises. Executives from these businesses account for a major portion of Macau's premium/VIP players.
Macquarie does not expect a sharp recovery in the market, such as occurred in 2009 and 2012, but believes that selective monetary easing will slowly stabilise China's economy. This should relieve funding needs for SMEs and prepare the scene for a recovery in Macau's gaming market. Goldman Sachs recently portrayed Crown as a competitive global challenger. Cash returns screen below many peers at present because of the high costs from recent renovations domestically. Upon completion of projects such as Perth Hotel in 2015, Crown Las Vegas in 2018 and Crown Sydney in 2019, the broker expects this position to improve.
Despite current weakness Macquarie believes there is upside in Macau for Crown, while the domestic properties are also poised to provide a recovery in revenue. The broker estimates the domestic properties are trading at 8.5 times FY15 multiples, at the bottom end of the 8.5-9.5 through-the-cycle range. A return to the mid point of this range for Crown's domestic properties should combine with meaningful upside in the MPEL valuation and offer returns to Crown shareholders approaching 25%, in Macquarie's view. JP Morgan recently downgraded forecasts to account for the softness in Macau's market but retained an Overweight rating given the stock is trading on attractive multiples. Citi took a slightly different tack, preferring to stay at Neutral because of the near term volatility in Macau earnings.
On FNArena's database there are six Buy ratings and two Hold. The consensus target is $16.91, signalling 21.1% upside to the last share price. Targets range from $15.20 to $20.00.
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