Archive for the 'Entertainment' Category

Macau gambling market results for November 2011: has a slowdown begun? …does it matter?

Published December 5, 2011 Industry Analysis , Stock ideas , Recent Market Action , Current Market Thoughts , Hong Kong , China , Entertainment , Casinos Leave a Comment
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the Tang report’s conclusion

Macau gaming stocks began a late-August swoon when Karen Tang of Deutsche Bank, an influential securities analyst in the Hong Kong market, published a report on the casino stocks there.  In it, she predicted that a sharp and protracted slowdown in spending by high-rollers in the Macau gambling market would soon begin.  According to Reuters, she said that revenue growth would slow to +34% year on year in October 2011, +32% in November and +20% in December. Growth might shrink to as little as +10% during 2012.

her reasoning?

Affluent Chinese were no longer spending on European-made luxury cars.  She and the DB economics department felt that this was the harbinger of a widespread pullback in consumption by the wealthy.  Finally, they thought, the affluent were succumbing to the Beijing government’s attempts to rein in economic growth on the mainland.

does the argument make sense? 

In my opinion, no.   There’s been no sign of falloff in any other area of Chinese luxury spending.  Maybe the new cars were ugly, or the potential buyers had no garage space left.  I’m not saying that Chinese gamblers aren’t going to spend less in Macau in the coming months.  That could happen.  I’m only observing that I don’t think the luxury car situation is evidence in favor of this conclusion.

I think Ms. Tang would have been better off arguing that the Macau casino stocks were fully priced for the best possible outcome and therefore had no near-term upside.  That would mean that they could only go sideways or down–reason enough to take some profit in the sector.

Nevertheless, the Tang report was enough to drive the sector down very sharply in late August and throughout September.  At one point, some stocks had lost close to half their value before beginning to rebound.  …and then the Europe-related selling began.

what does all this mean for us today?

Well, the November Macau gambling market results were posted on the website of the Macau Gaming Inspection and Coordination Bureau on the afternoon of December 1st.  Here they are:

Monthly Gross Revenue from Games of Fortune in 2011 and 2010
Monthly Gross Revenue Accumulated Gross Revenue
2011 2010 Variance 2011 2010 Variance
Jan 18,571 13,937 +33.2% 18,571 13,937 +33.2%
Feb 19,863 13,445 +47.7% 38,434 27,383 +40.4%
Mar 20,087 13,569 +48.0% 58,521 40,951 +42.9%
Apr 20,507 14,186 +44.6% 79,028 55,137 +43.3%
May 24,306 17,075 +42.4% 103,334 72,211 +43.1%
Jun 20,792 13,642 +52.4% 124,126 85,853 +44.6%
Jul 24,212 16,310 +48.4% 148,337 102,163 +45.2%
Aug 24,769 15,773 +57.0% 173,106 117,935 +46.8%
Sept 21,244 15,302 +38.8% 194,350 133,237 +45.9%
Oct 26,851 18,869 +42.3% 221,200 152,106 +45.4%
Nov 23,058 17,354 +32.9% 244,258 169,460 +44.1%

Source: Macau DICJ

As you can see from the bold figures, after being wildly wrong about October growth prospects, Ms. Tang seems to have predicted the November results reasonably accurately.

Is there any significance to the November prediction?  My guess is that there isn’t much meaning for the stock market, even if this turns out to be more than a lucky guess.  For one thing, the stocks are much cheaper today than they were when the original report came out.  For another, Beijing has just publicly signaled that it is reversing its money policy to favor GDP growth.  So stocks should now be beginning to discount a reacceleration of the gambling business in Macau–not a slowdown.

It will be interesting to see how the Hong Kong market evaluates this situation.  My hunch is that the mid-November lows will hold, but that the market will want to see at least the December market results before becoming more bullish.

Macau market gambling results for October 2011

Published November 7, 2011 Industry Analysis , Stock ideas , Recent Market Action , Current Market Thoughts , Asian economic development , Hong Kong , China , Entertainment , emerging markets , Casinos Leave a Comment
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Last week, the Macau Gaming Inspection and coordination Bureau posted, as usual, the monthly total for the SAR’s gambling revenue.  At 26.8 billion patacas, the take was an all-time high–and a 42.3% year on year gain.  The figures for this year and last are as follows:

