Global Gaming and Casinos Industry Specialist, Casino Business Review LLC

Howard J Klein

I am a 25+ year c-level executive of the casino industry in operations, marketing, international development and strategic planning. Currently, a consultant specializing in the casino space. Industry expert contributor and publisher of a subscription letter called "The House Edge". Extensive experience in marketing and development in the Asian gaming market while a senior executive at Caesars, Ballys Grand and Trump Taj Mahal.
Part of senior executive teams that valued acquisitions and mergers with companies in the casino, hotel, d entertainment rant  and restaurant space.

Global Gaming and Casinos Industry Specialist

Equity Bottom-Up

<ul>
<li>Australia's premier casino operator has been buffeted by regulatory and macro headwinds since 2015 crackdowns on VIP marketing and money laundering.</li>
<li>A final report has been issued by regulators that has already triggered management and marketing reforms. A clear path to licensing appears possible by May says government official.</li>
<li>Given the prime asset base and low stock price, Crown has attracted interest from acquirers, eventually scrapped due to self-inflicted wounds and pandemic.</li>
</ul> In 2017 Melco Resorts &amp; Entertainment(MLCO:NASDAQ) CEO, Lawrence Ho, broke with his Macau partner, Crown Resorts Ltd. (CWN:AX) James Packer, over a policy conflict on the degree of aggressive marketing to China mainland VIPs.  In 2016, China arrested Crown executives for overly intensive recruitment of mainland VIP gamblers. Ho’s response even after their subsequent release, was to divorce himself and his company from Crown and specifically, buy out Packer. After this a series of setbacks related to the ongoing pursuit of VIP business from China continued to plague  Crown culminating in a massive regulatory inquiry by Australian gaming authorities.  The government’s Bergin Report investigation was aimed at determining whether Crown was suitable to be licensed for their new, AU$2.2b super-luxury Sydney property. The finding: Due to a pattern of questionable tactics in the pursuit of VIP play and incidents involving then largest shareholder James Packer, a determination was made that both Packer and the company was “unsuitable” to hold a gaming license for the property. I have read the entire 67 page Bergin Report. The core of it is best expressed in the following conclusion which is extracted from an internal document prepared by consultant guiding management as to how to address the ongoing regulatory challenges they faced regarding recruitment of mainland China VIP business early into the probe: “Bottom Line Assessment thus far—Proceed with marketing efforts, but keep them low-key, with small groups at a time, and no publicity. It would be well advised to avoid cell phone and text message communications dealing with marketing efforts and limit overall use to the degree possible while in country. Concerning business cardsw, would also limit that to known, specific customers and avoid distributing to random individuals.” The report found both Packer and Crown “unsuitable” and denied it a license. This outcome triggered a series of resignations by board members and the dismissal of executives. It was the final hammer brought down on the company since the first Beijing crackdown on junkets and money laundering that began in 2015 affecting the entire Asian gaming industry.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/188/514/original/p.png?1613247796" class="editor-image img-responsive" data-smartkarma-image-id="188514"></figure><div class="content-caption">Poised for a move now that regulatory woes appear to position company to make changes to satisfy regulators.</div></section>The Chairman of the New South Wales gaming regulatory division has since said that it is “possible” that Crown could be granted a license for Sydney by late April or early May if it made the necessary changes in policies and personnel indicated by the findings. Crown’s top management has already expressed a willingness to work with regulators to eliminate “serious issues” raised by the report. Our best industry source in Sydney responded to our question regarding the likelihood of this outcome:<blockquote> “There’s much confidence that the changes will be made fully and fast. It is in nobody’s interest to have that place closed, employees out of their jobs and the company subjected to even more distress going forward during this pandemic.”</blockquote> The report’s key recommendations were far reaching, calling for far stricter enforcement of money laundering laws, tightened compliance rules about suitability of junket operators and key employees and the establishment of an Independent Casino Control board to supervise the entire industry. On balance this is seen as a positive because it will set up compliance standards that will provide management with clearer guidelines. This final blow to Crown comes after a series of moves and events which over the past five years has had a chilling effect on the stock, keeping it hostage within a narrow trading range that does not reflect the real value of its business and asset base. The ongoing threat of regulatory woes compounded by an over dependence on China VIP business has clouded the possible upsides inherent in the company’s strong business.