Sky city industry analysis

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2015 Autumn Group Assignment Part One

Business Valuation and Financial

Analysis 22743

SkyCity Entertainment Group Limited

Source：http://calvinayre.com/2013/08/19/casino/skycity-eyes-manila-for- possible-casino-epansion

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NTENT

Executive Summary.......................................................................3

SKC !usiness" #acroeconomic an$ %n$ustry Ana&ysis......................'

1.0 #acro Economic (actors An$ %ts %n)uence On *+e Per,ormance O,

S-y City........................................................................................'

1.1 Gross omestic Pro$uct Per,ormance (orecast ,or 5 /ears................'

1.2 %nterest ates an$ Consumer Price %n$ex CP% (orecast ,or 54 /ears

...........................................................................................................'

1.3 %n)ation ates (orecast (or 54 /ears..............................................5

1.' *+e %mpact o, #acroeconomic (actors on companys Per,ormance....5

2.0 %n$ustry Ana&ysis.....................................................................5

2.1 iva&ry amongst Existing (irms 6o7...............................................5

2.2 *+reat o, 8e7 Entrance to t+e #ar-et 6o7.....................................9

2.3 *+reat o, Su:stitutes 6o7.............................................................9

2.' !argaining Po7er o, Customers ; Casino 6o7" <ote& <ig+.................9

2.5 !argaining Po7er o, Supp&iers 6o7................................................9

3.0 SKC !usiness Strategy.............................................................4

3.1 Provision O, <ig+ =ua&ity Service....................................................4

3.2 SKC #ar-et Positioning...................................................................4

3.3 A$+ere *o egu&ations o, Per,orming !usiness.................................4

'.0 is-s Attri:ute$ to !usiness Per,ormance.................................4'.1 Company Per,ormance....................................................................4

5.0 Sustaina:i&ity o, Pro>ts...........................................................?

e,erences................................................................................... @

Appen$ix 1.................................................................................10

Appen$ix 2.................................................................................11

Appen$ix 3.................................................................................12

Appen$ix '.................................................................................13

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Executive Summary

The underlying influence of the macroeconomics factors has helped determine the firm’simmediate position in terms of operation. The macroeconomic factors in both Australia and NewZealand, where the company operates, prove to be favourable to steer future success and growth.By use of the Porter’s ive model, the paper has established that industry upon which thecompany operates is portrayed by wea! competition in casino business, which is a plus in regardsto competitive advantage and higher levels of revenues. The hotel industry, however" e#perienceshigh competition due to the easement of entry into this mar!et by smaller businesses. $n fact,most of the firm’s revenues emanates from gaming as opposed to business unit. %owever, in aneffort to shield its future profits and growth, &'( has engaged in a multiple level of activities thatinclude" partnering with Auc!land (ouncil to open a gaming street and the launching of newloyalty program aimed at sustaining future customer base.

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SKC !usiness" #acroeconomic an$%n$ustry Ana&ysis

1.0 #acroEconomic (actors An$ %ts%n)uence On *+e Per,ormance O,S-y City

The process of evaluating the company’s immediate macroeconomic environment iscomple# in nature. The ne#t section of this paper puts up a discussion on these factors as theyaffect its performance.

1.1 Gross omestic Pro$uct Per,ormance (orecast,or 5 /ears

The level of Australia’ gross domestic product has been on the increase for the past )years. Although there has been a slight decrease in the current financial years, still they remainfavourable in comparison to global indices. The recent developments in technologicaladvancements and mining sectors, as well as an increase in the trading of these items within the

securities mar!ets, postulate a positive future growth. &tatistically, in *ecember of +-,Australia /*P grew by about .0 reflecting a +.10 percentage change 2Australian Bureau of&tatistics, +-)3. The /*P is e#pected to even grow further in this current financial year.Appendi# - shows the growth in Australia’s /*P over the past ) years or so. Notwithstanding,according to &tatistics of New Zealand 2+-)3, the +- /*P grew slightly by -0. $ts economyis also e#pected to improve due to economic activities, as well as primary industries 2Appendi#+3.

1.2 %nterest ates an$ Consumer Price %n$ex CP%(orecast ,or 54 /ears

Australia’s current interest rates depict a favourable downward trend. This is a positiveindication that there is going to be increased economic activities especially in the financialsectors. (P$ remains relatively lower than .+ per cent in +-. This can be clearly seen inAppendi# 1. New Zealand’s interest rates for the fourth 4uarter of +- remained unchanged at1.)0. The country’s future with its trading partners is set to improve tremendously in +-). $t isimportant to note that for both of these countries the economy is set to increase primarily becauseof the recent lowering of oil prices. As a result of relatively lower oil prices, the purchasing

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power of all households within these two economies is set to increase hence a guarantee on theimproved income disposal. There are also high e#pectations of future profits since the cost ofdoing business will reduce significantly due to low manufacturing costs.