Monthly Gross Revenue from Games of Fortune in 2011 and 2010
Monthly Gross Revenue Accumulated Gross Revenue
2011 2010 Variance 2011 2010 Variance
Jan 18,571 13,937 +33.2% 18,571 13,937 +33.2%
Feb 19,863 13,445 +47.7% 38,434 27,383 +40.4%
Mar 20,087 13,569 +48.0% 58,521 40,951 +42.9%
Apr 20,507 14,186 +44.6% 79,028 55,137 +43.3%
May 24,306 17,075 +42.4% 103,334 72,211 +43.1%
Jun 20,792 13,642 +52.4% 124,126 85,853 +44.6%
Jul 24,212 16,310 +48.4% 148,337 102,163 +45.2%
Aug 24,769 15,773 +57.0% 173,106 117,935 +46.8%
Sept 21,244 15,302 +38.8% 194,350 133,237 +45.9%
Oct 26,851 18,869 +42.3% 221,200 152,106 +45.4%

Interestingly, Hong Kong-based analysts didn’t take this as an unambiguously good result.  They point out that, although Golden Week in early October was a rip-roaring success this year, the year on year growth of the market for the month as a whole was the lowest since January.  That’s obviously correct.

They conclude from this that Macau’s wealthy Chinese customers are feeling the pinch of the mainland’s efforts to slow economic growth, and are gambling less as a result.  A corollary, not so clearly spelled out, is that casinos are posting gambling winnings as revenues today that will ultimately have to be written off as uncollectable receivables.  That may also be true, although the bond rating agency Fitch says there’s no evidence of any of this so far. Fitch, in fact, estimates that the Macau gambling market will grow by at least 20% next year, double the rate that the more pessimistic analysts are calling for.

One notable feature of recent months’ results is the market share shift toward the companies with newer casinos, located in Cotai.  This suggests there’s gambling space in other, older casinos that is going unused.  There are any number of explanations for why this may be happening, like transportation bottlenecks that prevent visitors from reaching Macau, or casinos turn away “iffier” credits.  But it’s also possible that we’re reached a phase of market maturity where simply getting to Macau and gambling anywhere isn’t enough.  Some gamblers may be choosing not to go to Macau unless they get a minimum level of service.

If so, we should expect a more sedate rate of growth than the 45% or so we’re experiencing now.  But the more important investment issue may well be to separate winners from losers.  That’s certainly been the case so far in 2011, as Galaxy and China Sands have left other casinos in the dust–especially SJM and MGM.

 

thoughts on Las Vegas Sands (LVS)

Published October 30, 2011 Industry Analysis , Stock ideas , Recent Market Action , Current Market Thoughts , Entertainment , emerging markets , Casinos , Lodging Leave a Comment
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a big valuation discount

As I wrote on Friday, the most striking thing to me as an investor about LVS is the huge valuation discount at which it trades compared with its global rivals WYNN and MGM.

To recap:  if we take the current market price in Hong Kong of the firms’ interests in Macau, and in LVS’s case us the same multiple to value its Singapore casino, we get the following results:

market cap of WYNN  = $17 billion  =  market cap of Macau interests   +   $5 billion

market cap of MGM  = $6 billion = market cap of Macau   +   $2 billion

market cap of LVS  =  $34 billion = market cap of Macau + Singapore   - $11 billion.

LVS shares would have to be trading about a third higher just to have its Las Vegas interests valued at zero.

why?

Q:  Why is LVS trading so cheaply?

A:  I don’t know.  What is striking, however, is not necessarily that LVS is so cheap on an absolute basis (although I think it is) but that is so cheap relative to its industry peers.

Possible reasons:

the financial crisis

LVS was in the midst of aggressive expansion when the financial crisis hit.  In late 2008 the company announced that its auditors were questioning LVS’s ability to avoid being crushed by a mountain of debt.  It took a $2.1 billion capital raising and a modification of LVS’s expenditure plan for the accountants to issue a clean bill of health.  Not LVS’s finest hour.

litigation

Every company is involved in lawsuits or one type or another.  Wall Street typically ignores them.

In LVS’s case, however, even though little, if anything, is put down on paper, a series of legal actions appear to have analysts and investors concerned.  Here’s a quote from the company’s latest 10-K (LVSC is Las Vegas Sands Corp.; SCL is Sands China Ltd.:

