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Gambling stocks punished on ASX

The arrest of 18 employees of James Packer’s Crown Resorts Ltd (ASX: CWN) on Friday by Chinese officials has thrown a cat amongst the casino pigeons.

In afternoon trading, Crown’s share price has plunged 10% to $11.70, but other casino operators are also getting hammered. Star Entertainment Group Ltd (ASX: SGR) ex-Echo Entertainment has also seen its share price drop 5.5% to $5.41, SkyCity Entertainment Group Limited-Ord (ASX: SKC) share price is down 3.9% to $4.20 and Donaco International Ltd (ASX: DNA) is down 3.5% to 41.5 cents.

The reason is that a crackdown on Chinese VIP gamblers by the Chinese government doesn’t just affect Crown. It is likely to affect all the casino operators that are trying to lure Chinese VIPs to their overseas casinos, whether they are in Macau, Australia, New Zealand, Laos, Thailand or Vietnam.

According to reports, the staff detained are almost all of Crown’s China-based employees, and it appears that the arrests were timed to coincide when Jason O’Connor, Crown’s head of VIP International had arrived in the country.

China is struggling to control the massive flow of capital out if the country, particularly through the gambling mecca of Macau. A crackdown on gamblers flocking to the city’s numerous casinos saw revenues plunge, but also appears to have forced offshore casinos to ramp up their direct marketing to Chinese high rollers – who spend millions in the casinos – and are worth much more than locals in many casinos.

However, casino companies are not allowed to advertise their casinos in China. They can advertise other facilities like the resorts, hotels, activities, shopping and restaurants often attached to the casinos.

South Korean sales and marketing staff for casinos in China were arrested last year for “soliciting and organising Chinese citizens to gamble overseas”.

The problem for Crown and the other casino operators is that the high rollers could start avoiding those companies with casinos offshore.

It’s no secret that many Chinese have been trying to get money out of the country via various means, including purchasing property in Australia and gambling. China is cracking down on these avenues, one reason why a number of Chinese investors are struggling to come up with the cash required to settle on properties where the deposit was paid ages ago.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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