SkyCity boss warns Chinese crackdown on foreign gambling will hurt high-roller revenue

SkyCity Entertainment Group interim chief executive John Mortensen has warned there will be a drop in the immediate term in the business it gets from high-rollers following a Chinese government corruption crackdown which has led to detention of 18 Australian Crown casino employees.

Crown officials last week ordered media off their premises at the annual meeting in Perth as an unhappy shareholder spoke out about what he called a lack of transparency over the arrests.

Mr Mortensen said it was hard to determine what was going on with Crown management giving out little information because they have been given little information in China and no reason provided yet for the detainment of their staff.

"This is part of the Chinese government's drive on corruption and their viewing all of the movement of finances from the country. But we're aware of the rules and regulations and our independent contractors operate within those rules and respect the laws of China," he said.

Gaming companies are not allowed to explicitly advertise gambling in China and it's illegal to arrange for more than 10 people to gamble overseas. If convicted, the detained employees could face up to 10 years in prison.

International media reports say the latest arrests and those of 14 South Koreans, including casino employees last year suggest the Chinese government is targeting foreign casino competitors. The anti-corruption drive has caused a more than two-year decline in gambling revenue in the southern Chinese territory of Macau and VIP gaming revenue from Asia is down across the board.

The latest move has sent casino stocks tumbling, including that of SkyCity which dropped to a year-low on Friday after the casino operator posted weaker first-quarter revenue due to lower gaming and high-roller activity in Auckland, difficult trading conditions in Darwin, and the higher level of the kiwi dollar against the Aussie. Its shares fell as low as $3.69 and were recently down 12% to $3.77.

Revenue slipped 1.3% to $260.7 million in the three months ended September 30 compared with the same period a year earlier

Mr Mortensen told shareholders at a packed venue for the company's annual meeting in Auckland that while international business is an important part of SkyCity's business, it represents only 15% of normalised group revenue and 10% of normalised ebitda.

In the 2016 financial year, SkyCity's share of the total international business market in Australasia was 9% with about half of the customers coming from China. It doesn't have any staff in China, using independent contractors only.

"It's important and one would expect in the immediate term, until we can find out what's going on, it will impact the business, " he said.

A bigger push will be made in other Asian markets such as Singapore, Malaysia and Vietnam to attract more VIP players.

The 20% drop in international business in the first quarter of the 2017 financial year was unrelated to the Chinese crackdown, Mr Mortensen said.

Auckland international business, which is by far the largest in the group, had a record year last year which was strongest in the first quarter. Overall, SkyCity's IB turnover rose 32% in the 2016 financial year to $12.4 billion of which half came in Auckland. That compares with Crown casino reporting $A65.1 billion in VIP play turnover this financial year, down 8%.

When SkyCity's financial results were released in August, the casino operator said it was expecting further growth in IB activity over the medium term, particularly from Asian VIP customers, and it would continue to focus on direct relationships with those high rollers.

But Mr Mortensen said today the IB business is always volatile.

"You only need several of the larger players to defer trips or come in and not feel lucky and not play, and that impacts it," he said. "The difficulty of looking at a three-month trend in a business that volatile is, you can jump to conclusions. The 20% downturn from year before, that can turn around with a couple of players."

One shareholder questioned the continuing poor performance at the Darwin Casino where first-quarter revenue declined 7.2% to $A32.5 million due to continued difficult local economic conditions.

Mr Mortensen said the property continues to experience increased competition from pubs and clubs due to a 30% increase in gaming machines in the greater Darwin area, licensed under the previous state government.

The Darwin casino has low revenue from international business due to poor airline connectivity. "Some of the players come in that are attracted to Crown and Star we can get to Adelaide in a one-hour flight while it is four hours up to Darwin and getting out is a pain. But the facilities up there are by far the best in the group," he said.

Darwin's medium outlook remains positive, Mortensen maintained, with potential for growth in IB considering the casino's close proximity to Asia.

The Northern Territory's newly elected chief minister Michael Gunner has said he will focus on improving tourism into the state and has a delegation going to China in a few weeks to discuss direct flights to Darwin.

Mr Mortensen said direct flights from China and other parts of Asia would mean a "completely different ball-game. It opens up Darwin for tourism and makes our business a lot more palatable."

(BusinessDesk)