VIP shows signs of life after China detentions

Australia’s casinos are seeing an improvement in their VIP business and can look forward to a brighter year in 2018, as the market recovers from a collapse triggered by the detention of Crown Resorts employees in China.

According to Morgan Stanley analyst Monique Rooney, recent discussions with industry contacts have pointed to a material improvement in junket operations since the start of the Australian fiscal year in July.

“Whilst we acknowledge that VIP is quite volatile in nature, we do however believe the outlook is more promising vs our previous expectations,” she wrote in a note.

The firm has raised its forecast for Crown’s VIP revenue next year to 9.4 percent, a swing from its prior estimate for a drop of 6 percent. Star Entertainment Group, which was not affected as badly, is expected to see an 8.4 percent gain next year compared to prior forecasts for a 6 percent increase. 

The VIP business in Australia was hit hard by the arrest of 19 Crown employees in China in October 2016 on charges they were promoting gambling. A Shanghai court in June handed down sentences to 16 of them, though these were adjusted for time already spent in jail and most have been released.

The damage was severe. Australia’s share of the global VIP market dropped to 3 percent at end June from 6 percent previously, throwing into doubt several planned developments targeting the China VIP market. It also prompted Star Entertainment Group Chairman John O’Neill to warn against an over-reliance on the China tourism dollar in Australia.

Crown Resorts’ profits for the full year to end-June clearly showed the consequences. Normalized profit fell 15 percent to $343.1 million, while VIP program play plunged by a half.

However, reported profit at the operator, which is developing a six-star VIP only resort in Sydney, doubled to $1.86 billion as it booked gains from the sale of its stake in its Melco Crown Entertainment venture.

The operator marked its final exit from the decade-long venture, which brought to life iconic properties such as City of Dreams Macau and City of Dreams Manila, in May. It had begun the process in late 2016, also pulling out of a planned project in Las Vegas, to focus on the domestic market. 

Crown, whose digital business was the strongest growth area for the company last year, has also taken a big step into skill-based gaming. Though many have been mulling the benefits of these new types of games to appeal to the younger generation, Crown has jumped in, forming a joint venture with New Gaming Pty to roll out a series of skill-based products. 

Rival operator Star Entertainment also saw a drop in its VIP business in the year, though was able to offset the decline by diversifying its international business and reaping the rewards from the revamp at its properties in both Sydney and the Gold Coast. 

Star is forging ahead with its $3 billion Brisbane project, beginning demolition and preparation work at the Queen’s Wharf site. The resort, which is being developed along with Hong Kong’s Chow Tai Fook and Far East Consortium, is expected to open its core areas in 2022.

Other ambitious projects planned for Queensland have, as widely expected, run into difficulties. 

The ASF Consortium’s proposal to build an integrated resort at the Southport Spit was nixed by the Queensland government, while Hong Kong investor Tony Fung has dropped plans for an A$8.15 billion integrated resort to be known as Aquis Barrier Reef. The entertainment complex is still being built at a quarter of the budget and without the casino element.

The Queensland government is looking for bidders for the license and says it has had strong interest, though analysts are skeptical that the type of mega-project Aquis and ASF had been planning could be supported. Australians still show a preference for slot machines in pubs and clubs over ritzy casinos and the decline in the VIP market demonstrated the pitfalls from relying on one set of clientele.

It’s also been a hard year for Australia’s online market, with amendments to the Interactive Gambling Act passed by the Senate in August. It’s now illegal for any offshore operators to target Australian consumers, with online bets only permitted by those licensed in the country and only on lotteries and sports. It has also outlawed in-play betting.

As a result, there has been an exodus of companies, such as Pokerstars, Vera&John, and 888poker.

Although the online sports betting market is thriving, there is a further cloud in the form of tax changes that may take a heavy toll on revenue. South Australia introduced a point of consumption tax in July that will impose a 15 percent tax on revenue in excess of $150,000 on any bet taken in the state, irrespective of where the company is based.

The law came amidst growing resentment at companies choosing to take advantage of low-tax base jurisdictions, such as the Northern Territory to base their operations while collecting revenue across the country. 

Industry players are now concerned that the tax will be introduced nationwide, clouding prospects for the booming sector.