What happened? Crown Resorts Ltd (ASX: CWN) shares have surged higher in June and July despite the group's Macau-based joint venture Melco Crown Entertainment Limited (NASDAQ: MPEL) reporting a 32.4% fall in revenue (year-on-year) for the second quarter at its flagship City of Dreams resort. The result is actually an improvement on last quarter, where Melco reported a 35% fall over the first three months of the year.
Should shareholders be concerned?
In a recent interview with Bloomberg, Melco's billionaire co-chairman Lawrence Ho stated that he expects Macau as a whole to have an overall 'rough second half', however he believes that the region is undergoing a period of transformation away from low-margin VIP gaming and into high-margin mass-market gaming.
This has obvious implications for Melco, seeing as mass-market play at Melco's City of Dreams casino fell only 9.9% in the quarter, implying increasing market share, however with the group's Studio City entertainment complex to open soon, investors will hope it won't cannibalise its own customers.
Of major concern right now is that Studio City hasn't been allocated a fixed amount of gaming tables for gamblers to play on. Mr Ho is hoping for 400 tables, however there's simply no knowing how many it'll end up with- investors simply must be concerned and on alert.
Studio City to be a Catalyst?
Studio City in Macau is going to be a little different to competitors; it will be Macau's first Hollywood-themed resort. The complex will have around 1,600 hotel rooms, a theatre for magic shows, a 5,000-seat entertainment complex, a flight simulation ride with Batman flying through Gotham City, and a 3,700 square meter indoor playground with rides and other interactive facilities featuring characters such as Daffy Duck and Bugs Bunny.
Mr Ho believes the Studio City opening could be part of the catalyst that revives Macau. It could well be the case, however, it's expected that relaxed travel rules by the Chinese government as of July 1 will have a more significant impact on the region.
How does this impact Crown?
Crown owns a 33.6% stake in Melco Crown, which is currently worth around $3.5 billion or 33% of Crown's market capitalisation. If Melco Crown's new investments are a flop there's absolutely no doubt that it'll weigh on Crown's share price.
The downturn has also impacted Crown's income as Melco Crown had started to deliver quarterly dividends that had been earmarked to help fund development of Crown's Sydney and US projects. Investors need to be aware that the lack of income could result in a capital raising in the next two to three years.
Should you buy Crown?
I own Crown shares but I won't buy any more shares for the time being. I plan to wait until the end of 2015 to see how the Macau and Australian markets settle following a period of relative instability.
