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Investors with nerves of steel sometimes benefit from taking advantage of the adage that says markets shoot first and ask questions later.  Negative news about a particular company can send investors fleeing for the exits, not only from the stock in question but also from peer companies in the same business sector.
This is exactly what happened at the beginning of the trading week of 17 October.  The market learned that employees of our top casino stock, Crown Resorts (CWN), had been arrested in China for “crimes against gambling.”  When the “shooting” stopped, Crown’s share price fell 14% on the day and has continued to drop, falling 17% by the close of trading on 20 October.  The carnage extended to Crown rivals Star Entertainment Group (SGR), SkyCity Entertainment Group Ltd (SKC), and Donaco International (DNA), although the declines of those stocks were less severe.  As of the 20 October close, Star Entertainment was down 9%; SkyCity had dropped 7.6%; and Donaco’s share price had fallen 4.6%.  
Crown boasts three casino operations in the Chinese held island of Macau, a former Portuguese colony returned to China in 1999.  Star operates only in Australia while SkyCity has casinos in both Australia and New Zealand.  Donaco International has casinos in Viet Nam and Cambodia.  Now that the shooting has subsided a bit the primary question to be asked is how the Chinese crackdown will impact the revenues of these casino operators, especially the three with no properties under Chinese control.
Investors familiar with the sector are well aware that a substantial percentage of casino revenues come from “high-rollers” or VIP players on “junkets.”  Analysts estimate 70% of Crown’s revenues from its Macau casinos comes from these VIP’s who are lured to the casinos by promoters packaging “junkets” including free or special deals on accommodations and air fare and other special incentives.  The Chinese crackdown focused on gambling in Macau but as yet specific details of the nature of the crimes are unclear.  The government there has ramped up efforts to crack down on corruption and curb the outflow of money from the rich to offshore ventures, from real estate investing to gambling.  The current arrest of Crown employees was preceded one year ago by the arrest of 13 South Koreans for promotional efforts designed to attract Chinese high-rollers to casinos in South Korea.  Casinos cannot advertise their gambling operations but can feature resort and related tourist attractions. 
Current Chinese law makes it illegal to organise for more than 10 people to gamble overseas.  Therein lays the risk for all ASX casino operators. Junket promoters in China steer high-rollers to casinos in Australia, New Zealand, the Asia Pacific region, and elsewhere.  The speculation is that government moves against promoters may be in the offing. The problem may be how casino operators market their non-gambling attractions such as resort accommodations and tourist attractions in China.  It is possible the current “gambling crimes” leading to the arrest may involve direct marketing overreach with some veiled attempts to promote resort gambling offerings.
Although the dust has yet to settle on the situation, at least three top-tier analysts have weighed in on Crown Resorts, with a Deutsche Bank analyst claiming market reaction to the news seemed to assume Chinese VIP’s would virtually disappear in a drop approaching 100”%, which the analyst viewed as “excessive
Although the Deutsche Bank analyst forecasts a 20% decline in VIP revenue for FY 2017 the DB recommendation for CWN was raised from NEUTRAL to BUY.  A Credit Suisse analyst downgraded revenue forecasts from VIP players to flat for FY 2017 followed by a 14% drop in FY 2018.  A Citi analyst remains optimistic, predicting an 8% revenue decline for Crown in FY 2017.
Investors with little or no appetite for risk should probably take a wait and see attitude.  Although the risk is real, gambling is not going away and VIP players who come to Australia are not limited to the Chinese.  They come from elsewhere in Asia as well as from Europe and the Middle East.
The following table lists the three top ASX casino operators along with minor player Donaco International.  Crown management claims less than 50% of its total VIP gambling revenue comes from mainland Chinese but it is hard to imagine the company’s stock price will not be subject to drops from more news about its arrested employees in particular and the Chinese government’s intentions on international gambling in general
For some, that would make Crown arguably the highest risk investment in the sector, despite its size. Forward earning projections for all four of these companies will come down in the coming weeks as financial websites catch up with analyst revisions.  Crown wholly owns and operates integrated resorts here in Australia, one in Melbourne and the other in Perth, offering hotels, restaurants, shopping, convention centres, and of course, casinos.  The company has operations in the Chinese island of Macau. Crown also solely owns Crown Aspinal in London, an exclusive casino and restaurant operating in London’s West End.  Casino operators actually benefit from government regulations designed to limit gambling.  Licenses are sometimes exclusive to a sole operator while the total number of casinos in an area is limited.  Crowns London property is one of only five operating in London’s renowned West End entertainment district.
