President Donald Trump has become the obvious person to blame for just about every ill in the world economy, so why not sheet home to him the collapse in the share prices of Crown Resorts and Star Entertainment Group over the past three months.

It turns out there is some merit in the “blame Trump” scenario being bandied around markets. But it would be foolish to allow that to completely blacken investor views of Crown and Star Entertainment.

The global VIP gaming market is hostage to whatever happens in China. It can be hurt by Chinese crackdowns on corruption, Chinese efforts to stem capital outflows or weakness in the Chinese economy caused by trade wars.

But Australia only accounts for 3.5 per cent of global VIP gaming revenues or $1.4 billion. A big movement in gaming revenues in Macau may have minimal impact in Australia.

In addition, VIP gaming turnover in Sydney hit record levels in the year to June, judging from the latest Star Entertainment accounts. The Sydney-based company said it had VIP turnover of $53 billion, which is higher than the record set by Crown in Melbourne of $50 billion in 2015.


Turnover is the best measure of performance because it is the amount of money put through the system and excludes the element of luck which can affect revenue.

If you strip out the bad year of 2017 caused by the arrest in China of Crown employees, the Star Entertainment VIP volumes were up 13 per cent over a two-year period. In the year to June, Crown had a total VIP volume of $43.8 billion.

Crown and Star Entertainment, which are heavily reliant on Chinese VIP gamblers, have lost a combined $3.9 billion in market capitalisation since August. There were tentative signs on Wednesday of a bottoming in the share price moves but wise investors will probably be waiting more data.

Packer waits out storm

It is hard to ignore the fact that billionaire James Packer would have lost about $800 million in paper value on his stake in Crown. But thanks to his wise move to slash his personal debts he can patiently wait out this particular storm.

Whatever positive developments there have been in the VIP gaming market in Sydney, the fact is that Crown and Star will be sharing the turnover from 2021 when Crown’s Barangaroo casino is due to open.

In Asia, the opening of new casinos has usually resulted in the total gaming pool getting larger. This “win win” situation could occur in Sydney.

Both Crown and Star Entertainment are in the midst of ambitious capital expenditure programs. To a large extent shareholders are shielded from the construction risks because Crown has a strong balance sheet and Star Entertainment’s Brisbane casino is being funded by two of the richest families in Asia.

Crown is under greater scrutiny from investors because it is trying to sell $800 million worth of apartments. The company has made it known to those who ask that sales are in line with expectations. But it understandably won’t release any figures.

It would be dumb to have the market fully informed as it would only lead to fights over how much each person paid per square metre. The apartments will not be affected by the building of two apartment blocks between Barangaroo and the Harbour Bridge thanks to their height.

The Barangaroo building will have 350 hotel rooms which are expected to command the highest prices in Sydney.

The fall in the share prices of Crown and Star Entertainment accelerated in the past two weeks thanks to the unusual and awfully damaging forecasts issued by Matt Maddox, the relatively new chief executive of Wynn Macau.

During a quarterly earnings call, Maddox revealed an ordinary third quarter but it was what he said next which spooked investors around the world. He single handedly whacked every casino stock in the world.

Maddox said that Wynn Macau made about daily EBITDA of about $US4.5 million in the third quarter of 2018. He then forecast that daily earnings would fall by 20 to 35 per cent in the fourth because of weakness in VIP and premium mass gambling.

Although Maddox later told analysts the negative impacts would be transitory, the market took the forecasts very badly. Gaming stocks in Las Vegas fell between 10 and 15 per cent in the wake of the forecasts while gaming stocks in Macau fell hard. The Las Vegas gaming stocks are down between 28 per cent and 40 per cent this year.

Melco Resorts & Entertainment, which Packer sold out of in 2017 at prices ranging from $US15.50 and $US18, is now trading at $US15.96. It is down 45 per cent this year.

Harry Curtis, an analyst at Nomura, said many investors and Wynn management seemed to fear that Macau’s gambling demand was about to “fall off a cliff”. He says that is too pessimistic.

“We spoke with several Macau operators who believe universally that Wynn’s implied roughly 10-15 per cent GGR (gross revenue from games) contraction is a far worse estimate than the current trends indicate,” he said in a note on Monday.

Macau gaming revenue has been extremely volatile in recent years. It grew at quarterly rates of between 11 per cent and 36 per cent over the past few years but is headed for negative 2.5 per cent growth for this calendar year, according to Curtis.

There is now no doubt that Trump’s trade war with China is having a broader spillover effect on the important parts of the Chinese economy.

Goldman analysis

Analysis of that spillover effect was released on Wednesday by Andrew Tilton, the chief Asia economist at Goldman Sachs.

“US President Trump’s imposition of tariffs on imports from China, alongside other economic measures and tougher rhetoric from US officials, has led to heightened uncertainty about the direction of the bilateral economic relationship,” he says.

“The abrupt shift to more aggressive US tactics has affected not only China’s exports – via short-term “front-loading” to avoid tariffs, and potentially longer-term shifts in demand and sourcing — but also domestic demand.

“Heightened uncertainty is a challenge for export-related investment. Meanwhile, business and consumer confidence has been dented.

“To gauge tariffs’ impact on China to date and in the future, we leveraged economic analysis from our GS colleagues and the IMF, reviewed surveys and financial reports of companies doing business in the region, and conducted a new survey of our Asia equity analysts.

“The negative effects of tariffs and other trade uncertainties look set to increase in 2019 as firms draw down “front-loaded” inventories and higher tariffs encourage substitution to non-Chinese suppliers.

“Elsewhere in the region, growth spillovers are likely to be negative in coming months as trade growth and Chinese activity slow.

“A near-term “deal” — or at least a pause in the escalation of tariffs — is a possibility when presidents Xi and Trump meet December 1 on the sidelines of the G20 summit in Argentina, although for now our base case remains further escalation in early 2019.

“Regardless of the outcome, the past year has revealed the potential for US-China tensions to cause widespread supply chain disruption, and this realisation will likely influence firms’ investment and sourcing decisions in the future even if a deal is eventually reached.”

Tony Boyd

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