The Star Entertainment Group has confirmed what everyone in the gaming industry knew the minute Chinese authorities arrested 18 Crown Resorts staff three months ago. The world's most lucrative source of gaming revenue was suddenly off limits and casinos could no longer rely so much on the private jet-loads of high-rollers flocking to casinos in Australia and elsewhere.
The Star has reported a 27 per cent drop in its VIP gaming business in November and December as news of the Chinese government's clampdown on high rollers filtered through. This trend has continued into January and early February.
While casino operators have tried to downplay the impact of the Crown arrests on the industry, The Star's first-half results provide clear evidence that the Chinese VIPs are staying away. This is partly because casino operators are no longer marketing themselves in China for fear of a repeat of the Crown situation but also because the high rollers themselves are treading carefully.
Chief executive Matt Bekier is correctly taking a cautious approach towards China despite the damage to revenue from the number one source of gambling dollars in the world. The Star, like other global casino operators, pulled marketing staff out of China in November as a precautionary measure.
Historically, about 80 per cent of The Star's VIP turnover comes from Hong Kong, Macau and mainland China. It wants to reduce that dependency and The Star is trying to focus on lower risk companies in other parts of Asia.
The Star has grown its VIP revenues consistently over the last five years but it is now experiencing a major shift in the types of Chinese gamblers flocking to its Australian casinos.
Bekier says he is now seeing more "mid-range" VIP players. These are wealthy Chinese high-end players who will provide up front cash of $1 million to $5 million instead of the $20 million or so that a "whale" would put down. Like the whales, these mid-range gamblers still expect the same level of service when they arrive at one of The Star's casinos but they do not expect a private jet to bring them. Bekier says the higher cost of looking after a larger number of individuals gambling less is balanced by lower commission rates.
The Star's investors are not overly worried about the China situation though after the company posted a better-than-expecpted 135 per cent lift in half-year net profit to $141.8 million. The Star shares, which have recovered after falling in November on concerns about China, rose one per cent on Thursday.
Normalised net profit fell 17.7 per cent to $107.1 million off the back of a 3.7 per cent fall in normalised gross revenue. This was because of the international VIP rebate volume decline as well as the disruption to The Star's Sydney and Gold Coast properties which it is renovating.
A higher win-rate helped boost The Star's earnings The win rate in the fist-half was 1.62 per cent compared to 0.88 per cent in the prior half. Anything below 1 per cent means the House loses. The company is also seeing a recovery in electronic gaming and food and beverage.
Bekier is pulling all the right levels at The Star. Investments in the company's loyalty program, marketing and long overdue refurbishments to its Sydney casino and Jupiters property on the Gold Coast are yielding results. The Star is also building the new $3 billion Queen's Wharf project in Brisbane.
This is a critical period for Bekier, who got the company back on track after a string of management changes and setbacks at its Sydney casino as James Packer campaigned against it to build a second casino in the city. Crown, which is selling down its stake in its Macau casino joint venture to pay down debt and focus on its Australian assets, will open a $2 billion casino at Barangaroo in 2021.
michael.smith@fairfaxmedia.com.au
