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Gaming Sector – Crown

Crown’s first half profit result last week revealed some very good numbers from its domestic casinos in Melbourne and Perth. In particular, the Melbourne casino enjoyed a 15% lift in its VIP gaming revenue and backed this up with some good cost control to generate an operating profit (EBITDA) of $291.9m, an increase of 8.4% over the same period last year.

Crown Melbourne’s extensive refurbishment program is nearing completion which should remove an obstacle to even better operating earnings in the near future. The timing is good as Crown is about to see its gaming taxes rise after a deal with the state government last year.

Refurbishment disruption is also hindering Crown Perth’s numbers but this casino is also about to enter a long period of earnings growth as the construction nears completion and patrons can enjoy an unfettered run at the new premises and facilities (car parks, entertainment, and restaurants).

Crown’s investment in Melco Crown Entertainment (MPEL) looks better with every result reported, and the latest figures leave us in no doubt that the market is under-appreciating the value of this factor. MPEL contributed $65m to Crown’s earnings in the period and is smack in the middle of the Chinese New Year celebrations which should provide yet another strong outcome when the numbers are next reported.

There is a gradual transition underway in Macau from an initial reliance on high-roller gaming towards the mass market. It has taken a number of years to build the various casinos catering to the massive growth in Chinese visitation and this is now just beginning to hit its straps.

One point worth noting was Crown’s impressive increase in VIP turnover at Melbourne which lifted to $24.3bn from $21.1bn in the previous comparable period. Although the win rate was slightly below the mathematically calculated ‘theoretical’ win rate of 1.35%, Crown’s revenue from VIP gaming increased 15.1% to $328m.

Take a look at last year’s total VIP turnover and revenue at Crown against the same metrics at Echo Entertainment. The chart shows Crown is head and shoulders above its domestic rival in this important segment.

Crown has extensive opportunities at hand in Macau (Studio City), the Philippines, Sydney (Barangaroo) and Perth (new 6-star hotel). It is also now emerging from a multi-year period if substantial capital investment in its Australian casinos.

The company’s balance sheet is in good shape with net debt of $1.89bn against equity around $3.4bn.

Even though the media focused on Crown’s $52m loss of value on its Echo Entertainment Group stake, this is just a distraction.

We think there is plenty of upside in Crown’s share price, especially when compared to Echo.

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