Thu, Jul 11, 11:24am by Staff Writer
Australia’s latest casino king is having a nice little run.
The Hong-Kong listed shares of Lawrence Ho’s Melco International Development have surged 34 per cent in the past month, rebounding from the recent low hit after his deal on May 30 to buy a 19.99 per cent stake in Crown Resorts from James Packer.
The AFR reports that Crown Resorts’ shares are up a more modest five per cent during that period and were trading at $12.74 on Tuesday, still below the $13 a share price implied by Ho’s $1.76 billion cash splash.
A few bits of good news are helping boost Melco.
Last week, the company celebrates the first anniversary of its monopoly casino operation in Cyprus, where it runs three properties and revealed that almost 900,000 visitors had passed through in the first year.
Hong Kong stocks have also enjoyed a small relief rally after the G20 meeting in Osaka, where trade tensions between China and the United States were taken down a notch.
And perhaps most importantly, new numbers are suggesting that conditions in Melco’s home market of Macau are better than expected.
Gaming revenue there rose for the second straight month in June, and the 5.9 per cent jump is three times expected growth.
Concerns about the impact on Chinese gamblers of the trade tensions and the slowing Chinese economy appear overdone.
Instead, Macau’s proximity to China has proven key to its resilience.
That will come as no surprise to Perpetual fund manager Garry Laurence, who runs the firm’s global equities portfolio, which holds a stake in Melco.
He says it is mass market punters – rather than wealthy VIPs – who are now driving the Macau market, as infrastructure links between the island and mainland improve.
“The improving transport links into Macau are allowing more visitors from China, and that’s basically holding up growth,” Laurence says.
The recent share price bounce means Melco’s stock is up 25 per cent for the year.
But there have been some peaks and troughs.
The stock lost about 30 per cent between April 26 and June 1, the day after Melco announced it was buying the Crown stake, as trade tensions mounted.
Perpetual, which is the third biggest shareholder in Crown behind Packer and Melco, with a 5.1 per cent stake, is supportive of Ho and Packer’s deal.
— Financial Review (@FinancialReview) July 9, 2019
“We always liked Crown’s exposure to Macau through Melco,” says Laurence.
“And we’ve always respected Lawrence Ho’s ability to manage casinos and also new builds.”
What Melco gets in Australia, Laurence argues, are casinos with monopoly positions in Melbourne and Perth, and a big opportunity for growth from Crown’s Sydney casino at Barangaroo, set to open in 2021.
“I think the opening of Barangaroo will really create a huge opportunity for Crown,” Laurence says.
“We think Lawrence Ho sees that and wants to diversify the group to a mix of growth in Macau, but also with some more stable assets in Australia.”
Where Melco can help Crown with Barangaroo is in attracting VIPs to what Laurence describes as “one of the best cities in the world.”
“Melco have a lot of contacts in the region and know a large amount of the VIPs to start with. SO it’s just about promoting the casinos more.”
Macquarie analysts say it’s not just the big whales that Melco could eventually help push towards Sydney.
To be classified as a VIP punter in Australia – and qualify for a tax on winnings of just 10 per cent – a player will just need a foreign passport and $10,000 of local currency.
But in Macau, that same punter – known there as a premium mass player – would be taxed at 39 per cent.
Macquarie analysts say that leaves “Melco a 29 per cent margin to entice players with rebates and comping” via free or heavily subsidized accommodation and transport.
Laurence says there is no need for urgency for Ho to make good on his desire to take an even bigger slice of Crown.
“I think Lawrence Ho has a long-term view of building out positions in casinos around the world.”
It might be in the best interests of Packer and Crown investors to wait too. The closer it gets to Barangaroo opening its doors, the more the market will understand its potential benefits.
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