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/188/515/original/11350382-4x3-xlarge.jpg?1613247947" class="editor-image img-responsive" data-smartkarma-image-id="188515"></figure><div class="content-caption">Crown Sydney, "unsuitable" verdcit by regulators but likely to be reversed as management changes indicate quickly addressing problems.t</div></section> May 2019: Majority owner James Packer, citing health reasons, announced his plan to sell 19.99% of Crown to former partner Lawrence Ho of Melco for $1.75b. Ho acquired the first 10% tranche but one year ago, citing the pandemic, he backed off the deal. Insiders believed it was not only the pandemic that caused Ho to walk away but the growing fears of the ongoing regulatory inquiries into Crown VIP policies that he feared could blemish Melco’s reputation. In the spring of 2019, Wynn Resorts Ltd. (NASDAQ: WYNN) which had been in early stage negotiations to acquire all of Crown for AU$10b, suddenly broke off talks. CEO Matt Maddox cited that news leaks of the deal had triggered speculation distorting the valuation of the stock and that had soured an orderly progression of the talks. On the news of the Wynn interest, Crown shares spiked 22% based on a report that Wynn had put $14.37 price on the table. That valuation was a clear indication that even though the premium wasn’t monumental, it was clear that had Wynn progressed further, the stock would have been bid up to a point where it no longer fit Wynn’s valuation. Lost in translation: Despite continuing turmoil, Crown could be  a jewel in hiding as the endgame of the pandemic begins<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/188/516/original/ad1183686d7e5ce083e814f967fd04e1_2048X1152.jpg?1613248030" class="editor-image img-responsive" data-smartkarma-image-id="188516"></figure><div class="content-caption">Crown Melbourne, one of three premier properties.</div></section>From the perspective of recent history, it is understandable why investors have by in large kept the stock trading in an unimpressive, narrow range. For the most part it initially was the uncertainty over the ROI of Crown’s big investment in the Sydney property, plus hesitancy about James Packer’s aggressive VIP marketing policies.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/188/517/original/190301-Crown-Perth-Careers-Metropol-980x700-1.jpg?1613248116" class="editor-image img-responsive" data-smartkarma-image-id="188517"></figure><div class="content-caption">Crown Perth: Strong tourist destination.</div></section>Then in early 2020 came the pandemic that crushed the entire consumer discretionary sector dependent on public assembly. All these headwinds then were only the table setting for the biggest blow that came early this month with the damning Bergin Report as noted above. The root of the current trade of Crown I believe really began back in 2015, when Beijing first brought down the hammer on VIP junkets and money laundering throughout Asia.  The targeting of China VIPs by casinos lay at the heart of Beijing’s hostility. This I believed disproportionately suppressed Crown prospects. Its two Australian resorts in Melbourne and Perth were heavily dependent on VIP business to the degree of ~46% of gaming win. This echoes the apogee of Macau gaming for example in 2013, when it achieved US$45b in GGR of which over 70% was VIP business. In addition, Crown owned 50% of VIP focused Aspinal’s London. Group wide Crown had positioned itself as a VIP focused gaming operator. However, Australia leads the world in gross gaming yield per capita according to the Business Insider survey. With US$866 of gross gaming yield per capita, it suggests that the Australian public in general has a healthy appetite for all forms of gaming including sports betting. (Crown has a significant interest in the Betfair sports betting business). So while VIP business from China is the single most important high end player source, the proclivity of Australians to gamble also stands as a catalyst for the continued health of the industry there.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/188/518/original/BB+improvements+1.640x480.png?1613248199" class="editor-image img-responsive" data-smartkarma-image-id="188518"></figure><div class="content-caption">Crown has a considerable position in online betting site Betfair, also competing in growing US market.