It has taken just 12 months for Australia’s VIP turnover to rebound following the arrests of 19 Crown Resorts employees in China in October 2016, but the balance of power between Australian operators has shifted dramatically in the process.
Just 12 months after the release of 16 Crown Resorts employees from two Chinese prisons last July – bringing to an end the nine-month ordeal that followed their October 2016 arrests for promoting gambling – Australia’s VIP gaming market has staged a full recovery. At least, that’s what the numbers say.
Having seen nation-wide VIP turnover fall from around AU$60 billion in 1H16 to just AU$33 billion at the height of Crown’s China crisis early last year, the market rebounded strongly through December 2017 to AU$55 billion with analysts now predicting turnover will return to 2016 levels when FY18 financial results are released in the coming weeks.
But while players have returned, the tables have turned on Australia’s traditional VIP leader with domestic rival Star Entertainment Group – whose IR portfolio includes The Star Sydney, The Star Gold Coast and Brisbane’s AU$3.5 billion Queen’s Wharf Development – swooping in to steal Crown’s mantle for the very first time, a role reversal that seemed entirely implausible just two years ago. Star confirmed its standing as the country’s newly preferred VIP gaming destination for international players when it announced an impressive 48% sequential increase in VIP turnover for the six months to 31 December 2017 to AU$30.9 billion – emphatically halting a year-long slide.
By comparison, Crown – whose annual VIP turnover at its Melbourne and Perth properties fell 48.9% in FY17 as Chinese operations hit a brick wall – could only book 14% sequential improvement in 1H18 to AU$22.6 billion and now finds itself in the unfamiliar position of having to re-build turnover and compete for business with a newly invigorated rival. But more on that later.
Crown’s woes began on 16 October 2016 as news broke that 19 Crown Resorts employees, including the company’s head of VIP operations Jason O’Connor, had been arrested during a series of targeted raids in mainland China on suspicion of “gambling related crimes”, specifically the running of direct VIP operations targeting Chinese high rollers.
The stunning development made headlines around the globe – no doubt the very result China had intended – while the long eightmonth wait between arrest and sentencing ensured the eyes of the world remained transfixed throughout.
In the end, 16 of the 19 employees originally detained were jailed for between nine and 10 months each with Crown paying a total of AU$1.67 million in fines. The company’s lucrative Chinese VIP business ground to a halt.
But it wasn’t just Crown taking a hit.
Star, which turned over AU$49 billion in FY16 (compared to AU$65 billion by Crown), saw VIP fall to AU$39.7 billion over the ensuing 12 months after quietly winding back its own Chinese ambitions.
Likewise, SKYCITY – which operates five integrated resorts in Australia and New Zealand including its flagship SKYCITY Auckland – experienced a 30% decline in VIP turnover in FY17 to AU$8.7 billion, stating in its earnings report that, “SKYCITY’s International Business was adversely impacted by increased restrictions on funds transfers and a reduced number of visits by larger customers during the period, particularly following the Crown arrests in 2Q17.” VIP turnover at SKYCITY’s Australian properties immediately climbed 27% in the six months following the release of all Crown employees.
The timing of China’s Crown ambush even contributed to a decision by Hong Kong businessman Tony Fong’s Aquis Entertainment in April 2017 to scrap plans for a massive AU$8 billion casino resort in tropical far north Queensland, although Fung told The Australian he was “still incredibly bullish on Chinese tourism in the future,” and may eventually revisit the project.
Aquis is currently planning an AU$330 million redevelopment of modest Casino Canberra – purchased for just AU$6 million in 2014 – which will include expansion of VIP gaming facilities if approved.
Meanwhile, the lingering effects of China’s Crown crackdown are more than cosmetic at Star, which responded by switching its VIP focus to Southeast Asia and reducing the reliance on junkets – a good move according to JP Morgan’s Vice President, Equity Research – Gaming and Leisure, Donald Carducci.
“Star has gone to the direct Southeast Asian marketing concept which is a very sound concept,” he told Inside Asian Gaming. “Going to direct Southeast Asian premium customers was a really smart strategy and they have de-levered their VIP turnover from a lot of the junkets towards more of that direct Southeast Asian idea.”
In contrast, Crown’s immediate VIP future – particularly in regards to sourcing high rollers from China – will almost certainly rely more heavily on junkets such as Suncity Group, who run a prominent VIP Club at Crown Melbourne.
Carducci also points to Star’s partnership with Chow Tai Fook (CTF) and Far East Consortium (FEC) as a clear sign of intent in the battle for Asian VIPs. Having first come together to jointly bid on Brisbane’s AU$3.5 billion Queen’s Wharf IR Development – a bid they won – Star welcomed the Hong Kong business giants as 4.9% equity partners in March. Both companies are tipped to increase their stake to 9.9% once regulatory hurdles are cleared.
“I think Star will continue to see strong VIP numbers, especially given their relationship with Chow Tai Fook and Far East Consortium,” Carducci explains. “The loyalty program they offer has about 6 million people and Star has said it can add another AU$20 million in earnings if they can tap just a small fraction of those members.
“The fact that Far East and CTF each own equity in Star is indicative of the fact that here are two of the three wealthiest Chinese families that are absolutely going to pump their members through Star. I think it’s really, really positive for Star in terms of their outlook for VIP turnover in comparison to Crown who are down on one knee.”
Crown, of course, holds a big hand of its own in the form of the AU$2.2 billion Crown Sydney development in Barangaroo – barely a stone’s throw from The Star. Due for completion in 2021, the 271-meter tower will boast a six-star hotel, Sydney’s most expensive residential apartments and a casino designated exclusively for VIPs.
Barangaroo will make Crown the only company operating casinos in each of Australia’s two biggest cities, potentially providing a decisive edge as competition between the local heavyweights heats up.
Yet even in its current state as a busy harbourside construction site, Crown Sydney hasn’t escaped the fallout from China.
“The interesting thing with Crown is that the long-term repercussions the China arrests have on the VIP market will actually be the business case for Crown Sydney, because that AU$2.2 billion property really only makes sense if you have VIP,” Carducci says. “It’s a VIP-only casino and if all of a sudden you don’t have VIP turnover and that’s not reflected in the numbers, it makes it much more difficult to present that business case with positive ROIs.”
According to Carducci, Crown must find a way to re-build VIP turnover before launch for Barangaroo to remain feasible, while he fully expects a request to add high-end slot machines to its gaming offerings “to moderate the downside.”
In the meantime, with gambler preference now strongly leaning its way, Star Entertainment Group has no intention of looking back.
“We embarked more than two years ago on a diversification strategy in relation to VIP,” Bekier told IAG.
“At the half-year we said the diversification strategy was proving effective with continued higher growth in markets other than North Asia.
“We also said we are seeing strong growth in VIP from all customer segments as market conditions return to normal.”
