NEW YORK--(BUSINESS WIRE)--The detainment of Crown Resorts' 18 employees in China underscores the risk associated with global casino operators' Chinese VIP business. The detainment is a sign to Fitch that high roller gambling by the Chinese nationals outside of China remains top of mind for Chinese authorities.
The circumstances around the detainment remain largely unknown. Casinos and casino marketing are illegal in China, with the exception of Macau, a Special Administrative Region (SAR). Marketing operations, particularly targeting VIP players, exist in China through junkets that maintain relationships with the players and often facilitate credit and collections.
In early 2015, China had publicly condemned casino operators in neighboring countries targeting Chinese nationals. The comment is widely believed to exclude Macau. In late 2015, China's authorities detained 13 casino employees and agents related to casino operations in South Korea, according to news reports. The fallout on Korea's casino operations is hard to ascertain since VIP volumes have declined prior to the detainment, likely due to the broader corruption crackdown in China, and have stabilized since.
Fitch believes the risks related to the more recent detainment (namely reduced VIP volume) to be more applicable to APAC casino operators outside of Macau. In Macau, VIP represents less than 20% and 10% of the departmental profits for Fitch rated MGM China ('BB' Issuer Default Rating [IDR]) and Sands China ('BBB-' IDR), respectively.
Outside of Macau, Fitch rated casino operators with significant Chinese VIP business include Genting Singapore ('A-' IDR), Marina Bay Sands ('BBB-' IDR), Crown Resorts ('BBB' IDR) and Imperial Pacific ('B(EXP)' IDR). Genting Singapore and Marina Bay Sands have solid stand-alone financial profiles, strong market positions in duopoly Singapore market and, in Fitch's opinion, implicit support from financially healthy parent companies.
Crown and Imperial Pacific are more at risk, although their IDRs have factored in the risk related to the companies' respective VIP business, which tends to be opaque. For Crown, VIP represents 28% of hold normalized revenues at the company's Australian assets in the calendar second half of 2015; however, VIP's EBITDA contribution is notably lower because of VIP's lower margin. Crown's USD2 billion project in Sydney is focused on VIP gaming, but Fitch does not include EBITDA or cash flow from Crown Sydney in its forecasts.
Moreover, Crown's Melbourne and Perth properties are largely underpinned by cash flows from stable locals mass market where they hold the sole license in the respective regions. Thus while Crown could see volatility in its VIP program play over the next 24 months, the strength of its locals mass markets continues to support its financial profile. Imperial Pacific's business model is Chinese VIP focused and a tightened operating environment in China could potentially have serious credit implications.
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