Category Archives: China

Macau gambling and the Chinese economy

April 3, 2013 By in Asian economic development, Casinos, China, Current Market Thoughts, economics, Entertainment, Industry Analysis, Recent Market Action Tags: , , , , , , , , 1 Comment

March 2013 Macau gaming results

The Macau Gaming Inspection and Coordination Bureau has just released its report on the gambling take of casinos in the SAR during March 2013.  The figure is eye-popping.  Last month gamblers exited Macau;s gambling palaces with their wallets lighter by 31.3 billion patacas (US$3.9 billion).

how good is that?

–P31.3 billion is an all-time monthly record for casino win in Macau.

–It represents a 25.4% improvement over the comparable period of 2012.

–The year-on-year gain is the highest for the SAR since January 2012, after which the Chinese economy–and the Macau casinos–began to falter.

–March is also up 15%+ vs. February, which runs contrary to Macau’s (admittedly short) pattern of flattish month-on-month comparisons in the first quarter.

winners?

This is great for the Macau casino industry, and especially for the firms that have recently added capacity, mostly in Cotai, to accommodate extra gamblers.

At the same time, the Macau gambling results give us a good idea about how well-to-do Chinese citizens feel about their economy, their personal earning prospects and their degree of comfort with the newly-installed government.  It’s a solid thumbs-up on all counts.

The figures also suggest that in its newly-launched anti-corruption, anti-ostentation campaign, Beijing is aiming at much bigger fish than high-roller casino patrons.

noodle making returning to UK from China–what this means

March 14, 2013 By in Asian economic development, capital flight/brain drain, China, economics, emerging markets, the UK Tags: , , , , 1 Comment

noodles to Leeds

British Food company Symington’s, the inventor of pea flour and maker of Golden Wonder’s pot noodles, is returning its noodle manufacturing operations from Guangzhou to Leeds, according to the Financial Times.  The FT says the company cites equivalent/lower labor costs in the UK and better response times to customers’ requests as the main reasons.  (I’ve looked in vain on the Symington’s website for a press release.)

This says something about China.  

But it’s not new news.  Alerted by Hong Kong-based distributor Li and Fung and by David Pilling of the FT, I wrote  in late 2010 about the shift of labor-intensive manufacturing, like t-shirt making, away from China to places like Bangladesh and Vietnam.  As I commented back then, this wasn’t particularly new news in 2010, either.

China has run out of cheap labor on its eastern seaboard, a signal that at least this region of the country has to shift to higher value-added manufacturing.  The textbook solution for a nation facing this issue is to allow its exchange rate to rise, while holding local currency wages steady.  China, however, hasn’t followed the schoolbooks.  It has kept its exchange rate relatively stable, while aggressively encouraging local currency wages to rise.  Although this also gets the job done of forcing the most labor-intensive and low value-added businesses to go elsewhere, it runs the risk of creating a lot of inflation.  We’ll see how things turn out.  But, personally, I’m not betting against Beijing on this one.

What’s more interesting, to my mind, is what this says about the UK

Yes, the home country has won back the noodle makers.

There certainly are transportation time and cost savings.

Symington’s will doubtless use “Made in the UK” to its marketing advantage.  And there are probably political points being scored as well.

Nevertheless, this isn’t wresting high-tech business from Google, or Samsung or Amazon.  It isn’t bio-tech.  It isn’t competition for LVMH.  It’s labor-intensive work that would otherwise have ended up in a developing country further down the food chain than China.

“Reshoring” of this type is a two-edged sword.  On the one hand, it’s an illusion-shattering phenomenon for dreamers who recall the days when Britain held a privileged place as the manufacturing hub for a far-flung colonial empire–including Bangladesh.  On the other hand, it’s a place to start.  And with sterling gradually depreciating, UK labor will be in increasing demand.

as an investor…

…this may not be great news for UK manufacturing.  Nor is it a reason to be interested in this sector, because profits are likely to be slim.  But even a low-end manufacturing revival means more jobs.  That suggests that mid- to low-end entries in consumer-oriented areas like lodging, specialty retail and supermarkets may have better prospects than is currently factored into their share prices.

imminent crackdown on high rollers in Macau?

February 6, 2013 By in Casinos, China, Current Market Thoughts, Entertainment, Hong Kong, Industry Analysis, Recent Market Action, Stock ideas Tags: , , , , , , , , , , Leave a comment

an anti-corruption campaign

Overnight The Times of London published an article saying that the new administration in Beijing will begin a crackdown on corruption in China shortly after the start of the new year late this month.  This will included an attack on organized crime (triad)-related money-laundering junkets by gamblers to Macau.

Most Hong Kong-traded Macau gambling stocks sold off by 5%-7% on the news–the one exception being, oddly enough, MGM China ( HK: 2282), which is strongly linked to Stanley Ho’s daughter, Pansy.  US-traded gambling stocks with Macau exposure are selling off today as well, although to a much lesser extent.

