After resources and education, tourism is Australia’s third largest export. More than 9m foreigners visited Australia in the twelve months to 31 March 2018, with China, at 1.4m visitors, topping the list.
Two companies that benefit greatly from tourists – and particularly those from China – are Australia’s major casino owners Crown Resorts (ASX: CWN) and Star Entertainment (ASX SGR).
Helped by many of them being regional monopolies, casinos have long been amongst the most popular tourist destinations in Australia. 31 million people visited Crown’s casinos in Melbourne and Perth last year, while nearly 18 million visited Star Entertainment’s casinos in Sydney and South-east Queensland. By comparison, Sydney’s iconic Operate House attracts “only” 8.2 million tourists annually.
According to Star Entertainment, China is their biggest source market for ordinary (or “mass market”) punters and both Star Entertainment and Crown generate a large percentage of their VIP custom from mainland China, Hong Kong and Macau too.
With Chinese tourists projected to increase to 3.9m in 2027, it’s no surprise that both casino operators are investing heavily in their properties to attract more Chinese visitors.
After recently completing a new $650m, six-star hotel at its Perth casino, Crown is busily constructing $2.2bn VIP-only Crown Sydney and also planning to add a fifth hotel – six-star, 388 room “One Queensbridge” – to its casino in Melbourne.
For its part, Star is spending around $500m further improving its Sydney property and adding hotels to both its Sydney and Gold Coast properties. The company is also spending around $1.2bn for its half share of a brand new and much larger Brisbane casino.
So should Crown and Star Entertainment investors be worried about recent tension between the Australian and Chinese governments?
A concern in the short term…
Yes, but likely only in the short to medium term.
Any reduction in the flow of Chinese visitors to Australia would impact both companies’ current profitability while also calling into question the expected returns on their investments.
For instance, Crown has just begun marketing the 80 apartments that are part of the Crown Sydney building. Potential reductions in Chinese investment in Australia could mean Crown wont achieve the expected $800m in proceeds that will reduce the net cost of Crown Sydney.
And Matt Bekier, chief executive of Star Entertainment, has expressed his concerns over the impact of the deteriorating relationship could have on Chinese tourism numbers. “Of course, we want a positive political relationship between Australia and China. China is our biggest and most important contributor to tourism growth”, he told Fairfax Media.
…but less so in the long term
But I’m less worried over the longer term.
Both Chinese investment in, and migration to, Australia has increased dramatically in recent decades and so has the number of Chinese families sending their kids to be educated at Australia’s renowned universities.
So while Chinese investment in, and visitation to, Australia could be significantly affected if China’s government decides to play hardball, the ever increasing familial and business links between the two countries are unlikely to reverse over the longer term.
Although one would expect him to say so, this does help explain Bekier saying “we are extremely confident in the long-term outlook”.
Of course, there are other risks which could befall both Crown and Star Entertainment, such as cost blowouts on their projects, a housing downturn or recession, and probably some other risks that I’ve missed.
Even so, while there could be some short-term hiccups if relations between Australia and China deteriorate further, both Crown and Star Entertainment’s investments should prove profitable over the longer term.
Disclosure: the author owns shares in Crown Resorts.