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Casino's in Focus - Crown

25.06.2015

People sometimes refer to decisions as a roll of the dice; not by chance, Crown Resorts is rolling towards a six. Crown Resorts is an ASX listed Gaming and Entertainment Company with geographic diversification, strong cash flows, and firm market positions in the cities it operates.

Crown Resorts is the owner of two casinos in Australia, Crown Melbourne, and Crown Perth, with proposals for Crown Sydney and Queens Wharf in Brisbane. In addition to the Australian operations, Crown Resorts own Crown Aspinall’s in London’s West End, three casinos in Macau through a 34.3% holding in Melco Crown Entertainment, and City of Dreams in Manila. Crown Resorts enjoys strong performance from its Australian operations, boasting a remarkable EBITDA margin of approximately 30%. Sales per share have increase 4% between 2012 and 2014, followed by 6% growth for the 2014/2015 financial year.

The casino market in Australia includes strong barriers to entry, supported by state issued casino licenses. State issued casino licenses are difficult to obtain due to community pressure, and rarely do cities approve more than one casino license. Fortunately for Crown Resorts they hold exclusive casino licenses for their Melbourne casino which expires in 2050, and Perth which expires in 2060. These onerous barriers to entry provide Crown Resorts with a monopolistic position in the cities in which it operates, further strengthening the stability of earnings. The profitable Australian market has positioned Crown Resorts to expand internationally, specifically through their investment in Melco Crown Entertainment, an owner of casinos in the gambling mecca of Macau. The properties in Macau have enjoyed growing earnings from a loss of AUD $64 million in 2010 to a profit of AUD $288 million in fiscal 2014. Melco Crown Entertainment are in expansion mode with their City of Dreams casino in Macau (76% owned) which opened in February 2015, Studio City (60% owned) is due to open later this year, and a 5th hotel tower is due to open at City of Dreams in 2017. Increased capacity is expected to meet the growing demand from Chinese gambling, and increasing tourist numbers.

In addition to Macau, Crown Entertainment is entering the lucrative Sydney casino market, opening Crown Sydney in 2019-2020, with a focus on high rollers. More recently, Crown Resorts acquired a 25 acre site on Las Vegas Boulevard with the intention of constructing a new casino complex with an initial budget of approximately US$1.6Billion to US$1.9 Billion in partnership with a number of other operators. The Chairman of Crown Resorts, James Packer, is confident that a casino on Las Vegas Boulevard that caters for high roller Chinese Gamblers is a niche market which is not being adequately catered for in Las Vegas. Consequently, Crown Resorts is intending to build a high-end casino to cater for this growing demographic.

Crown Resort’s financial position is strong, underpinned by cash & cash equivalents of AUD$178 million, a debt to equity ratio of 0.65, an EBIT interest coverage ration of 6 and undrawn bank facilities of approximately AUD$1 Billion. These numbers tell a story, sufficient cash and undrawn bank facilities to weather any storms or future cash flow issues, a capital position which can support increased debt financing for development and sufficient equity to protect investor’s. Crown Resorts enjoys a credit rating from Standard & Poor’s of BBB, investment grade.

The largest risk facing Crown Resorts is the stability of earnings from Melco Crown Entertainment based in Macau. The Chinese government crack down on corruption and money laundering has slowed gaming revenue growth, however, we believe that in the long run the Chinese gaming market will grow inline with a growing Chinese economy and population.

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