Crown began its involvement in Macau in 2004 through a joint venture with a Hong Kong based company called Melco International.  Crown owns about 34% of the new company – Melco Crown – and a 60% interest in Macau Studio City and a 68% interest in the Melco Crown property in Manilla, City of Dreams.  Both are fully integrated resorts.  Melco Crown began trading on the US NASDAQ Market in 2006.  The reaction of US investors to the news of the arrest of Crown employees stands in stunning contrast to what happened to CWN, as the following chart shows>The story appeared in the US financial press, including Reuters, the Wall Street Journal, CNBC, Bloomberg, and the New York Times, yet the stock price did not suffer.  
Some might see the US reaction as a good sign, and there are other reasons to consider investing in Crown. First, the company gained NSW approval to build a six star resort complex in Sydney, scheduled to open in 2021 at Bangaroo.  Second, Crown’s interests in Macau have seen hard times well before the latest developments and Crown’s owners had already announced a demerger that would create a new company to take control of Crown’s interests in Melco, leaving the high-performing Australian assets along with the company’s online and other gaming interests under the Crown banner.
The experience of Star Entertainment Group (SGR) is another reason to consider Crown.  In June of 2011 Tabcorps Holdings spun off its casino operations into a new entity, Echo Entertainment, in order to concentrate on its core operations in wagering, keno, and entertainment.  Echo changed its name to Star Entertainment Group after debuting as Echo with a first day closing price of $3.52.  Here is how the share price has performed since.The Star Group owns and operates three premium properties, The Star in Sydney, Treasury Casino and Hotel in Brisbane, and Jupiter’s Gold Coast.  In addition, the company operates the Gold Coast Convention and Exhibition Centre on behalf of the government of Queensland.  
The Jupiter’s property is undergoing extensive renovation and the Star Group bested rival Crown in reaching an agreement with the Queensland government for a $3 billion redevelopment at Queen’s Wharf in Brisbane. Star Group has the best earnings growth estimates and according to analysts is at minimal risk from Chinese government actions as it derives only 10% from Chinese VIP players.
New Zealand based SkyCity Entertainment Group (SKC) operates two casinos here in Australia in Darwin and Adelaide; four in New Zealand along with an assortment of additional hotels, bars, and restaurants. On the morning of 21 October the company issued a trading update which sent the share price plunging.  The following chart shows the drop as of late morning.For starters, revenue was already trailing the previous corresponding period by 5.7%.  Hardest hit was the company’s international business operation which saw a drop in visits from the highest of the high rolling VIP customers, leading to a 20% drop in group revenue.  To top it off, management stated it expects further declines in its international business due to the situation in China. 
Donaco International (DNA) may be the smallest of the group but this company presents investors with an array of impressive numbers.  The average Price to Earnings (P/E) ratio for the sector is 17.25.  Donaco’s current P/E is 5.80 with a Forward P/E of 4.10.  The Price to Earnings Growth Ratio is 0.31 with an astonishing 5 Year Expected P/EG of 0.11.  Book value per share is $0.57, with the stock trading at $0.41.
Revenues exploded from $17.1 million in FY 2015 to $143.3 million in FY 2016 with profit going from a 2015 loss of $2.9 million to a profit of $77.2 million.  The company declared its first dividend of $0.01 per share. Analysts forecast dividend growth of 126% over the next two years, increasing to $0.034 in FY 2017 and $0.051 in 2018.
Gambling is illegal in Viet Nam so the company’s lavish Aristo International Hotel on the Chinese border caters to internationals, mostly from China.  The Aristo opened in 2003 under the name Lao Cai International Hotel and Casino and underwent extensive renovations in 2014, emerging as the Aristo.  The company owns 95% of the property in conjunction with the government of Viet Nam.  Donaco also has a casino in Cambodia, the Star Vegas Resort and Club, acquired in early 2015.  

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