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Echo aces Crown in Brisvegas

To no-one’s astonishment, Echo Entertainment played its cards right and won the Queen’s Wharf Redevelopment Project in Brisbane and will move its headquarters to the city.

Echo’s consortium win has effectively secured its monopoly on casino gaming in Queensland (avoiding a damaging second competitor), extricated itself from the Treasury casino building straitjacket but now placed a question mark on the future of the Jupiter’s Casino on the Gold Coast.

Before investors get too excited about the news, the development is a long way off. Construction is expected to start in 2017 with completion in 2022. Crown Resort’s Barangaroo development in Sydney is expected to open in 2019 providing direct competition to Echo’s Star Casino in Sydney, albeit on the VIP segment only.

Echo Entertainment says it will fund its share of the investment from existing and new debt facilities and its own free cash flow. Ostensibly, the Star Casino in Sydney could be the source of much of that cash flow.

No mention was made of how VIP gaming fits into the equation but this element (Queensland VIP earnings) is currently immaterial to group earnings. That said, it must be an opportunity to think about how it can leverage off the Sydney business.

The Queen’s Wharf project is symptomatic of what has been happening to gaming companies across Asia particularly over the last decade. Visitors to Singapore’s two massive developments at Sentosa and Marina Bay would be under no illusion that they have been designed around tourism and entertainment as much as gaming.

Integrated resorts are de rigueur when it comes to gaming precincts these days as it promotes tourism and non-gaming activity to sanitise the presence of gaming activity. Echo said its proposal would generate 8,000 jobs on completion, add 1.39 million tourists to the state annually and boost gross state product by around $4 billion.

So far, the details of Echo’s proposal for the Queen’s Wharf project are quite broad, focusing mainly on the assets to be built rather than the financial aspects.

The most notable facet is that the awkward Treasury Casino will be relieved of its gaming duties and will be converted to a Ritz-Carlton hotel and retail plaza. The gaming facilities will be transferred into a new property within the project which should give Echo far greater flexibility to design and control the business in a purpose-built structure.

But this will not happen until the new casino is built in 2022 so that Echo will continue to endure the sub-par earnings of the existing Treasury casino for at least seven more years.

Like the Adelaide casino, owned by Sky City Entertainment Group, the historic nature of the Treasury building in Brisbane was a major hindrance to providing a world class gaming facility.

In doing so, Echo will need to be mindful of the potential cannibalisation of the nearby Gold Coast Jupiter’s Casino which has until now, been the premium property of the Queensland portfolio. Echo sold the Townsville casino in October 2014 for $70 million.

The announcement was almost devoid of discussion of the impact on gaming revenues, facilities, taxes, and regulations. This detail is essential to understand the financial attractiveness of the project and for now, we are forced to accept Echo’s assurances it will meet the company’s return hurdles and deliver ‘superior value’ to investors.

Echo will earn a management fee for operating the integrated resort, based on the level of revenue and earnings but again, details were not available.

The integrated resort will build 1,100 new hotel rooms across 5 different hotels. But the residential towers will be funded and owned by Echo’s partners, Chow Tai Fook and Far East Consortium.

There is also a large amount of public space incorporated into the project that is simply part of the cost.

Also adding to Echo’s cost will be the relocation of its headquarters to Brisbane. The company has over 300 staff in its Sydney bunker but the elongated project construction period means it also has time to encourage its key people to head for the Queensland sunshine. They will join Tatts Group who moved from Melbourne in 2013 though under different circumstances.

Crown’s nuisance bid was probably designed to keep Echo’s consortium honest and give the process an air of credibility from the new Queensland Government’s point of view. Crown has bigger fish to fry elsewhere and probably won’t lose any sleep over the outcome.

The Queen’s Wharf project does change the landscape for investors in this segment. It turns Echo into a Sydney and Brisbane/Gold Coast integrated gaming company with strong joint venture partners in Brisbane. It lacks the international exposure that Crown Resorts offers in terms of properties.

The main competitive overlap between the two groups is in VIP gaming in Australia and in this regard, Crown Resorts is the clear leader.

Echo needs the Sydney business to perform strongly throughout the next few years while the disruption to the Brisbane precinct is underway. That’s a big ask as Crown’s Barangaroo project looms menacingly across the water from The Star.

Crown Resorts has been heavily impacted by the pullback in gaming activity in Macau as the Chinese government stamps out rampant corruption and smoking bans are implemented. The domestic businesses in Melbourne and Perth are in excellent shape having already significantly upgraded their properties. Essentially, Crown has relatively little domestic capex ahead while Echo has plenty.

Each stock therefore offers a different risk and return profile. My preference is for Crown Resorts as the overall group has significantly more upside to Asian tourism and gaming growth than Echo Entertainment.

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