1.3 %n)ation ates (orecast (or 54 /ears

As opposed to what was early anticipated, the inflation rates in Australia have continuedto reduce with the fourth 4uarter of +- recording a -.50 decrease. The decline in inflation ishighly attributed to the plunged global oil prices. 6i!ewise, the increase posted in New Zealandgovernment statistics indicates a satisfactory decrease within the five7year period to a figure below -.)0 in fourth 4uarter +-. The reduction in inflation is ascertained to current reduced oil prices in the global mar!et, which has facilitated a reduced cost of conducting businessoperations and reduced costs for basic needs.

1.' *+e %mpact o, #acroeconomic (actors oncompanys Per,ormance

As it can be noted from the figure above, there is a certainty of current and future profits because of the relatively stable gross domestic product, inflation rates and interest rates. This ishighly attributed to the reduction in costs of doing business within these economies. *espite theimprovements in the numerous macroeconomic factors postulated above, the consolidated annualstatements indicate an insignificant decrease in the revenues from 89):,):; in +-1 to89+,91; in +-.

<4ually important, it is crucial to note that the e#pected future revenues will increasesignificantly since the plunge in oil prices occurred towards the end of the +- fourth 4uarter.There is a prospect for a brighter future for the company because of the possible increasedincome disposal and reduced costs of conducting business. %owever, this will depend on whether

Australia will manage to uphold positive macroeconomic factors in the coming ) to 5 years ofoperations.

2.0 %n$ustry Ana&ysis

$n this section, the paper utili=es the Porters ive actors to evaluate the casino and hotelindustry as well as establish the e#act level of the present competition.

2.1 iva&ry amongst Existing (irms 6o7(asino industry postulates a low level of rivalry. $t should be noted that the Australian and

New Zealand casino industry has continued to develop significantly. %owever, the fees imposedon customers in both countries fail to attract them hence a firm might find it hard to enter themar!et as e#it strategies are e#pensive. The hotel industry however> indicates a high level ofcompetition. $n fact, the intense level of competition might best e#pound on the reducedrevenues.

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2.2 *+reat o, 8e7 Entrance to t+e #ar-et 6o7

The threat to casino mar!et is small because the business highly depends on the e#istingeconomies scale to survive low revenues. $t is crucial to note that a larger competitors alwaysen?oy cost advantages over others hence they are more profitable in nature. $n fact, this is the

main reason potential entrants into the mar!et suffer due to the absence of cost advantage on their side. $n essence, the first mover advantage rests with local casinos that en?oy localised monopolyover others. or instance, &!i (ity Auc!land and Adelaide en?oy monopoly in these regions asthey hold the sole license for operations.

The threat is also low in the hotel industry because customers already have hotels of their choice hence limiting further entry of new ones. The industry also operates on an economics ofscale model so that the first movers in the industry en?oy the benefits of favourable locations. &'$(ity is a first mover in this industry because it managed to enter the (asino business thus en?oysa superior brand recognition and customer loyalty. or instance, the firm is popular in bothAustralia and New Zealand in terms of 4uality casino service provision.

2.3 *+reat o, Su:stitutes 6o7

Both hotels and casinos are not e#posed to any form of substitutes because of theuni4ueness of services offered. or e#ample, in the casino industry, it is difficult to ascertain asubstitute for gambling as a !ind of entertainment. Therefore, there are no forms of threat forsubstitution of entertainment. &ubse4uently, domestic gamblers always en?oy spending their timein local casinos. or hotel industry, on the other hand, the level of 4uality services determines the possibility of substitutes. %ence, they engage in intensive processes to ensure that services remainat a top notch level at all times.

2.' !argaining Po7er o, Customers ; Casino 6o7"<ote& <ig+

or casino business, it is relatively low for &'( customers. This is partly affected by thelow number of casinos as well as price infle#ibility hurdle. The power remains relatively lessdespite the fact that there are numerous differentiations of gambling sports. The limitation,however" arises with the fact that these distinctions occur in different sections and regions so thatthe decision to visit them is limited.

or the hotel, however, the bargain is high because of diversity of customers. (ustomersthat boo! more rooms can negotiate for fair prices. A perfect e#ample rests with tour operatorswho have the capacity to boo! for more space given that they en?oy direct access to potentialcustomers. $n the event, that hotels fail to meet the underlying demand for their clients then theirrespective bargaining power can be wea!ened all the same.

2.5 !argaining Po7er o, Supp&iers 6o7

or casino business, the bargain is considered to be low due to relatively reducedswitching costs. $t is also low due to &'(’s dominance in the mar!et. or hotel industry, however

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the bargain is considered higher. This is significantly attributed to monopoli=ation of suppliers inregards to electricity and gas.

3.0 SKC !usiness StrategyThe company main ob?ective is to ensure ma#imisation of profits and minimisation of

possible costs. The company can employ the following elements in order formulate and install itsstrategic plans.

