Category Archives: Hong Kong

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.

Macau gambling crackdown?

December 5, 2012 By in Asian economic development, capital flight/brain drain, Casinos, China, economics, Entertainment, Hong Kong, Industry Analysis, Recent Market Action, Stock ideas Tags: , , , , , , , , , , Leave a comment

The Financial Times, among others, ran stories yesterday attributing the sharp, across the board fall in Macau casino shares in Hong Kong Tuesday to the detention by Chinese authorities of several junket operators who organize groups of high roller gamblers travelling from the mainland to the SAR to gamble.  Government inquiries have apparently also been made to the casinos themselves for information about the structure and betting behavior of some junkets.

To my mind, it’s not yet clear what’s going on.  The possible government concerns, as I see them, might be:

–displays of affluence in a socialist economy.  This has never bothered Beijing before, so I doubt this is the issue now, other than as a formalistic expression of official disapproval.

–possibly illegal flow of foreign exchange out of China.  This is a perennial problem for any country with foreign exchange controls.  The time-honored method of moving funds abroad, however, is through corporate transfer pricing.  But there’s no evidence of a wider crackdown, so I don’t think this is the issue, either.

–money laundering.  This was a notorious problem while Macau was a Portuguese colony, and while the former casino incombent had a monopoly on legal gambling.  Money of dubious origin enters the casino and leaves as legal, taxable gambling winnings–with the casino serving much the same function that urban parking lots sometimes serve on a smaller scale.

This is a serious issue.  In my view, eliminating criminal influence in the Macau casino industry is the prime reason the Macau SAR granted gambling concessions to Wynn Resorts and Galaxy Entertainment.  I’d be surprised and disappointed if Galaxy, Sands or Wynn were involved in money laundering.  Authorities have apparently contacted all three for information, however.

–defining political have-nots.  It seems that a lot, if not all, of the regulatory attention has been focused on associates of the disgraced former head of Chongqing, Bo Xilai, whom Beijing regarded as a threat to the stability of the Communist Party.

my take:  my guess is that what’s going on is some combination of #3 and #4 and that any investigation will end up having little negative impact, if any, on Wynn Macau, Sands China or Galaxy.  But I have no hard facts to base this view on.  So my reaction is to trim my positions–the Hong Kong stocks have been very strong performers recently–and wait for further clarification.

a weak 3Q12 for Tiffany (TIF)

November 30, 2012 By in Asian economic development, China, earnings conference calls, Gold, Hong Kong, Industry Analysis, Japanese development, Luxury goods, Retail, Stock ideas Tags: , , , , , 1 Comment

the results

Before the New York open on November 29th, TIF announced 3Q12 earnings results (the company’s fiscal quarter ended October 31st).  Sales were up 4% year on year.   Profits for the three months, however,  were down 30% yoy at $63 million, or $.49 per share–lower than the company had guided to during its 2Q12 conference call.  TIF also revised down its expectations for the full fiscal year to eps of $3.20-$3.40 vs. its prior guidance of $3.55 – $3.70.

What’s behind the earnings miss?

Business was better than expected in Europe and Japan. It was so-so in Asia-Pacific—comparable store sales down 4% yoy—but in line with management’s view. In the US, however, which still comprises about half the company, sales weren’t as good as TIF had expected.

Not only that, but product mix was a problem. Purchases of items costing over $500 each held up well. Sales of less expensive silver jewelry, however, flagged. And they carry higher margins at the moment.

 How can sales be up and profits still fall by almost a third?

As I interpret TIF’s actions in preparing for 2012, the company expected a sales advance for the year of around 10%. So it increased sales space and added staff with that kind of increase in mind. Those extra costs are now acting against the company (negative operating leverage) because sales aren’t yet high enough to absorb them fully.  That cost the company about $6 million in operating profit in 3Q12, I think.  More important,

TIF also build its inventories aggressively. The fundamental choice a firm makes is between:  do I keep inventories small and risk losing sales?  …or do I keep the shelves full, at the risk of having too much?  Based on its sales forecast, TIF picked the second.

In addition, in carrying out its strategy TIF appears to have acquired or made goods containing gold when the yellow metal’s price was relatively high. That decision has two consequences that have also turned into temporary negatives. Because their costs are high, those pieces carry lower gross profit margins than TIF has shown in recent quarters. This wouldn’t be a big deal if sales were growing as rapidly as TIF thought. Better to lose a couple of points of margin on a necklace or ring rather than have a customer walk out empty-handed because there’s no merchandise in the store. But when sales are slow, as they are now, lower-margin merchandise can end up being a big chunk of sales for an entire quarter or two.  As I reckon it, this cost the company about $30 million in operating profit in 3Q12.

At some point, however, maybe in 4Q12 or 1Q13, TIF will have sold all these items and gross margins should rebound.

Finally, to carry out all its plans and still continue to buy back its stock, TIF’s debt has gone up by about $250 million yoy.  Interest expense is $4 million higher in 3Q12 than in 3Q11, as a result.

Do TIF’s quarterly earnings matter at this point?

Yes and no. The stock dropped by about 10% in the pre-market Thursday before rebounding to close down 6% or so. To my mind, that’s not much of a negative reaction, considering how big the earnings shortfall was vs. expectations and how strongly the stock has performed in recent months.

To my mind, investors have clearly been betting that we’re at or near a business cycle low point for high-end jewelry sales. They’re buying TIF in anticipation of a significant upturn in profits. For these investors, the overall story is still intact. Their timing may have been a bit off, but they’re not worried.  And, in my view, TIF’s management didn’t do anything crazy.  It carried out an intelligent plan for 2012 that’s been undermined by a weaker than expected world economy.

On the other hand, I suspect it will be difficult for the stock to advance from the present level without the company demonstrating that the low point is behind it.

One other note: it seems to me that the area of concern for Wall Street based on 3Q12 results can’t be China, even though sales there were down yoy. Why do I say that? Chow Tai Fook Jewellery, which caters solely to the China market, was up 4% overnight in Hong Kong.

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