Packer's Macau Play

If you have bad luck at the casino, don’t worry, just "bide your time, for success is near". Because "when good fortune finally comes, no one can ever stop it". Such Chinese proverbs provide a clue why PBL is expanding into Asia.

In March we speculated that PBL might sell out of media to expand its gaming interests. Despite some rumours, nothing has been announced, but there’s been plenty of action in the gaming division. As well as the recent licensing of Betfair, PBL has been moving forward with its joint venture with the influential Ho family to develop casinos in Macau.

PBL reported a 21% increase in normalised net profit to $541million in 2005, which takes into account a theoretical win rate at its casinos. The actual net profit fell 28% to $480 million, because it won more than expected last year and less this year. With the strong underlying result, PBL’s share price is up 3% since August.

The result included 10 months from the Burswood Casino, which was bought in September 2004. Combined with Crown, the gaming division reported a 42% increase in earnings before interest, tax, depreciation and amortisation (EBITDA) to $457 million. Channel Nine struggled with higher costs and lower ratings and reported a 3.6% fall in EBITDA to $270 million. The magazine business continued to deliver, with a 16% increase in EBITDA to $245 million. Equity accounted profits from its other investments increased from $7.4 million to $17.8 million.

In his heyday, Kerry Packer was the biggest gambler in the world and could singlehandedly make or break a casino’s yearly result. In recent years, though, he has preferred sitting on the other side of the table. Owning a casino is a licence to print money and Crown casino has done just that for PBL.

It’s no secret that Asians, particularly the Chinese, love to gamble. It brings out certain aspects of their culture '” most particularly beliefs in destiny and luck. In contrast, Australians and Americans are more likely to go to a casino simply for fun. In Las Vegas the average loss is estimated at $US200 per visit, compared with $US500 in Macau. What’s more, this is achieved from an average stay of four nights in Vegas, compared to just one in Macau.

PBL’s Crown and Burswood casinos have been popular destinations for Asian gamblers because there have been few alternatives. Vegas was too far and Macau had a smoky and sleazy reputation. In the past few years this has changed with the opening of new casinos.

The tiny former Portuguese colony sits off the Chinese mainland, just 70 kilometres from Hong Kong. It was in decline until the 1960s, when Hong Kong businessman Stanley Ho was granted an exclusive licence for all Macau’s gambling. In the 40 years that followed, Ho became one of the richest men in Asia. As well as 16 casinos, he owns the ferry, a bank, real estate and stakes in the local television station, racetrack and airline.

Gambling has been a boon for the "Monte Carlo of the Orient". It is estimated that about 65% of Macau’s government revenue comes from gambling taxes, and this should increase with new licences, now that Ho’s exclusive licence has lapsed. New operators in the region include Sheldon Adelson, Steve Wynn and MGM Grand from Vegas. Other new licensees are Stanley Ho’s son, Lawrence, and his business partner, PBL.

The first new casino to open up was Adelson’s Sands Macau in 2004, a Las Vegas-style casino that cost $US265 million to build. It apparently recouped this amount in its first year and profits are now financing what will be the world’s largest casino. Macau’s development is still in its early stages, but the region has already surpassed Vegas as the world’s biggest gambling location.

PBL announced the joint venture with Lawrence Ho’s company, Melco, last November. So far it has spent $US163 million on developing two casinos. It has also been establishing gaming machine lounges across Macau with linked jackpots and loyalty clubs. Currently, gaming machines make up less than 5% of total gambling revenue in Macau. That compares with more than 50% in Australia and Las Vegas, so it’s another area for potential growth.

PBL might come a cropper in Asia as others have before it, but Packer’s reputation as a punter and businessman make it unlikely he’ll be gobbled up and spat out. We’d be more concerned if, for example, it was Tabcorp making these moves. Other risks include competition from all the new casinos and a popping of the China bubble. But for a relatively small investment, PBL has its foot in the door to the most lucrative and fastest-growing gaming market in the world '” and it’s in there with the most experienced and influential family in the region.

PBL is trading on a price/earnings multiple of almost 21 times its normalised 2005 earnings. This looks expensive but it doesn’t take account of potential profits from Macau, or Betfair for that matter. We’re not prepared to recommend buying this stock at current prices, but it’s easy to make a case for continuing to hold.