What’s going on?

–I’m assuming the report is true, even though I’ve never–ever–seen The Times break an important stock market-related story.  If I had to guess, this is a deliberate leak from the police in Hong Kong.

–The extent of triad influence in Macau today is unclear.  In colonial Macau it’s thought to have flourished, with the rumored help of the Ho family of SJM Holdings–then the monopoly casino operator.  In my view, one of the main reasons the SAR invited American firms like WYNN and LVS to establish casinos a decade ago was to be a counterweight to traditional influences–partly for their superior technology, partly for their far superior compliance procedures.

–Income inequality, and in particular the vast fortunes that relatives of high officials seem to routinely accumulate, is a topic of increasing political concern in China.  It’s also a specific target of the new administration.  So a crackdown may have more targets than just the underworld.

–The selloff so far has been across the board, ex MGM and MGM China.  If the target is just the underworld, it’s possible that casinos associated with the Ho family, long rumored to have triad connections, would be hit the worst.  If the target is also high rollers in general, add the WYNN interests to the list, since that company specializes in catering to the high roller market.  Arguably, Galaxy Entertainment and the LVS companies will be hurt the least, since they focus on the growing mass market and haven’t had the greatest success in wooing deep-pocketed individuals.

what to do

No one really knows how severe or how long-lasting an anti-corruption campaign focused on Macau gamblers might be.  To pick a number out of the air, it’s possible that the result would be a permanent 10% reduction in the level of gambling in the SAR.  I think that’s probably too severe, but let’s stick with that figure.   After whatever initial downward shock there might be, this would mean a year without much growth in the SAR’s gambling revenues.  The pain would probably be distributed as I’ve described in the previous section.

I believe that the long-term prospects for Macau gambling are excellent–at least unless/until Beijing decides to establish a competing gambling enclave on the mainland.  There’s no sign that’s likely to happen; it’s just the only thing I can see that will upset the apple cart.  I’m all for anything that cleans up illegal activity.  So I look at the threat of a decline in the Macau gambling stocks as a temporary affair and mainly an issue of portfolio risk control.

These stocks have generally been outstanding performers recently, on the idea that the upturn in the Chinese economy now under way will mean a rebound in Macau gambling market growth.  So the stocks may have become outsized parts of your portfolio.  Trim position sizes, if necessary.  Imagine a 20% stock price decline from here.  Are you satisfied to hold all the stock you own now?  If not, cut the position sizes and wait to see what happens.

 

 

4Q12 for Las Vegas Sands (LVS): Asian good times are back

January 31, 2013 By in Casinos, China, earnings conference calls, Entertainment, Hong Kong, Industry Analysis, Stock ideas Tags: , , , , , , , , Leave a comment

the report

After the New York close yesterday, LVS reported its 4Q12 earnings results.  The company reported profits of $434.8 million, or $.54 a share, on revenues of $3.06 billion.  EBITDA (earnings before interest, taxes, depreciation and amortization–a measure of operating profits) was $1.002 billion.

Revenues were up 20% year on year, net income up 35%.

As regular readers know, casino company financials are unusual in that what counts as revenue for gambling companies is not the amount bet by customers but rather the portion of that amount that the casino retains or “holds”–that is to say, the amount that customers lose.  The amount bet, which appears nowhere on the income statement (but is normally somewhere in the company press release), is, in my experience, a relatively stable and pretictable function of customers’ income and casino floor space.  The “hold,” on the other hand, is also a function of luck, which can vary considerably over short periods of time.  The first thing an analyst will do in looking at casino earnings is to correct them for these luck variations.

As for LVS, the company was unusually lucky in Macau during 4Q12, but unlucky everywhere else.  Overall, EPS would have been $.63 if the company had had average luck throughout its operations.  That compares with the Wall Street consensus, which I’ve always read as being luck neutral, of $.59.

LVS has also raised its quarterly per share dividend from $.25 to $.35, starting with the March 2013 payout.

As I’m writing this, the stock is up by about 5% in after hours trading.

the details

Macau

Sands China generated EBITDA of $622.2 million during the quarter, up 44% year on year.  Subtracting out unusually good luck, EBITDA was $575.4 million, up 32.5% vs. 4Q11.

LVS’s aggressive expansion in developing the Cotai area appears to be paying off.  Because it has developed extra capacity, it stands to benefit disproportionately as both economic recovery on the mainland and better transportation links deliver increasing numbers of visitors to Macau.

Perhaps more important, LVS announced it has been granted permission by the Macau government to add 200 new tables to its casinos, a strong sign that the SAR approves of the way Sands China is doing business.

