Don't be fooled by the bounce in Crown Resorts Ltd's (ASX: CWN) share price today – the headwinds buffeting the stock are likely to intensify as one of Macau's largest junket operators warned that it could shut down.
Neptune Group said it will pull out of Macau unless there is a pickup in high rollers willing to go to the Chinese enclave as it posted a pre-tax loss of $HK998.6 million ($183.7 million).
Neptune's comments prompted some analysts to speculate that things in Macau are going to get a lot worse than what many were thinking and that's bad news for Crown as it has significant exposure to Macau though its 34% stake in Melco Crown Entertainment, which operates a number of casinos in the territory.
But a sharp decline in VIP gamblers going to Macau due to the Chinese government's crackdown on corruption, the devaluation of the yuan, a slowing economy and restrictions on cross boarder money transfers have put its future under a cloud.
Neptune, which organises trips into Macau for VIP gamblers, warns that "With limited cash on hand and long outstanding unsettled debts at risk of being totally written off, as well as the availability of banking facilities, the group's liquidity position is extremely vulnerable".
The company is unsure how to cope with the situation and is expecting an acceleration in junket room closures.
Investment bank Normura believes that other junket operators are under the same stress and said that its 13% forecast drop in revenue from VIP gamblers in 2015-16 may prove to be too conservative and has reiterated its "reduce" recommendation on NASDAQ-listed Melco Crown.
Investors here have not really caught on to the news with shares in ASX-listed Crown jumping 0.7% to $9.87 in afternoon trade.
While there is a lot of bad news priced into the stock following its 29% plunge over the past year, I fear there is still more downside risk to the stock on the back of poor sentiment, even though the stock is looking inexpensive as it trades on a 2015-16 price-earnings multiple of around 13.5x.
This ratio could decrease if the situation in Macau gets worse, but the stock will still look good value on fundamentals, raising questions about whether Crown might be taken private. Former chairman James Packer holds too big a stake in Crown for it to become a takeover target – not without his blessing anyway.
Crown's rival Echo Entertainment Group Ltd (ASX: EGP) has fared much better but the stock is looking fully valued after its close to 50% surge over the past 12 months. The same can be said for Tabcorp Holdings Limited (ASX: TAH).
In my opinion you will have to look at the small-cap sector if you are looking for a gaming stock trading on attractive valuations and with a bright outlook.
One example is eBet Limited (ASX: EBT) with the gaming systems provider issuing a strong full year result. As I have written before, the stock is worth $4.60 compared to its current share price of $3.50.
