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Sydney casino shapes as ace in the hole for Crown

Lex Hall  |  17 Dec 2018Text size  Decrease  Increase  |  
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Crown Resorts' dominance in VIP gaming at its new Sydney casino and an influx in Chinese tourists will boost the company's earnings and ensure its competitive edge over rival Star. 

That’s the outlook from Morningstar analyst Daniel Ragonese, who says shares in Crown (ASX: CWN) are trading at a 21 per cent discount to his fair value estimate of $15.
At 2.30pm Sydney, Crown was trading at $12.04, up 1.18 per cent.

The market is underestimating the value of the Sydney casino, says Ragonese, who expects the site to be finished by the start of fiscal 2022. This is a more conservative timetable than Crown management, who say construction of the $2.2 billion project is on schedule and expected to open in 2021.

Crown has undergone a big sell-off in recent because of concerns about the near-term outlook for the VIP sector and softening in consumer sentiment. But Ragonese is upbeat about the long-term prospects of Crown and its ability to outperform Star and seize on Chinese clientele.

Crown already has casinos in Perth and Melbourne, and Ragonese predicts the Sydney site will allow it to steal a meaningful portion of rival Star Sydney’s VIP and premium table revenue.

“Despite Crown essentially competing head-to-head with Star Entertainment in Sydney, we believe the brand new facility, with superior location, a six-star hotel and premium-only clientele will be difficult for star to compete with,” Ragonese says.

“Star has been playing catch-up for several years, and while return on invested capital improved following the major refurbishment in 2022, we think Crown will come out ahead due its superior location and exclusive.”

Crown

Crown's new Sydney casino will boost the company's earnings, says Ragonese


The casino site at Barangaroo - Sydney’s newest harbour foreshore precinct – already houses a strip of high-end bars and restaurants, and is close to other landmarks and tourist attractions. This is estimated to play in Crown’s favour.

It is also banking on fewer tables - about 130 to Star’s 340 - and targeting gamblers with deeper pockets.

“While membership criteria are somewhat ambiguous and to a large extent, discretionary, we believe minimum spend for a platinum customer (Mahogany/Sovereign) is around $30,000 per year,” Ragonese says.

Star Sydney is expanding its premium Sovereign Resort and adding about 50 per cent table capacity to the premium in a bid to ward off Crown.

But it’s too little, too late, Ragonese says. The way he sees it, Crown has played its cards right with the new site by focusing on the high rollers. To this end, the Barangaroo site - which, at 75 floors and 271m, will be Sydney’s tallest tower - will exclude slot machines, low-limit tables and access to the general public.

The NSW Planning Assessment Commission gave final approval to the controversial project in 2016, after several years of negotiations about the building's design and location.

The site won initial government support in 2013 under then-premier Barry O'Farrell, who said it would not house poker-machines and would be restricted to high-rollers.

The other ace in Crown’s deck is a boost in Chinese tourists to Sydney. Chinese tourists to Australia have grown at almost 20 per cent during the past five years, and Ragonese expects this trend to continue.

According to Tourism Research Australia, about a third of the $9000 spent per Chinese tourist during fiscal 2017 went towards food, drink, accommodation, entertainment, and shopping for items to take home.

Up to 80 per cent of high-roller customers of Australian casinos come from North Asia, predominantly mainland China. This trend is predicted to continue as gamblers seek to avoid the scrutiny in Macau, following a crackdown on corruption by the Chinese government in 2014.

The addition of a third casino in Sydney will also increase Australia’s share of the VIP sector, which is tipped to grow by about 10 per cent a year.

 

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