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Crown Casino (CWN.AU) Vs Melco Crown (MPEL.US)


Which offers the better 'value'?

 

created by John Cahill - Fusion Partners Wealth Management

01 June 2012

 

I recently went on a trip to Hong Kong to speak at a conference on indexing and ETF's and decided to spend a couple of days getting a first hand experience of the development on the Cottai strip.

In particular i wanted to see the Melco Crown owned City of Dreams as i have long been interested in investing in Crown Casino (CWN.AU).

My interest in investing in Crown has been predominantly due to :

- the fact that Australians love a punt, and gambling is almost a recession proof industry in Australia. However, the Aussies love of the punt is incomparable to the Asian love of the punt. So investing in casinos in Asian countries seems a logical step...and if you are going to invest in an Asian country, why not get exposure to the world's biggest country - China.

- Crown has exposure to 'the China story' through its investment in Melco and subsequent interest in City of Dreams casino (and Studio City if developed) in Macau. Macau is currently the only part of 'China' where casinos are allowed to operate, so there is a massive influx of gamblers from mainland China ready and willing to boost the casinos coffers.

- Crown has the best management of any casino operator in Australia and consistently performs.

- the investment theory of riding a billionaires coat-tails and letting them take you for the ride, has some merit, and investing in James Packers ability to get use his power and influence to get things done at Crown is a strong argument. Many people believe James Packer lacks the ability of his father, but his decision to exit the Nine Network at the top of the market was masterful. The ability for any son to sell the family business after the death of his father should not be underestimated, but his ability to emotionally detach is a strong indication of his resolve. Regardless of James's ability, he has surrounded himself with some of the best managers and advisors around, and it is the people behind him that really count.

 

There are six companies authorised to operate 'games of fortune' and 'games of chance' in Macau - SJM Holdings, Galaxy, Sands China, Melco, Wynn and MGM.

SJM have the largest market share of all the operators (28%) but are not focused on the Cottai Strip where all the mega resorts are located and all the growth is occurring. MGM (10%) and Wynn (13%) have proposed developments on the Cottai Strip but are currently both only located on the Macau Peninsula, and Melco (13%) has the City of Dreams development and an additional proposed development on the Cottai Strip (being the Studio City project).

Galaxy (19%) since opening their mega resort, complete with wave pool, had become the largest player on the Cottai strip, edging out long time front runners - Sands China(19%), but the market share is now about equal, and with the opening of the Sands new development - Cottai Central, market share dominance should once again return to Sands China.

 

 

Map of Macau Casinos

 

The truth be told, even though i was visiting Macau to see the City of Dreams, i actually stayed at the Sands owned Venitian. The reasons for this is that the Venetian is the main 'drawcard' hotel in the area. The Venitian also had the most competitive deals, including bundled offers to see the Cirque show - Zaia, transport via the Cottai Jet from Hong Kong, and a host of other freebies.

My experience of the Sands, and in particular, the Venetian, is that they dominate the Cottai strip, from the number of buses, to the number of patrons, the Venetian seems to be the place everyone is going to. I attribute this primarily to the fact that the Sands had first mover advantage, that they are centrally located in the Cottai Strip, that they also own the Cottai Jet and thus have cross marketing capabilities, that they have the largest exhibition space, that they have the Cirque production Zaia in house, and last but not least - they have a theme.

The City of Dreams and Galaxy are themeless and lack the appeal of the Venitian. As opposed to the casinos of Las Vegas where themes dominate - New York, New York, the Bellagio (fountain), the pyramids at Luxor, The Venetian, Paris, Treasure Island, Planet Hollywood - Macau casinos have not gone in the theme direction and as a result there is less appeal to the other casinos and less reason to visit. That being said 'The City of Dreams' has an amazing light show on the external facade of the buildings, has the Hard Rock hotel and some themed casino area, has a crowd pleasing mermaid and marine projection in the foyer, and has two permanent shows (the production - 'House of dancing water' i believe is better than the Venitians 'Zaia')

I often strolled through the Venitian casino as i went walking and it was almost always packed. Whether it be 3 in the afternoon or 3 in the morning it was almost impossible to place a bet at the tables, let alone get a seat. In contrast, the Galaxy and The City of Dreams were comparatively empty when i walked through. As a result of these observations i was surprised by monthly figures showing Galaxy market share was comparable to the Venetian (Sands China) and City of Dreams (Melco) was not far behind. I attribute this to the Venetian having a much larger walk in market but the Galaxy and the City of Dreams having a larger VIP market, so whilst the Venitian are getting a large amount of low margin clients, they are not getting the high margin clients.

 

Another observation i made whilst in Macau is that there are a huge number of Indian visitors. I asked several staff about this and they said Indians made up a large number of the visitors. This excited me more than anything else about my visit to Macau, as i imagined the growth possibilities of not just tapping the Chinese market but also the Indian market....the two most populous nations on earth.

