Crown falls on further UnionPay restrictions

Crown shares have fallen 6% today after Melco Crown Entertainment, in which it has a 27% stake tumbled 14% overnight. Melco Crown owns casinos in Macau and The Philippines and fell due to reports that China will halve the amount of money Macau gamblers can withdraw daily using their UnionPay cards.

Although there are other ways to bring funds into Macau, the restrictions will likely affect gross gambling revenue and hence casino profits in the short term. As such, it's a setback to the apparent cyclical upturn in Macau, where gross gambling revenue has been increasing in recent months, albeit helped by the opening of new casinos such as Wynn Palace and Las Vegas Sands' Parisian.

With another, MGM Cotai, due to open next calendar year, it may also result in greater competition among the Macau casino concessionaires to lure punters to their properties.

Over the medium to long term, however, the prospects for Macau remain positive. Improved transportation infrastructure, the Chinese cultural attachment to gaming, rising living standards in China and the ongoing diversification of both Macau and nearby Hengjin Island's economies into non-gambling businesses all bode well for Melco Crown (see Betting on Crown – part I).

So far at least there's been no change to the UnionPay withdrawal limits overseas, including in Australia. This is a potential risk to Crown's Australian casinos too given that mainland Chinese represent a substantial percentage of the international visitors that provide one-third of Crown's revenue.

As today's news and the arrest of Crown's staff in China show, even if our investment case proves correct, there will be setbacks and Crown's share price likely won't increase in a straight line.

As we noted in Crown: adding up the chips on 14 November, Crown is a complex company with a wide range of potential outcomes. So it makes sense to start a bit below our maximum recommended portfolio weighting of 4% to allow room to buy more if a better opportunity presents itself. BUY.

Note: The Intelligent Investor Growth and Equity Income portfolios own shares in Crown Resorts. You can find out about investing directly in Intelligent Investor and InvestSMART portfolios by clicking here.

Disclosure: the author owns shares in Crown Resorts.