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Crown shares tank following China arrests

Nicholas Grove  |  17 Oct 2016Text size  Decrease  Increase  |  

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Shares of Crown Resorts (ASX: CWN) had slumped over 13 per cent to $11.18 by the closing bell on Monday after news broke about the arrest in China of 18 of the casino operator's executives, including three Australians, for alleged gambling-related offences.

In a statement to the ASX, the company said it believed Crown's executive vice president VIP International, Jason O'Connor, was one of 18 Crown employees that had been detained by Chinese authorities.

"To date, Crown has not been able to speak with its employees and is working closely with the Department of Foreign Affairs and Trade to urgently make contact with and ascertain the welfare of its employees," the company said.

"Crown is endeavouring to provide support to the families of its employees in China and Australia. Crown is yet to be provided with details of why its employees have been detained."

According to ABC News, the arrests come as part of a wider anti-corruption crackdown by the Chinese government on the gaming industry.

The Australian government is expected to officially hear from Chinese authorities later on Monday about the fate of the Crown staff, ABC News said.

China's Foreign Ministry would only say the trio, including a senior marketing executive from Crown's Melbourne casino, were being detained for "gambling crimes," the report said.

Chinese authorities would not detail the allegations, but it was understood they related to soliciting Chinese high rollers to gamble in overseas casinos--which can carry a jail sentence of up to 10 years, ABC News said.

Crown Resorts' 27.4 per cent-owned joint venture, Melco Crown Entertainment, is one of only six concession holders that are able to operate casinos in the world's largest gaming market of Macau.

Morningstar equities analyst Ravi Reddy said the arrests of the Crown employees has clear negative implications for the company, as well as Star Entertainment (ASX: SGR) and SkyCity Entertainment (ASX: SKC).

"Unfortunately, estimating the extent of the impact is almost impossible at this stage, particularly as the reasons for the detention remain unclear," he said.

"What is clear is the elevated risk profile for all these operators' exposure to the Chinese high roller market."

Reddy said while the latest development in China vindicates his high uncertainty ratings for the casino operators under Morningstar's coverage, at this stage he is maintaining their fair value estimates.

"We are reluctant to make a snap judgment on the impact of the Crown employee detention on the intrinsic value that we have on all these casino operators," he said.

"There will clearly be an impact on earnings if there are any tightening restrictions on how their employees can promote Australia's 'tourism appeal' to Chinese high rollers without directly marketing the group's casinos.

"However, much of this is merely conjecture at this point and certainly forms no basis to change our moat ratings for Crown (narrow), Star (none) and SkyCity (narrow)."

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Nicholas Grove is a Morningstar journalist.

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