James Packer's Crown Resorts may find it hard to make enough money out of the proposed $1.3 billion luxury hotel and VIP casino in Sydney.
The NSW government and Crown have entered into a binding agreement to proceed with the development at Barangaroo, pending the passing of legislation, planning approvals and the issuing of a gaming licence.
Crown Sydney, which is expected to be operational from November 2019, will include a casino open only to invited VIP gamblers and guests, and no poker machines.
Crown will pay a fee of $100 million for the new gaming licence, which will have a 99 year term.
The agreement guarantees total licence fees and gaming tax payments of at least $1 billion to the NSW government over the first 15 years of full operation.
If Crown Resorts chairman James Packer were to seek a return of 10 per cent on the $1.3 billion to be spent on the project, Crown Sydney would have to generate $130 million in earnings, CBA Institutional Equities analyst Ben Brownette said.
Without poker machines that would be hard.
"My view and the numbers I've run suggest that it's going to be very difficult for Crown to make a reasonable return on capital out of outlaying $1.3 billion," Mr Brownette said.
But he said Crown Sydney could generate benefits for Crown's other casinos in Melbourne and Perth.
Having a network of casinos in three capital cities would enable Crown to offer its Chinese VIP players a range of destinations, and make then think twice before switching to Crown's competitors.
Chinese gamblers believe in luck, Mr Brownette said, and if they are faring poorly at a gaming table in Melbourne, for example, they will want to leave.
So having another venue to send them to was important.
Mr Brownette said Crown had not been gifted anything by the NSW government, and was taking a very large risk on Barangaroo.
"Perhaps it is always something that James Packer has wanted, or perhaps there's a bigger prize," he said.
"Perhaps a lot of it is about keeping a global competitor out of Sydney."
Crown's plans also put pressure on Echo Entertainment, the publicly listed operator of Sydney's only current casino, The Star.
"Echo obviously need to lift The Star to another standard," Mr Brownette said.
"They obviously need a six-star offering if there is a six-star offering across the road.
"They've got five years to work it out."
Echo recently spent $870 million upgrading The Star.
Shares in Crown dropped 10 cents to $16.53.