</div></section>Headwinds beginning to abate, tailwinds not far away Crown is scheduled to next report earnings within a matter of days. It is clear that results will continue to show the ongoing impact of the pandemic on revenue and EBITDA. At the same time, looking at a forward picture in the coming months we see catalysts beginning to form for Crown: The long festering regulatory uncertainties surrounding its business practices have been investigated and a report issued identifying what the company must do to secure a license for its huge Sydney property. There has already been a prompt response by the company in executive and board resignations and the prospect of an entirely new senior management leadership coming into place. The possibility that the Sydney property could be up and running by late Spring is real. We are at the endgame of the pandemic. Australia has one of the lowest global numbers with 28,886 Covid cases to date, of which 26,113 have recovered. Deaths total 909. While we continue to see sporadic outbreaks of short duration, the overall estimate is that we appear to be at least at the beginning of the global endgame to forecast a reasonable duration. Applying probable levels of vaccine availability, the government has set as a goal the vaccination of the entire adult population by early October, The supply will accelerate once the imminent arrival of the AstraZeneca vaccine reaches 200,000 per day. What is key here is that  nearly 80% of Australians polled within the last month have said they expect to take the vaccine. What all this means is that the herd immunity factor which will have a direct impact on the easing of restrictions of access to public facilities like casinos, will come earlier. We could therefore see a strong pent up surge of visitation in Crown properties by late 2Q21 or early 3Q21. Translate that to earnings prospects and valuations toward summer and you have the makings of a strongly recovered earnings profile. Melco and Wynn saw value acted and withdrew for reasons unrelated to value Clearly the moves to acquire Crown by two companies with similar marketing focus is telling. Both Melco and Wynn saw in Crown a portfolio of pristine gaming properties (including the new Sydney one) as available at a very attractive price. The price paid by Melco for its initial tranche and that of Wynn later on, bore a modest premium largely due to the headwinds cited at the time.  However, consider that Wynn backed off because they feared competitive bids would surface once word of its interest in Crown was out. And such bids would not merely be from speculators betting on a quick in and out trade. More likely, it was a bet that another suitor could emerge and move the shares materially above the premium Wynn had in mind. And without question the uncertainties of the pandemic beyond that inhibited any higher competition should Wynn have stayed active in the pursuit. With the two big obstacles standing in the way now at least clarified and defined by a probable duration recovery arc, it appears here that Crown at its current price represents a bull case because its asset base, once Sydney is licensed, is probably a lot higher than its current trade. Crown Resorts Ltd (CWN:AX) All amounts in AUD unless otherwise specified.Price at writing: $9.89Market cap: $6.647BEnterprise value: $7.60BEV/EBITDA: 47.21Operating margin: 10.19% pandemic impacted.P/E (ttm) 84.53 Clearly reflecting the pandemic related and regulatory uncertainties cites above.I year analyst target: $13.60Our target by 3Q21: $15.855 year high: $14.20Pandemic low: (March 16,2020) $6.12) 52 week change: -16%Cash on hand: $286.9mLT Debt: $1.13BBook value per share (mrq) $7.02 Our view: Undoubtedly, the scrapped moves by both Melco and Wynn to acquire all or part of Crown recognized that at the time they came forward, the company was worth more than the market was saying it was. If you owned it, you’d have three trophy properties in a high gaming profile market with a VIP amenity focus perfect to cross market your own top database. Add to that the pre-pandemic 2019 tourist arrivals in Australia of 9.7million, the largest segment of which was from China with 1.4m visitors. (A total of over 2m came from Asian countries). In the wings? Aside from overcoming long festering headwinds, many of which were self-induced, Crown continues to present an inviting opportunity for an acquirer. Primarily due to the ongoing pandemic, valuations have been difficult to arrive at with endgame durations cloudy. But this was before the arrival of the family of vaccines that now enable us to put an educated guess duration on the endgame. Baking in that momentum as accelerating probably by summer, with an engine of pent up demand, we see renewed tire kicking on Crown by potential acquirers. We think elements of the market have not as yet recognized these potential catalysts to the stock.And for that reason we believe at its current trade, Crown offers a real upside entry point well before actual results confirm its recovery.


Australia's premier casino operator has been buffeted by regulatory and macro headwinds since 2015 crackdowns on VIP marketing and money laundering.
A final report has been issued by regulators that has already triggered management and marketing reforms. A clear path to licensing appears possible by May says government official.
Given the prime asset base and low stock price, Crown has attracted interest from acquirers, eventually scrapped due to self-inflicted wounds and pandemic.