Singapore

After having hold-adjusted EBITDA stall, with a slight downward bias, for the last year at around $380 million, Marina Bay posted 4Q12 EBITDA of $406.4 million, up 6.8% yoy and 9.1% qoq.  Although this market is so new it’s impossible to interpret the figures with any confidence, the fact that EBITDA is moving up again is encouraging.

the US

Flattish EBITDA, which is all investors should want.  Hold-adjusted, Las Vegas was down by $8.1 million at $87.9 million.  Bethlehem was up $3.0 million at $25.6 million.

asset value

LVS has a market cap, at the aftermarket quote, of about $45 billion.  It’s ownership of Hong Kong-traded Sands China is worth $29 billion.  If we applied the same valuation to 100%-owned Marina Bay Sands, it would be worth about the same.  But Singapore doesn’t appear to have the explosive growth potential of Macau, at least as things stand now.  Remember, though, this time a year ago there seemed to be no limit to the upward trajectory of Marina Bay’s EBITDA, so we’ve got to keep an open mind.  Trying to be conservative, let’s say that current Singapore earnings are worth a multiple of .6x what Macau’s are.  That would give Marina Bay Sands an asset value of about $17 billion.

Together, the Asian properties explain the entire market value of LVS.

Over the next year, what might we reasonably expect from Asia?  Sands China could be trading at a price 20% higher than it is now, based on Macau market growth and increased Sands China market share.  Revival of the apparently more business cycle-sensitive Singapore gambling market might produce 10%-15% EBITDA growth and a mild expansion of the relative multiple.  If so, even if the market continues to value the US operations of LVS at the current zero, we should expect a substantially higher share price for LVS.

earnings

Full-year earnings for LVS in 2012 were $2.14/share.  To me, it seems reasonable to expect $2.50 in 2013–meaning LVS is currently trading on a forward earnings multiple of 22x.  Yes, that’s high, but it’s no longer in the stratosphere.  The stock also yields 2.6%.

Therefore, even on a conventional PE basis, which I don’t think is the right way to value the stock, LVS doesn’t look bad.

 

 

Shaping a portfolio for 2013(lll): China

January 9, 2013 By in Asian economic development, China, Constructing a Portfolio, Current Market Thoughts, economics, Hong Kong, Japanese development, pink sheets, Portfolio management, Shaping a portfolio for 2013, Strategy Tags: , , , , , , , , , Leave a comment

China

Like the US, China is a complex topic with lots of moving parts.  I’ve also been investing in China-related stocks for over 25 years (hard to believe it’s been that long), so there’s an increased risk of my being distracted by details.  So, like my views on the US, I’m down to bullet points:

1.  In the late 1970s, China decided it had to embrace Western economics (not politics), because central planning wasn’t working and it didn’t want to end up like the old Soviet Union.  Like Japan before it, China pegged its currency to the US dollar and concentrated on growth through export-oriented manufacturing.

Two factors separate China from run-of-the-mill emerging countries using the Japan blueprint:

– the huge size of its population, and

–the single-mindedness with which it has pursued economic expansion.

Thirty-plus years later, China is now the second-largest economy in the world.  It’s three times the size of #3 Japan, and 80% as big as the US (using Purchasing Power Parity GDP figures).  In a handful of years, China stands to become #1.

2.  The financial meltdown in the US and the € crisis in the EU depressed demand in China’s two major markets.  China’s (very competent) economic mandarins initially added temporary extra stimulus to domestic activity to counter the effects.  But even while China was doing this, it was clear that the currency peg would, quickly enough, transmit enormous (and unneeded/unwanted) monetary oomph to the mainland economy.

Like other emerging economies, China has been spending the past couple of years trying to cool down an overheating economy.

That task has already been accomplished.

3.  In November, China completed its once a decade Communist Party leadership transition.  In the runup to this event, high-level decision-making grinds to a halt, since bureaucrats don’t know the identities, let alone the intentions, of their new bosses.  That drag on the economy is in the past, as well.

4.  Because of #2 and #2, it seems to me that the year of the Snake will be a strong one for China.  Growth may come in at “only” 8%, but that will certainly be better than most other places on the planet.  The Chinese PMI is already signalling acceleration.

how to invest

You can get some exposure by finding stocks in, say, the US or Europe, that have significant operations in China.

You can get more direct exposure by buying the stocks of Chinese companies.  As with any other equity investment, the basic choice here is whether to pick an index fund/ETF, or to actively manage–either by selecting an actively-managed mutual fund or picking the stocks yourself.

Personally, I own three funds in the Matthews family of China-related offerings.  I also have international accounts with Fidelity and Charles Schwab so I can buy Hong Kong-listed names in the local market.  Many are also available for trade on the pink sheets, although usually at considerably less favorable prices.

I’ve never been a big fan of ADRs.  In general, a foreign company only comes to the US when it thinks it can get a better price for its equity than it can from investors in its home market, who presumably know the firm and its business practices much better than foreigners.  The only exception I see to this rule is the case of EU-based tech companies, where local investors are mostly clueless.

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