9 days old but question hanging over Barangaroo still persists. Link at end allow you read numerous SMH reader's comments.
- OCTOBER 18 2016
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James Packer's Barangaroo could be the world's tallest white elephant
It would be a nail-biting time for
James Packer as he watches from Los Angeles the events unfold in China that will determine whether his dream of building a flagship casino on Sydney's foreshore at Barangaroo will be realised or whether it could become the world's tallest white elephant.
The reality is that it could take many months or even longer to understand the ramifications of the Chinese authorities arresting 18 Crown staff – whether the regulators' concerns were specific to Crown or part of a prolonged and wider crackdown on Australian or international casino companies targeting Chinese VIP gamers.
The impact of China's raids on Crown Resorts
Elizabeth Knight comments on the potential impact to Australian businesses after a government crackdown on Crown Resort's offices in China.
But if this bet on Barangaroo plays out badly for Packer his only option to rescue the $2 billion development will be to change the conditions and the betting criteria that he has already agreed with the NSW government.
This would not be an easy sell to a government that is promoting the new casino as a boost to tourism not as a means to enhance Crown's profit.
Crown Resorts has bet the house on high rollers.
To the extent there is a prevailing view at this early stage, it is that Chinese authorities were focused on Crown and money transfer issues rather than any marketing oversteps. But to be fair the information vacuum from the Chinese means any view remains pretty speculative.
Profit problem
If the raids
are part of a more radical overhaul China is looking to seriously curtail its wealthy citizens from using offshore casinos, it is a problem for the profitability of Australian casino companies. They will still turn a healthy profit – as these customers account for a significant but not all consuming 25 per cent of earnings.
But for Packer's yet unbuilt – Barangaroo casino, a drying up of the Chinese VIP market is a bigger problem.
Remember the deal Crown struck with the NSW government – and the reason the granting of a licence didn't go to a competitive tender –
was that it was a VIP-only establishment.
Nail-biting times: Crown's James Packer may have to change the conditions and betting criteria that he's already agreed with the NSW government. Photo: AP
How big a problem this is for Crown, which is investing $2 billion or more into this project depends on how exclusive the customers will need to be.
The $30 minimum bet will not exclude many, if any. The bigger issue is that Crown in Sydney has been proposed as a members-only venue. And to retain that membership patrons will need to have a minimum annual spend. We don't know what this minimum spend is and if it runs into the several thousand it will rule out the casual mass-market gambler.
(And remember that there are no slot machines which are a particularly lucrative part of the mass market.)
Slot solution?
To counter any revenue bleed resulting from fewer Chinese VIPs, Crown may need to lower the annual spend threshold or even attempt to persuade the government to allow slot machines.
NSW Premier Mike Baird, after initially dancing around the question, said he wouldn't be allowing pokies at the new casino. So that avenue doesn't look too hopeful.
At this stage the investment bank analysts that crunch the numbers on the gaming sector have not focused their attention on the impact on Barangaroo.
Although one commented yesterday, on the basis of anonymity, that without Chinese VIPs Barangaroo would be marginal in a profit sense.
For the most part they have assumed that this will broadly hit the operations of Crown, The Star and Skycity in the short to medium term but have used the precedent of South Korea – whose casino operators were the subject of a raid last year – to conclude that the hit to earnings will be significant but not life threatening for the Australian casino operators.
For example Mark Wilson from Deutsche Bank said in a note to clients that: "Following the detention of Crown's VIP employees in China, we estimate that VIP turnover will decline by 20 per cent in FY17 with Chinese turnover down 30 per cent. We believe the market is now (on Monday) pricing in a 70 per cent reduction in VIP turnover and a 100 per cent decline in Chinese VIP turnover, which we view as excessive."
A similar situation for the Korean casino operators in 2015 resulted in a 17 per cent decline in VIP turnover and a 31.5 per cent reduction in Chinese VIP turnover in the subsequent 12-month period.
Other analysts echoed the view that the share price reaction on Monday was overdone and not surprisingly the Crown share price retraced a bit of ground on Tuesday.
Deustche Bank said it viewed the raids as "disruptive to Crown's VIP business over the next 12-18 months, and as a result we have lowered our near term VIP growth outlook for Crown and now forecast an 8 per cent year-on-year decline in VIP revenue for Crown in [the 2017 financial year] (down from +3.5 per cent previous) and a 4 per cent year-on-year decline in the [2018 financial year] (down from +4 pre cent previous), also incorporating increasing competition across Asia-Pacific including the Philippines & Macau new supply, Saipan."
http://www.smh.com.au/business/comm...s-tallest-white-elephant-20161018-gs4u3m.html
