Markets: Crown's Chinese game floor?

China’s rising middle class could provide a rich market for Australian leisure companies, if they play their cards right.

Crown Limited (CWN) posted a 14 per cent increase in normalised net profit this morning, beating analyst estimates and sending its shares up seven per cent in morning trade.

With Australian consumers devoid of confidence and harbouring a general unwillingness to spend their cash, Crown’s results are impressive and are largely supported by their exposure to international markets.

As China moves from a production to consumption society, businesses like Crown are well positioned to benefit. You can count winemaker Treasury Wines in on this too.

Previously we have considered the Chinese economy as the global growth engine and the country that imported our iron ore. But times are changing and there remains plenty of opportunity for Australian companies to maximise opportunities from China – just not in the ways we are familiar with.

It is time to introduce the rise of China’s middle class. They are going to be important to the growth of Australian businesses with an international tilt as the trend of disposable income growth outpacing GDP is set to continue. With cash to splash, Chinese consumers are rich pickings.

Domestically, retail sales growth is static, compounded by the fact consumers are spending more on services. But both Crown and Treasury can evade some of these pressures and are well placed to leverage themselves to the rising domestic Chinese middle class to offset domestic lethargies.

Research by Bank of America Merrill Lynch has found that Australian and Macau gaming revenues are closely correlated with increases in China’s outbound tourism. Australia remains a popular travel destination for Chinese tourists, helping support a steady growth in Melbourne and Perth casinos. In addition, Macau-based assets are gaining momentum. All up, the fundamentals look strong both domestically and internationally for Crown.

Crown shares have gained 51 per cent against the ASX 200’s 15 per cent increase over the past 12 months.

Treasury Wines, through its portfolio of luxury wines, also shares some of the benefits of being able to tap Chinese consumers to support ongoing business growth. The Chinese market offers a high growth, high margin market for wine. Treasury reported a 35.6 per cent increase in EBIT from Asia, confirming the growth opportunities in this market.

It’s apparent the Chinese like a wine or two – they now lead the United States in terms of volume of wine consumed, according to BAML. They do however still lag on value.

If McDonald’s have commented Australia is a key area of weakness, they won’t be the only ones. To navigate weaker conditions in Australia, having another market to offer a source of growth should be something investors seek out.

The advantage of having exposure to an international market means companies aren’t tied to the performance of consumers in their primary market. After reporting disappointing numbers earlier this week, Super Retail Group (SUL) and Fantastic Holdings (FAN) know how this feels. 

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