The jewel in the Crown loses its shine

Melco Crown Entertainment's decision to delist from the Hong Kong stock exchange is the culmination of an annus horribilis for Macau's casinos. It is also an indicator of the drag that Macau will exert on earnings for James Packer's Crown Resorts.

Last financial year, Melco was the main contributor to the 35 per cent growth in earnings for Crown Resorts, more than offsetting softening consumer confidence at home. The contribution came both from growth in income, as Macau enjoyed its tenth straight year of rising gaming revenues, and from the first dividend that Melco, a joint venture between Crown and Hong Kong businessman Lawrence Ho, paid to its owners.

Melco Crown, which owns the massive City of Dreams resort in Macau, will delist from the Hong Kong exchange for reasons of “cost and utility”.

On the cost front, the group said maintaining the listing requires additional regulatory compliance, which resulted in “significant additional costs”.

As for utility, turnover has been very low and the company said it has not seen opportunities to raise capital in Hong Kong since it listed there in 2011. It will retain its listing on the Nasdaq.

Over 2014, shares in Melco Crown slumped 35 per cent, yet Bloomberg data shows that only an average $342,000 worth of Melco shares were traded daily in Hong Kong, against $98 million daily on the Nasdaq. The additional cost of maintaining the listing wasn't worthwhile.

A crackdown on corruption and money laundering by China's President Xi Jinping has cut into gambling revenues from both high-roller and mass-market players, and hit the shares of all six Macau casino companies including Sands China and Wynn Macau. A smoking ban introduced in October compounded the effect, and apparently a presidential visit -- as happened in December --always dampens business.

Official figures showed that Macau's gross gaming revenues in December collapsed by 30.4 per cent from a year earlier. For the full year, revenue in the city fell 2.6 per cent, the first decline on record and compared with growth of 40-50 per cent in 2010 and 2011.

Analysts at Deutsche Bank estimate Melco Crown's VIP revenue was down about 25 per cent in December and mass market revenue down in the “low teens”.

China also wants to promote more non-gaming tourism aimed at families to broaden the appeal of Macau, which means approvals for gaming tables at new developments may be harder to secure.

The surge in Melco's fortunes over the past decade is unlikely to be repeated this year, and that will weigh on Crown's outlook. Shares in Crown fell 14 per cent in December, and have lost around 23 per cent since August.

Crown's share of Melco's normalised earnings last financial year surged 91 per cent to $291m, driven mainly by mass market tables at City of Dreams. Crown also received dividends of $94m from Melco, which included a special div for 2013 and the first quarterly payout for 2014.

Melco's dividend is set at 30 per cent of net earnings for the quarter, so the slump in Macau will eat heavily into the joint venture's earnings and payout to Crown this year. 

The downturn in activity in Macau comes at a difficult time for Packer's sprawling casino empire, while it has various costly expansion plans underway that will drive future growth. Most of the funding for the capex will come from undrawn bank debt and cash flow.

Among Crown's projects are the new Studio City resort in Macau aimed at Chinese mass-market visitors, with 1,600 rooms and due to open in mid-2015, and the City of Dreams resort in Manila with 950 rooms and due to open for Chinese New Year next month.

Crown also made a return foray to Las Vegas last year, buying a 35-acre site where it plans to build a casino with an equity investment of $US400m to $US500m with a total project budget of $US1.6 billion to $US1.9bn.

Crown is in the running with Chinese partner Greenland to develop the Queen's Wharf precinct in Brisbane (as is its rival Echo Entertainment) and has won a licence for Sydney's Barangaroo casino.

Crown Resorts has its business firmly geared to the long-term development of Asia's middle class, which is forecast to surge to about two-thirds of the world's middle class by 2030, compared with one-third in 2009.

With China's outbound tourism one of the fastest growing markets in the world, Crown will be hoping the crackdown in Macau will result in long-term gain after the short-term pain.