The share price of luxury resorts and gaming company Crown Resorts Ltd (ASX: CWN) has underperformed over the past year, lagging the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) by 15%. The main contributing factor has been the ongoing crackdown by the Chinese government to stamp out money laundering and corruption, which has negatively impacted gaming revenues generated by operators in Macau. Crown Resorts has a significant exposure to the Macau gaming market via its stake in joint venture partner Melco Crown. Assets located in Macau comprise approximately 35% of Crown Resorts' earnings.
The company has also faced some domestic headwinds, in the form of weaker consumer sentiment and a slowing economy in Western Australia as the mining boom fades. As a result, it is estimated that Crown Resorts will post declining earnings of around 5% in each of the next two years.
So why am I bullish about the company's growth prospects?
Despite the weaker trading conditions in Macau, Melco Crown has been able to increase its share of the mass-market gaming tables segment, leaving it well positioned for a rebound in gaming activity. For the longer term, Crown Resorts has a number of world-class resort developments scheduled to come on line over the next five years, with potential to significantly increase revenues. These include:
- The City of Dreams, Manila
- Studio City, Macau
- The Crown, Sydney
- Hotel upgrades in Melbourne and Perth
In addition to the projects listed above, Crown Resorts recently signed off on a $2 billion-plus bid to the Queensland government for the rights to develop the Queen's Wharf precinct in Brisbane. Its rival in this bid, Echo Entertainment Group Ltd (ASX: EGP), already holds Brisbane's only existing casino licence, for Treasury Casino. Whilst most commentators view Echo as the favourite, Crown Resorts has had previous success going head-to-head with Echo, having been awarded the rights to the second Sydney casino licence in 2013. This resulted in Echo losing its monopoly position in that market.
Another planned move by Crown Resorts involves a return to the Las Vegas gaming market. The company recently secured the services of Andrew Pascal, the executive who previously managed the Las Vegas operations of U.S. gambling tycoon Steve Wynn. In recent days news reports have broken that James Packer has also snared one of the U.S.'s most successful nightclub operators, Jesse Waits. Waits, who was responsible for setting up the highly popular XS and Tryst nightclubs for Wynn, reportedly resigned his position over the weekend.
Crown Resorts is also seeking to diversify its domestic revenue base by further developing the online gaming operations of sports bookmaker CrownBet. These factors, combined with the company's ability to capitalise on the growing Asian middle class tourism market and a stable dividend yield of around 3% (including 50% franking), make it a compelling growth stock for the long-term investor.
Foolish takeaway
The long-term prospects for Crown Resorts remain positive, with its development pipeline providing a strong platform for future growth. The international flavour of many of these projects also benefits local investors by providing exposure to overseas earnings against the backdrop of a weakening Australian dollar. Whilst there are execution risks associated with each of the company's proposed developments (especially overseas), I believe that the current share price represents good value for investors seeking a stock with exposure to a growing global gaming market.
