With market cap of around A$8.4 billion, Crown Resorts Ltd. is one of Australia’s largest casino operators. The company runs two integrated resorts – one in Melbourne and the other in Perth. A third such property is slated for 2020 opening in Sydney’s Barangaroo precinct.
The integrated resorts model has been working quite well for casino operators with businesses in different parts of the world. The Asia-Pacific region has been a particularly attractive hub for development activity of this kind. And the above-mentioned model seemed to have worked quite well for Crown Resorts itself.
In the years following its establishment in 2007, the company expanded its presence beyond Australia and to Macau, and later on to the Philippines. Expansion also worked well for the casino operator or at least to a great extent. Here it is important to note that it hass operated its international business through the Melco Crown joint venture with Hong Kong developer Melco International Development. And up until recently, Crown Resorts considered and promoted its non-Australian properties as an important part of its overall business.
However, things began to change considerably in late 2016. The company announced that it would reduce its stake in Melco Crown by selling shares to its partner in the joint venture. Early last year, Crown Resorts and Melco International Development each had a 34.3% stake in their joint business. Following the latest shares selldown in February 2017, Crown Resorts now holds only 11.2% in Melco Crown.
The Australian casino operator futher informed investors and other concerned parties that it was scrapping plans for a casino development on the Las Vegas Strip. Crown Resorts had previously attempted to enter the Las Vegas casino scene, but bad investment decisions resulted in its plan’s almost immediate failure.
What Encouraged Crown Resorts’ Change of Mind?
The operator’s 2016 financial report showed that it had certain profit issues. Its net profit after tax was down 22.7% to $406.2 million for the 12 months ended June 30, 2016. The fact was that similarly to other casino companies with operations in the region, Crown Resorts had, too, suffered from the gambling crackdown in Mainland China.
The anti-gambling efforts of Chinese President Xi Jinping hit Macau and its casinos severely, but they also hit casino operations in the region, as a whole, and beyond Macau. Although gambling revenue in the Chinese administrative region has been showing stable signs for improvement, it seems that Crown Resorts has not been lured by the latest financial reports by the Macau government.
Yet, the true reason behind the Australian operator’s withdrawal from the international casino scene can be found in the recent arrest of staff members in Mainland China. As many as 18 Crown Resorts employees were detained last fall by Chinese police for allegedly promoting gambling, an activity that is explicitly prohibited under the country’s law. Several months have passed since the arrests, but no one really knows what is going to happen to those arrested. And it is not as if the company has been too vocal about the events that led to the staff members’ detention and the events afterwards.
On the other hand, Crown Resorts became quite vocal about the importance or rather about the not-so-big importance of Chinese VIP players for its operations. A top tier operator having employees arrested for illegal promotion of gambling is an international scandal by all standards. And this international scandal hit Crown Resorts’ profitability significantly as it resulted in a general withdrawal of Chinese high rollers from its casinos.
The Australian operator reported a 9.1% decrease in half-yearly normalized profit to A$191 million. VIP revenue plunged 47% during the six months to December 31, 2016. What is more, after news about the China arrests emerged, Crown Resorts saw its market capitalization reduced by more than A$1 billion.
Loss of this scale necessitated immediate actions. And as it seems, the actions involve the company’s gradual reduction of stake in Melco Crown in favor of more concentrated efforts to improve its domestic operations.
On the other hand, Crown Resorts’ Sydney property, which is currently under development, has been promoted as one that will offer VIP services exclusively. There is no shortage of high rollers in the Asia-Pacific region. However, Chinese players constitute a great portion of this group of casino customers in the region. With Crown Resorts’ worsened and probably worsening relations with China, doubt may be cast about its new property’s future viability.