A series of inquiries into the conduct of Crown Resorts and ongoing financial crimes investigations nationwide will likely result in greater regulatory oversight and increased costs for all Australian casino operators, according to a new report by Fitch Ratings.
The report, titled “What Investors Want to Know: Australian Gaming” and published Friday, takes a deep dive into the state of the Australian gaming scene given the revelations around Crown and the impact of COVID-19 on international tourism.
Crown, which was earlier this year deemed unsuitable to hold a NSW casino license pending significant corporate change, is currently facing two concurrent Royal Commissions in Victoria and Western Australia which have already unearthed concerns around tax payments and problem gambling. All three of Australia’s major operators – Crown, Star Entertainment Group and SkyCity Entertainment Group – are also in the crosshairs of Anti-Money Laundering watchdog AUSTRAC for potential non-compliance with AML and counter-terrorism legislation.
According to Fitch, any potential punishments to be dished out to the operators will almost certainly be accompanied with greater long-term scrutiny by regulators, which will impact their bottom line.
“We expect compliance costs for gaming operators to climb given the heightened scrutiny, which is likely to increase regulatory oversight and investment in compliance systems,” the report said.
“Some elements of the operators’ businesses may also be forced to cease, which could dampen their overall revenue generation ability and margins.
“We also believe the gaming operators will be required to increase their contributions to pay for the greater regulatory oversight. One of the recommendations out of the NSW inquiry was the creation of a specific gaming regulator, which would be funded by the operators – mainly Crown and The Star.”
On a more positive note, Fitch does not expect declining VIP revenues as a result of recent junket bans to have a significant long-term impact on profits given that Australian casinos rely primarily on domestic gaming. It also notes that VIP revenue as a percentage of all gaming revenue nationwide has fallen substantially in the past five years, from 34% VIP in 2015 to just 24% in both 2019 and 2020.
“The cessation of junket operations will shrink VIP revenue,” Fitch said. “In particular, operators will find it difficult to cater to Chinese VIPs, as China prohibits the direct promotion of gaming activities and junkets are used to facilitate international play. We believe a fall in Chinese visitation will significantly affect VIP revenue.
“However, VIP has historically made up a smaller proportion of Australian gaming operators’ revenue than domestic mass-market gaming, which remains stable. This should limit the impact of any decline in VIP revenue for operators.
“VIP revenue is also inherently more volatile and generates a lower margin than the domestic business – this means that the decline in profit will not be at the same level as the top-line decline.
“Domestic mass market performance has been stable over the past few years, with declines in 2020 due to the closure of the properties under pandemic-related restrictions. Most properties have reported a healthy return to profitability following their reopening progressively over 2H20, highlighting the market’s resilience, even when operating under social-distancing restrictions.
“We expect such restrictions will have a greater impact on gaming operators over the short term, as they are at the forefront of closures when governments are seeking to contain a Covid-19 outbreak, rather than other restrictions that more so impact the VIP market.”