Crown's Pain Is Investor Gain as China Trauma Spawns New Era

  • Crown has cut risk and lowered debt since staff were arrested
  • ‘Volatility that used to be part of Crown is pretty much gone’

In just eight traumatic months, Crown Resorts Ltd.’s entire overseas strategy has unraveled. Investors haven’t had such a bad time.

Some staff of the Australian casino operator in China were detained in October and this week convicted of illegally promoting gambling. Crown quit Macau, halted a Las Vegas project, scrapped a listing of offshore assets and closed most of its Asian offices. But the crisis also led to changes that sparked a bond and share rally at the company controlled by billionaire James Packer.

Packer’s reassessment of his assets -- triggered by the crackdown in China -- has created a slimmer, less-indebted business focused on profitable casinos in Melbourne and Perth rather than riskier developing markets in Asia. Investors have also been rewarded with a special dividend and a stock buyback.

“The company has basically transformed itself into almost a different investment vehicle, much more focused on income and less on growth,” said Theo Maas, who helps oversee about A$3 billion in assets including Crown shares at Sydney-based Arnhem Investment Management. “All the volatility that used to be part of Crown is pretty much gone.’’

Melbourne-based Crown’s shares slumped 14 percent on Oct. 17, the day the company announced the detention of employees in China. Since that date, the total return for Crown shareholders has been 26 percent, a gain that incorporates the 83-cent special dividend announced in February. The total return from Australia’s benchmark S&P/ASX 200 index has been 12 percent in the same period.

Crown’s 4.5 percent bonds due November 2019 have risen to 103.1 Australian cents from 102.1 on Oct. 17, according to data compiled by Bloomberg. At the same time, the cost to insure Crown bonds against non-payment has fallen to 136 basis points from 198, CMA data show. Crown has a higher credit rating than any global peer other than Malaysia’s Genting Bhd.

See also: Japan’s casinos will be able to survive without junket operators

Crown didn’t immediately respond to requests for comment.

Two months after staff were rounded up in China, Packer started to rein in his empire. Crown abandoned its proposed spinoff of international assets, flagged the sale of an undeveloped plot in Las Vegas, and halved its stake in Macau casino operator Melco Crown Entertainment Ltd.

Crown said in May it would use the $987 million generated from selling the last of its shares in Melco to further reduce debt. Net debt had already fallen to A$1.77 billion as of Dec. 31, 2016, from A$2.95 billion a year earlier as Crown trimmed its Melco holding.

“When Crown sold some assets, they had a bunch of money and they’ve used that basically to pay down debt,” said Raymond Lee, a fixed income manager in Sydney at Kapstream Capital, which doesn’t own Crown bonds. Macau was a “very volatile” market and the extra cash “is always a credit positive.”

Law Enforcement

The group of 19 current and former staff convicted on Monday were handed jail terms of as long as 10 months. The clampdown was China’s broadest enforcement of a law that bars gambling promotion in the mainland. Authorities are seeking to halt currency outflows while warning foreign operators against targeting the nation’s richest citizens as their most lucrative market.

It’s not clear what Crown plans to do with its cash pile, said Anthony Ip, a Sydney-based credit sector specialist at Citigroup Inc. 

“The cash proceeds that are sitting on the balance sheet haven’t really been earmarked for anything specific,” he said. “They could always go and do something that’s unexpected.”

And Crown’s shift away from a focus on high rollers in Asia raises questions about a planned A$2 billion ($1.5 billion) luxury resort in Sydney. The facility will focus solely on high-stakes gamblers.

Crown could still tap Asian markets by using local junket operators to contact high rollers and bring them to Melbourne and Perth, said Maas at Arnhem. That would be a lower-risk strategy than running operations in those countries, he said.

“It’s probably one of the most defensive stocks out there now,” Maas said.

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