 In 2017 Melco Resorts &amp; Entertainment(MLCO:NASDAQ) CEO, Lawrence Ho, broke with his Macau partner, Crown Resorts Ltd. (CWN:AX) James Packer, over a policy conflict on the degree of aggressive marketing to China mainland VIPs.  In 2016, China arrested Crown executives for overly intensive recruitment of mainland VIP gamblers. Ho’s response even after their subsequent release, was to divorce himself and his company from Crown and specifically, buy out Packer. After this a series of setbacks related to the ongoing pursuit of VIP business from China continued to plague  Crown culminating in a massive regulatory inquiry by Australian gaming authorities.  The government’s Bergin Report investigation was aimed at determining whether Crown was suitable to be licensed for their new, AU$2.2b super-luxury Sydney property. The finding: Due to a pattern of questionable tactics in the pursuit of VIP play and incidents involving then largest shareholder James Packer, a determination was made that both Packer and the company was “unsuitable” to hold a gaming license for the property. I have read the entire 67 page Bergin Report. The core of it is best expressed in the following conclusion which is extracted from an internal document prepared by consultant guiding management as to how to address the ongoing regulatory challenges they faced regarding recruitment of mainland China VIP business early into the probe: “Bottom Line Assessment thus far—Proceed with marketing efforts, but keep them low-key, with small groups at a time, and no publicity. It would be well advised to avoid cell phone and text message communications dealing with marketing efforts and limit overall use to the degree possible while in country. Concerning business cardsw, would also limit that to known, specific customers and avoid distributing to random individuals.” The report found both Packer and Crown “unsuitable” and denied it a license. This outcome triggered a series of resignations by board members and the dismissal of executives. It was the final hammer brought down on the company since the first Beijing crackdown on junkets and money laundering that began in 2015 affecting the entire Asian gaming industry.Poised for a move now that regulatory woes appear to position company to make changes to satisfy regulators.The Chairman of the New South Wales gaming regulatory division has since said that it is “possible” that Crown could be granted a license for Sydney by late April or early May if it made the necessary changes in policies and personnel indicated by the findings. Crown’s top management has already expressed a willingness to work with regulators to eliminate “serious issues” raised by the report. Our best industry source in Sydney responded to our question regarding the likelihood of this outcome: “There’s much confidence that the changes will be made fully and fast. It is in nobody’s interest to have that place closed, employees out of their jobs and the company subjected to even more distress going forward during this pandemic.” The report’s key recommendations were far reaching, calling for far stricter enforcement of money laundering laws, tightened compliance rules about suitability of junket operators and key employees and the establishment of an Independent Casino Control board to supervise the entire industry. On balance this is seen as a positive because it will set up compliance standards that will provide management with clearer guidelines. This final blow to Crown comes after a series of moves and events which over the past five years has had a chilling effect on the stock, keeping it hostage within a narrow trading range that does not reflect the real value of its business and asset base. The ongoing threat of regulatory woes compounded by an over dependence on China VIP business has clouded the possible upsides inherent in the company’s strong business.Crown Sydney, "unsuitable" verdcit by regulators but likely to be reversed as management changes indicate quickly addressing problems.t May 2019: Majority owner James Packer, citing health reasons, announced his plan to sell 19.99% of Crown to former partner Lawrence Ho of Melco for $1.75b. Ho acquired the first 10% tranche but one year ago, citing the pandemic, he backed off the deal. Insiders believed it was not only the pandemic that caused Ho to walk away but the growing fears of the ongoing regulatory inquiries into Crown VIP policies that he feared could blemish Melco’s reputation. In the spring of 2019, Wynn Resorts Ltd. (NASDAQ: WYNN) which had been in early stage negotiations to acquire all of Crown for AU$10b, suddenly broke off talks. CEO Matt Maddox cited that news leaks of the deal had triggered speculation distorting the valuation of the stock and that had soured an orderly progression of the talks. On the news of the Wynn interest, Crown shares spiked 22% based on a report that Wynn had put $14.37 price on the table. That valuation was a clear indication that even though the premium wasn’t monumental, it was clear that had Wynn progressed further, the stock would have been bid up to a point where it no longer fit Wynn’s valuation. Lost in translation: Despite continuing turmoil, Crown could be  a jewel in hiding as the endgame of the pandemic beginsCrown Melbourne, one of three premier properties.From the perspective of recent history, it is understandable why investors have by in large kept the stock trading in an unimpressive, narrow range. For the most part it initially was the uncertainty over the ROI of Crown’s big investment in the Sydney property, plus hesitancy about James Packer’s aggressive VIP marketing policies.Crown Perth: Strong tourist destination.Then in early 2020 came the pandemic that crushed the entire consumer discretionary sector dependent on public assembly. All these headwinds then were only the table setting for the biggest blow that came early this month with the damning Bergin Report as noted above. The root of the current trade of Crown I believe really began back in 2015, when Beijing first brought down the hammer on VIP junkets and money laundering throughout Asia.  