With Crown’s lean balance sheet, Who needs Japan?

TAGs: crown resorts, Editorial, Japan

Right now, Crown Resorts looks to be one of the best all-around casino investments in the world. I can find little reason not buy this company right now. The fiscal conservatives are running hog wild at Crown, if fiscal conservatives could even be described as running like wild hogs, which they probably can’t. It’s balance sheet is as strong as it possibly can be, it isn’t chasing dreams but rather shoring up its core assets, it’s dividend is through the roof, its stock is cheap, and Australia is a stable jurisdiction where government is more or less predictable compared to, say, China.

With Crown’s lean balance sheet, Who needs Japan?The only bad news out of Crown is actually good news for investors. The mass arrest of many of its executives in China is still a lingering embarrassment and scaring away new shareholders. A new scandal involving allegedly rigged poker machines is making the rounds, but Crown has challenged the MP involved in exposing the claim, Andrew Wilkie, to release any evidence he does have to the relevant authorities. This means either there is no evidence, or that Crown can easily hide the evidence or already has done so. If some sort of software was used to rig the machines and encourage certain betting patterns over others, the software could be easily removed at a moment’s notice.

I’m not saying that Crown actually did this or is hiding anything, but merely that they wouldn’t have challenged an MP to release evidence to the authorities if they thought he actually had any or could get his hand on it. Ultimately, most likely nothing will come of these accusations and they will be forgotten, with the advantage to investors being some artificial and short term bearish sentiment from the news to acquire stock more cheaply.

The other artificially bearish news is that Crown will not probably not be pursuing expansion into Japan, at least for now. Foregoing Japan has some people comparing Crown to Caesars when it decided not to expand into Macau. I believe the comparison is unfair because Caesars was in tremendous debt at the time, and Crown is not. Besides, Crown’s reasons for foregoing Japan for the near future makes sense.

First, it seems like it may be politics that is keeping them out, at least partially. Japanese licenses will be issued by committees of politicians in a big bidding (read: legalized bribery) fest, and Crown doesn’t like its chances. Crown has been known to try and legally skirt anti-money laundering regulations (who can blame them?), and Japan probably doesn’t like this so Crown would come into the bidding at a disadvantage.

Second, Japan is a complete fiscal and monetary mess of a country, the absolute worst in the developed world, even worse than Greece, with a debt to GDP ratio of 250%. Granted, it has been a basket case for over 20 years and has somehow found a way to keep its bubble inflated for a very long time, but it won’t last forever. The spit keeping the entire fiscal structure of Japan going at such extreme debt has been negative interest rates. Interest rates on Japanese government debt have been negative for nearly two years. Debt literally costs less than nothing for the Japanese government. People pay Tokyo for the privilege of loaning it money.

That won’t last. Perhaps, beyond the fact that Crown would come into Japan at a disadvantage, they realize that the situation there is much worse than it looks. Besides, Crown already decided to take the fiscally conservative path ever since it pulled out of Melco Crown. Going into Japan does not blend with that sort of business plan.

Fundamentally Crown’s numbers look great. Net profit jumped from $944M in 2016 to $1.824B in 2017. It has somehow managed to lower its income tax rate from 18.4% in 2015 to 5.5% in 2017. Whatever accountant team is in charge certainly knows what it’s doing. Total debt is down to $1.94B from $2.26B last year, for a respectable decrease of 16%. Net debt subtracting cash is actually negative. Flush with cash after exiting its joint venture with Melco, cash plus equivalents are higher than its total debt load. Much of that will be used to fund the development of Crown Sydney, but the point is debt repayment will not be a problem, even if interest rates rise substantially.

Crown Resorts has nothing to worry about in terms of balance sheet, so as long as it stays profitable, which looks likely, it can accumulate capital and wait and see what happens in Japan over the next 3-5 years. Most likely there will be a major debt collapse there and Crown may be able to enter the market then when blood is in the streets and other indebted casinos may be looking to sell their newly acquired rights on the cheap. In the meantime, Crown Sydney is under construction, so no reason to rush into dangerous markets with so many unknowns. Crown Sydney is scheduled to open in 2020, and by then the situation in Japan could look a lot different.

There is no reason to wait on Crown. It’s safe to buy now and hold for the long haul. Dividends of over 12% were paid out this year, and while they are not consistent and probably won’t be as high in 2018, the stock is close enough to multi-year lows that any more downside looks limited.


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