What's new The Macau government recently reported that annual gambling revenue in the Chinese enclave had risen by 13.5 per cent in 2012, making the market about eight times the size of the famed Las Vegas Strip. This triggered a further run-up in the already booming stock prices of Hong Kong-listed gaming stocks exposed to Macau.
However, even within this high-flying group, the performance of Crown's 33.4 per cent-owned Melco Crown Entertainment (MPEL) has been eye-catching, with the stock price more than doubling over the past 12 months.
The stellar rise is not without justification, as MPEL's operating income has jumped from about $US100 million-$US150 million a quarter in 2010 to $US250 million a quarter, and rising. Its City of Dreams property is enjoying steady growth in volumes and revenues from grind punters, while MPEL's more upmarket Altira property is benefiting from the return of high-rollers, as the Chinese economy (from which about 57 per cent of Macau visitors come) regains momentum.
MPEL has not been without controversy, though, including the latest probe by Taiwanese authorities into alleged illegal channelling of funds. Nonetheless, the market does not seem to be pricing in the full value of the operation to Crown.
Back in Australia, Crown's casinos have continued to show their revenue resilience and consumer allure. Since the start of the new fiscal year, revenues from its main gaming floors in Melbourne and Perth have increased 8 per cent compared with the same time last year, with non-gaming revenue rising by 6 per cent.
While pedestrian compared with Macau, such growth rates are nevertheless very solid when one considers that, overall, pokie machines in pubs and clubs around the country are generally experiencing zero revenue growth rates, or worse.
Outlook We expect the coming fourth-quarter earnings releases from all Macau-exposed gaming companies, including MPEL, to confirm the robust trading conditions in the region. With constantly improving infrastructure access to the enclave (driving further demand growth) and no new casino opening before 2016 (capping supply pressure), the outlook for the Macau gaming market looks positive for the medium term.
As for Australia, extensive capital expenditure programs are underway in Melbourne and Perth to better compete against regional peers for Asian customers. There has been no further news on Crown's plans for a $1 billion six-star hotel complex at the Barangaroo development in Sydney.
The "unsolicited proposal" put to the state government is undergoing due process and has further hurdles, not the least of which is the grant of an actual casino licence. However, it has significant tourism and employment factors that would make it attractive for the state government, not to mention the additional tax revenue the property would generate.
Price Crown's stock price has jumped by 36 per cent over the past six months, and 43 per cent over the past 12 months, comfortably outperforming the overall market. The rise has been driven by continuing earnings resilience in its core Australian operations, despite the weak economic environment, and higher attributed value from the surge in 33.4 per cent-owned MPEL's stock price in Hong Kong.
Worth buying? Crown's core existing businesses are operating solidly and it has multiple growth options under way. While the gap between the value of the MPEL stake and what is attributed to Crown's own share price has narrowed, we still see more upside. We remain positive on Crown and believe it is worth buying at current levels.
Greg Smith is head of research at Fat Prophets sharemarket research.
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