 

So i came home wondering what the answers were. Initially my thoughts were that any investment in City of Dreams was not as appealing as forecast, as i was disappointed by how vacant the casino often seemed. If anything i was more motivated to invest in the Venetian/Sands. But after looking at all the operator market share figures and the growth rates i see City of Dreams as an exciting proposition for the following reasons :

- Macau is growing before your eyes, whether it is the new port as you get off the Cottai Jet, the airport, the roads, the new highways, increase border gates, new metros, new high speed rail links, or the new casinos...there is obvious growth.

- There are continuous busloads of patrons rocking up at the doorsteps ready to throw there money on the table.

- City of Dreams occupies a high visibility position at the top entrance to the Cottai strip...any vehicle coming from the north going down the Cottai strip is sure to see it. Any pedestrian traffic will go past as they travel the main road parallel to the Cottai Strip which joins the Venetian with Wynn and MGM.

- I get the feeling that the local government is trying to reduce Sands involvement in Cottai. They own the Cottai Jet and had rights to develop on the most prominent sites on the Cottai Strip. In fairness, it is Sands that made Cottai work...they invested the money when there was the most risk, but i feel the local government is now trying to reign them in a bit, and this is most apparent in their decisions regarding Site 7 and 8 which Sands will no longer develop. Sands appears as though it has too big a presence and i would not be surprised if the local government is trying to diversify the risk through more operaters in Cottai rather than Sands having such control.

- The building of Cottai Central, MGM and Wynn are all in close proximity. However, this is perhaps an advantage as at present there is not much pedestrian traffic down the Cottai strip as it really is still a construction zone. As more casinos open up i think there will be more pedestrian outflow from the Venetian (in particular) to other casinos. At present, the Venetian is so big that there really is no reason to leave, especially if you are only there for a couple of days.

 

Analysis

 

Crown (CWN) has a market capitalisation of approx $AU6.1billion at a share price of $8.30.

So what does CWN own...

The biggest investment is a 33.4% shareholding in Melco Crown (MPEL). At a share price of $US11.90 and a total market capitalisation of $US13.13b, CWN's shareholding is valued at nearly $US4.4 billion.

At an exchange rate of 0.96, this is an investment of $AU4.2 billion, or nearly 70% of CWN's market cap.

So why would you buy Crown then...why not just buy MPEL?

Well CWN pays out 37 cents a year in dividends. That's a yield of 4.4%, whilst MPEL does not pay a dividend at all.

Also the dividends are 50% franked...so as an Australian resident you will be able to utilise those franking credits.

So one could look at a CWN share priced at $8.30 as a stapled security, being made up of $5.80 of unhedged MPEL shares that pay no dividend, and $2.50 of other assets that pay 37 cents dividend at a yield of 13%, 50% franked.

You have exposure to a high growth, zero yield asset in MPEL's Macau Casinos, and exposure to a very defensive, high yielding investment in Crown casino in Melbourne, Burswood casino in Perth and to a lesser extent, Aspinalls in Mayfair.

The other assets including Betfair, Cannery Casino (24.5%), Aspers (50%), Harrahs/Caesars (2.5%), Gateway Casinos (1%), and Station Casinos (4.9%) all have questionable value and the Fontainebleu (19.6%) investment has been written down to nil after Fountainebleu filed for bankruptcy.

 

 

So when looking at CWN i think of two things...

- Anytime i have visited Crown casino in Melbourne, The Star in Sydney or any of the Macau casinos, i witness masses of people, particularly those of Asian descent, almost beside themselves in desperation to throw their money on the table.

- If the house always wins in the long run, it seems betting on the house is the obvious bet.

 

 

Disclaimer

This article has been prepared for clients of Fusion Partners Central Coast (FPCC) ABN 37 113 405 218 and others on request.

The article is based upon generally available information and is not intended to be, or to replace specialist advice in the areas covered but rather, the article is intended to be informative and educational only.

Although the information is derived from sources considered and believed to be reliable and accurate, FPCC, its employees, consultants, advisers and officers to the maximum extent permitted by the law disclaim all liability and responsibility for any opinion expressed or for any error or omission that may have occurred in this document.

This article may contain general advice which is defined in the Corporations Act to mean that we have not taken into account any of your personal circumstances, needs or objectives. It is therefore imperative that you determine, before you proceed with any investment or enter into any transactions, whether the investment or transaction is suitable for you in consideration of your objectives, financial situation or needs and you must therefore, before acting on any information included in this article, consider the appropriateness of the information having regard to your personal situation. FPCC recommends that you obtain financial and tax or accounting advice based on your personal situation before making an investment decision.

All investments should be made with consideration of risk after reading the FSG and PDS of the product provider, and after obtaining professional advice from a financial planner.

This article was created by John Cahill, based on legislation in place at the time.  Legislative changes may mean that this information is no longer current.  You should speak to your financial adviser.