The targeting of China VIPs by casinos lay at the heart of Beijing’s hostility. This I believed disproportionately suppressed Crown prospects. Its two Australian resorts in Melbourne and Perth were heavily dependent on VIP business to the degree of ~46% of gaming win. This echoes the apogee of Macau gaming for example in 2013, when it achieved US$45b in GGR of which over 70% was VIP business. In addition, Crown owned 50% of VIP focused Aspinal’s London. Group wide Crown had positioned itself as a VIP focused gaming operator. However, Australia leads the world in gross gaming yield per capita according to the Business Insider survey. With US$866 of gross gaming yield per capita, it suggests that the Australian public in general has a healthy appetite for all forms of gaming including sports betting. (Crown has a significant interest in the Betfair sports betting business). So while VIP business from China is the single most important high end player source, the proclivity of Australians to gamble also stands as a catalyst for the continued health of the industry there.Crown has a considerable position in online betting site Betfair, also competing in growing US market.Headwinds beginning to abate, tailwinds not far away Crown is scheduled to next report earnings within a matter of days. It is clear that results will continue to show the ongoing impact of the pandemic on revenue and EBITDA. At the same time, looking at a forward picture in the coming months we see catalysts beginning to form for Crown: The long festering regulatory uncertainties surrounding its business practices have been investigated and a report issued identifying what the company must do to secure a license for its huge Sydney property. There has already been a prompt response by the company in executive and board resignations and the prospect of an entirely new senior management leadership coming into place. The possibility that the Sydney property could be up and running by late Spring is real. We are at the endgame of the pandemic. Australia has one of the lowest global numbers with 28,886 Covid cases to date, of which 26,113 have recovered. Deaths total 909. While we continue to see sporadic outbreaks of short duration, the overall estimate is that we appear to be at least at the beginning of the global endgame to forecast a reasonable duration. Applying probable levels of vaccine availability, the government has set as a goal the vaccination of the entire adult population by early October, The supply will accelerate once the imminent arrival of the AstraZeneca vaccine reaches 200,000 per day. What is key here is that  nearly 80% of Australians polled within the last month have said they expect to take the vaccine. What all this means is that the herd immunity factor which will have a direct impact on the easing of restrictions of access to public facilities like casinos, will come earlier. We could therefore see a strong pent up surge of visitation in Crown properties by late 2Q21 or early 3Q21. Translate that to earnings prospects and valuations toward summer and you have the makings of a strongly recovered earnings profile. Melco and Wynn saw value acted and withdrew for reasons unrelated to value Clearly the moves to acquire Crown by two companies with similar marketing focus is telling. Both Melco and Wynn saw in Crown a portfolio of pristine gaming properties (including the new Sydney one) as available at a very attractive price. The price paid by Melco for its initial tranche and that of Wynn later on, bore a modest premium largely due to the headwinds cited at the time.  However, consider that Wynn backed off because they feared competitive bids would surface once word of its interest in Crown was out. And such bids would not merely be from speculators betting on a quick in and out trade. More likely, it was a bet that another suitor could emerge and move the shares materially above the premium Wynn had in mind. And without question the uncertainties of the pandemic beyond that inhibited any higher competition should Wynn have stayed active in the pursuit. With the two big obstacles standing in the way now at least clarified and defined by a probable duration recovery arc, it appears here that Crown at its current price represents a bull case because its asset base, once Sydney is licensed, is probably a lot higher than its current trade. Crown Resorts Ltd (CWN:AX) All amounts in AUD unless otherwise specified.Price at writing: $9.89Market cap: $6.647BEnterprise value: $7.60BEV/EBITDA: 47.21Operating margin: 10.19% pandemic impacted.P/E (ttm) 84.53 Clearly reflecting the pandemic related and regulatory uncertainties cites above.I year analyst target: $13.60Our target by 3Q21: $15.855 year high: $14.20Pandemic low: (March 16,2020) $6.12) 52 week change: -16%Cash on hand: $286.9mLT Debt: $1.13BBook value per share (mrq) $7.02 Our view: Undoubtedly, the scrapped moves by both Melco and Wynn to acquire all or part of Crown recognized that at the time they came forward, the company was worth more than the market was saying it was. If you owned it, you’d have three trophy properties in a high gaming profile market with a VIP amenity focus perfect to cross market your own top database. Add to that the pre-pandemic 2019 tourist arrivals in Australia of 9.7million, the largest segment of which was from China with 1.4m visitors. (A total of over 2m came from Asian countries). In the wings? Aside from overcoming long festering headwinds, many of which were self-induced, Crown continues to present an inviting opportunity for an acquirer. Primarily due to the ongoing pandemic, valuations have been difficult to arrive at with endgame durations cloudy. But this was before the arrival of the family of vaccines that now enable us to put an educated guess duration on the endgame. Baking in that momentum as accelerating probably by summer, with an engine of pent up demand, we see renewed tire kicking on Crown by potential acquirers. We think elements of the market have not as yet recognized these potential catalysts to the stock.And for that reason we believe at its current trade, Crown offers a real upside entry point well before actual results confirm its recovery.

Crown Resorts Ltd: Bloodied but Unbowed, past Regulatory Woes and Pandemic, an Upside May Loom