Asia Market Commentary

Battle of the casinos heat up in Asia and Australia

19/6/2012, Peter Esho, Chief Market Analyst, City Index

Genting doubles up One of the major themes we have been looking out for this year is businesses that are leveraged to the shift from Chinese investment to consumption as export markets start to moderate, particularly in Europe. Our focus for now is the casino battle between the major players, outside of Macau. The fact that the Singapore-based Genting conglomerate has increased its holding in Australia’s Echo Entertainment tells us three things: There may have been an agreement between Genting’s KT Lim and Crown’s James Packer that each group would hold a 10 blocking interest for now and wait to see what develops over the next few years, fending off a hostile takeover and keeping the board in check. Genting being interested at all could signal some doubts around the future or the intensity of development in Macau and the need to diversify south into Australian assets. We don’t doubt Macau’s long term attractiveness but in the short term there could be early signs of a moderation in the rate of growth as China’s economy cools. As an anecdote, Hong Kong listed Sands China – owner of the Venetian, Sands and Plaza properties in Macao – has continued to see its shares fall from a high of HK$33 in April – to yesterday’s closing price of HK$24.90. Malaysian investment bank CIMB is said to have advised Genting on the deal. The group is said to be ready to expand its Australian presence as part of a long term strategy. The move adds credibility to ANZ’s push up north and IAG’s decision to shift its international focus from the UK into Asia. Perhaps more Australian businesses will wake up to the fact Asian expansion is not a desire but a necessity. JB Hi-Five? In Australia, it wasn’t long ago that many were speculating on JB Hi-Fi being a takeover target given its low cost business model and scale benefits in the consumer electronics space. These days, caution prevails and there aren’t too many brave souls that want to go near the stock. History shows the opposite of consensus opinion is sometimes the right decision, particularly when it comes to discretionary cyclical retailers. We haven’t been backers of JB Hi-Fi in the past and have cautioned its vulnerabilities but news that 6.3 of the stock changed hands yesterday and 4.2 on Friday causes us to re-evaluate the business. Some 5 of the stock went through a single trade at $8.40 – high five to the buyer. The most likely buyers would have been hedge funds punting on a turnaround in retail fortunes over the next few months. The seller? An institution fed up with the poor performance, knowing that the upcoming result is unlikely to carry any positives. A less likely outcome could be a buyer looking at taking an interest as a platform to launch a takeover, but who? Woolworths ruled out interest a little while back, citing differences in management and JB Hi’Fi’s price. The price has more than halved from its all time highs and the new CEO is probably a little short on ideas, so closing the door on the country’s largest retailer wouldn’t be all that sensible. Woolworth’s Price to Earnings ratio is now well above that of JB Hi-Fi unlike the past where the latter had immense earnings growth. JB Hi-Fi doesn’t have any warehouses so bedding it down and bolting it into the existing supply chain would be relatively easy for Woolworths. JB Hi-Fi shareholders would also probably be more willing to accept Woolworth’s shares and a cash component than say an all out cash exit, given the extent of recent shareprice decline. Why would Woolworth’s be interested? It might be the lesser of two bad options. The Dick Smith sales process is still ongoing and a failure to find a buyer willing to pay a reasonable price would further dent management’s confidence at a time where it needs to restore its dominance over arch rivals. The Dick Smith pain has already been taken through the balance sheet at the tune of a $300m pre tax write-down. Buying

Archived Articles