DEUTSCHE BANK: Buy Crown

Gaming in Macau. Aaron Tam/AFP/Getty Images

Deutsche Bank has upgraded its rating on Crown Resorts to a buy from a hold.

Crown’s shares dropped hard yesterday as news broke about 18 of its staff being arrested in China in an apparent crackdown on the marketing efforts of casino operators.

Deutsche Bank says the stock was trading at a 19% discount to its revised valuation of $13.75 a share. The shares are trading at $11.29 today, a rise of more than 1% after a 13.9% fall on Monday.

“We believe that junket operators and players will be less inclined to travel to Australia while these investigations are ongoing,” Deutsche Bank says in a note to clients.

However, Deutsche Bank believes some are overestimating the impact on Crown’s revenue. It forecasts that Crown’s VIP turnover, the business of high rollers, will fall by 20% in 2017 with Chinese turnover down 30%.

“We believe the market is now pricing in a 70% reduction in VIP turnover and a 100% decline in Chinese VIP turnover, which we view as excessive,” write analysts Mark Wilson, Anthony El-Khoury and Joseph Kim.

“A similar situation for the Korean casino operators in 2015 resulted in a 17% decline in VIP turnover and a 31.5% reduction in Chinese VIP turnover in the subsequent 12 month period.”

In June 2015, 13 gaming managers from the Korean casinos and 34 of their Chinese agents were arrested across Beijing, Hebei, Shanghai and Jiangsu for allegedly luring Chinese gamblers to foreigners-only casinos in South Korea.

Trials were held in Shanghai and Beijing this year. The VIP marketers from Paradise and Grand Korea Leisure were found guilty, fined and deported.

The two companies have withdrawn all employees from mainland China.

“While Crown is yet to be provided with details as to why its employees have been detained, press reports suggest they have been held on suspicion of gambling crimes, including the unauthorized collection of a gambling debt and the illicit follow of funds from China to Australia,” the analysts write.

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