3.1 Provision O, <ig+=ua&ity Service

This should be provided in the form of 4uality gaming and entertainment as well as hotelfacilities li!e food and accommodation for domestic and international customers.

3.2 SKC #ar-et Positioning

(onsidering the fact that there has been substantial growth in entertainment and gamingindustry over the years, the firm should be able to e#pand its mar!et needs and preferences inorder to maintain a stronger position.

3.3 A$+ere *o egu&ations o, Per,orming !usiness

The company should ensure that their activities in both casino and hotel industry operatewithin the legal framewor!s in both Australia and New Zealand. This is important to avoid possible future fines and penalties, which can decrease revenues substantially.

'.0 is-s Attri:ute$ to !usinessPer,ormance

irst, there is a possibility of fluctuations in the money mar!ets. This might bring aboutforeign e#change ris!s such that revenues will be either being appreciated or depreciateddepending on the stability of @& dollar. &econdly, there is also a possibility of &'( to faceimminent li4uidity ris!s attributed to the rather cash and cash e4uivalents in its balance sheet. $nthe case of movements in the money mar!ets, the firm might lose substantial amounts of moneydue to depreciation or appreciation of the @& dollar.

'.1 Company Per,ormance

&'(’s strategic level of the framewor! has been accomplishing significant levels ofresults over the five7year period between +: and +-. The firm has managed to secure and

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maintain a favourable position in the industry performance indices across the globe as well as being the leading domestic gaming entity in Australia.

5.0 Sustaina:i&ity o, Pro>ts &'( is deemed to be the largest entertainment firm that operates casinos, $P gaming

and hotel services in both Australian and New Zealand mar!ets. $t is a public traded companywhose shares are sold in two mar!ets of operation.

The firm’s total revenues have decreased by about .)0 in the period between +-1 and+- with the figures dropping from 89):,):; to 89+,91; respectively. The drop isattributed to decreased income from gaming related services and products in +- 2Appendi#3. $t is also attributed to increased e#penses especially from restructuring costs, which increasedfrom 81,+1); to 8:,-5; and depreciation and amortisation e#pense that increased from

85C,59; to 89,5C:; in +-1 and +- respectively. ollowing the fact that Australia response to the effects of the global financial crisis has been positive, it is e#pected that the firm will continue to post growth and favourable profits inthe future. $n conse4uence, it can be argued that the increased brand mar!eting for the firm as alu#ury destination has continued to attract a great deal of gamers in both the domestic andinternational mar!ets as well.

&ome of the notable efforts pursued by the company to guarantee sustained profits in thefuture can be seen in the partnership it made with Auc!land (ouncil where a total of 8-; wasinvested in transforming a street into a gaming street. &ubse4uently, some of the reconstructioncosts were incurred in the renovation of &!y Towers in order to accommodate future demands. Notably, as a way of enticing and retaining loyal customers, the firm recently launched the

Premier Dewards $nitiative that aims to reward loyal customers hence ensuring future stabilisedcustomer base.

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e,erences

Australia Bureau of &tatistics. +-). Australian National Accounts> National $ncome, <#penditure

and Product, *ec +-> *ecember 'ey igures. Detrieved on ;arch --, +-) fromhttp>EEwww.abs.gov.auEausstatsEabsF.nsfEmfE)+C.

&!y (ity Annual Deport. +-. Detrieved on ;arch --, +-) fromhttp>EEir.s!ycityentertainmentgroup.comEphoeni#.=htmlGcH-C+5:CIpHirol7reportsAnnual+-

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Appen$ix 1

Source: Australian Bureau of Statistics, 2015

/raph - > /*P growth rates, olume measures, 4uarterly change of Australia

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Appen$ix 2

/raph +> The /*P and /*< value of Australia

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Appen$ix 3

Australia

PricesLast Previous Highest Lowest Unit

$nflationDate

-.5 +.1 +1.: 7-.1 Per cent JKL

$nflationRate ;om

.+ .) 5.)) 7-.) Per cent JKL

(onsumerPrice$nde# (P$

-C.C -C. -C.C .+$nde#

PointsJKL

(ore$nflationDate

+.- +.-- 5.C .95 Per cent JKL

(ore(onsumerPrices

-5.- -C.) -5.- 1.$nde#Points

JKL

/*P*eflator

--.- --.- --.9 C.5$nde#Points

JKL

ProducerPrices

-.- -. -.- 5.5$nde#Points

JKL

ProducerPrices(hange

-.- -.+ C.1 7-.) Per cent JKL

<#portPrices

9).1 9).1 --+.+ -C.1$nde#Points

JKL

$mport

Prices

-).+ -.1 --C.1 )-.)$nde#

Points

JKL

ood$nflation

+. 1.) +.C 71.+ Per cent JKL

/raph 1> The data of !ey performance indictor of Australia prices

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Appen$ix '

/raph > $ncome statement of the &!ycity <ntertainment /roup 6imited for the year ended 1Mune +-

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Sky city industry analysis

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