The news that Macau gaming revenues are expected to fall by 25% in December after a strong run of growth won't surprise many investors. All winning steaks come to an end eventually, but what will the impact be on Crown Resorts Ltd (ASX: CWN)?
Crown Resorts currently has exposure to Macau through its 33.6% share in Melco Crown Entertainment (MCE), a joint venture between Crown and Melco International Development Limited which owns the City of Dreams resort.
Snake eyes for Macau
According to Business Insider, Wells Fargo estimates gaming revenues could fall by 25% in December. This is due to the duel impact of China's anti-corruption efforts and a collapse in the way Chinese VIP junket operations work, which were relied upon to finance high-rollers in exchange for a cut of gaming revenues.
Both factors are also likely behind the recent sharp drop in shares of Donaco International Ltd (ASX: DNA). Despite being based in Vietnam the company relies heavily on Chinese junket operators and the company's shares have fallen 36% in the last three months.
Potential impact
For Crown though, the decline in Macau will take some of the shine off earnings prospects for FY15 after a strong year in FY14. Melco Crown Entertainment was the driver of Crown's improved performance in FY14, with strong growth at City of Dreams.
Crown's 2014 Annual Report noted its share of MCE's reported NPAT result for the year was an "equity accounted profit" of $287.6 million, which is 41% of Crown's total Reported NPAT (before significant items) of $702.5 million.
Just how much impact Macau's troubles will have on MCE's revenues is hard to say. The company's most recent Q3 report declared net revenue falling by approximately 10%, attributable to "lower group-wide rolling chip revenues".
However the impact of falling revenues could be worsened by the increase in competition. Without a monopoly in Macau competition for existing gamers will increase costs for promotions and advertising, while hurting margins.
Shares in Crown are down 17% so far in 2014 so investors should be prepared for a bumpy 2015.