“On October 20, 2010, Steven C. Jacobs, the former Chief Executive Officer of SCL, filed an action against LVSC and SCL in the District Court of Clark County, Nevada, alleging breach of contract against LVSC and SCL and breach of the implied covenant of good faith and fair dealing and tortious discharge in violation of public policy against LVSC. Mr. Jacobs is seeking unspecified damages. This action is in a preliminary stage. The Company intends to vigorously defend this matter.
On February 9, 2011, LVSC received a subpoena from the SEC requesting that the Company produce documents relating to its compliance with the Foreign Corrupt Practices Act. The Company has also been advised by the Department of Justice that it is conducting a similar investigation. It is the Company’s belief that the subpoena emanated from allegations contained in the lawsuit filed by Steven C. Jacobs described above. The Company intends to cooperate with the investigations.”
LVS fired Mr. Jacobs in mid-2010.  He sued for wrongful termination.  Press reports indicate that in his lawsuit Mr. Jacobs maintains that LVS asked him to compile files on prominent Macau politicians and to offer some of them improper benefits.  These assertions appear to have prompted a number of regulatory inquiries, both in the US and in Hong Kong/Macau.   As far as I’m aware, Singapore, which runs a very strict regulatory regime and which awarded LVS one of two casino licenses there, has taken no action.
An article in the Wall Street Journal from October 21 outlines the issues.  This article prompted the question from a reader which has led to this post.
As an investor, not a lawyer, I find it impossible to predict an outcome to all this.  I do have a number of observations:
–It seems to me that LVS has done the right thing by beefing up its legal staff with Washington regulatory experts.  This gives them people who understand the regulatory environment and whom the regulators presumably trust.
–As a stock, LVS is up less than 5% over the past year.  This compares with a gain of 8.8% for the S&P 500 and 28.8% for WYNN).  Sands China, on the other hand, is up 46.1% over the same time period, vs. +32.7% for Wynn Macau and a loss of 13.3% for the Hang Seng index.  So investors closest to the Macau situation don’t seem troubled by the legal issues surrounding LVS/Sands China; if anyone, it’s US investors who are.
–To my eye, Sands China’s results have perked up considerably since Mr. Jacobs was replaced.
–If the discount to its peers is due solely to legal worries, then the numbers above imply that Wall Street is anticipating a negative outcome on the order of $15 billion.
The correct number for legal damages may be zero, it may be a significant figure.  I don’t know.  I own LVS, which means I’m betting that $15 billion isn’t in the right ballpark, or even in the right town.  (This isn’t how I usually invest.  Normally, I’d want to have a precise downside estimate, which I don’t have here.  So my position is small.)
family control
About half the stock in LVS is owned by CEO Sheldon Adelson and his family.  As the 10-K notes, Mr. Adelson’s financial interests may not be fully aligned with those of other shareholders.  In particular, I’d characterize Mr. Adelson as a very aggressive investor in mammoth new projects who has gotten his fingers burned recently. He’s not one to quietly sit by and let his financial leverage decrease to zero.
That doesn’t bother me so much.   It’s just a fact of life.
Based on my limited observation, though, because it’s “his” company, Mr. Adelson doesn’t seem to go to great lengths to cultivate the global securities analyst community.  In his latest conference call, for example, he says he’s going to send analysts towels in the mail, so they can wipe the egg off their faces for underestimating LVS’s prospects.  Maybe that’s a joke and I don’t realize it.   Yes, it’s emotionally satisfying for Mr. Adelson.  But it’s not a gesture aimed at making analysts feel all warm and cuddly about LVS shares  …quite the opposite.
analysts are skittish
This is only partly because of the “us vs. them” undertone the company seems to foster.  Analysts on this stock seem to me to divide into two types:  Wall Street analysts who know a lot about Las Vegas-style gambling but nothing about Asia; and Singapore or Hong Kong analysts who know the local market but nothing about the hotel or gambling industries.  The biggest risk to either group is to be too bullish.
what to do
LVS has a special situation aspect to it, to my mind, because I think it trades at an undeserved discount to its peers.  Operations around the world are going better than expected.
On the other hand, maybe I’m wrong.  Although the stock has performed relatively well recently, it may take time for the discount to narrow.  Negative news on the legal front probably won’t help performance, either.
LVS shares aren’t for the faint of heart, but I’m content to own them.  They may, or may not, have a possible place in your portfolio.  Don’t make this your largest position, though.


 

LVS’s 3Q11: very strong, across the board

Published October 28, 2011 Industry Analysis , Stock ideas , Recent Market Action , Asian economic development , Hong Kong , China , earnings conference calls , Entertainment , Casinos , Lodging Leave a Comment
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the report

After the close of New York trading on October 27th, LVS reported 3Q11 results.  Revenue was a record $2.41 billion, up 26% year on year.  Property EBITDA (earnings before interest, taxes and depreciation and amortization) was up 43.2% to $924.1 million.  EPS were $.55, a 61.8% boost over earnings in 3Q10.  The Wall Street consensus eps estimate was $.52.

LVS shares are up by about 4% in aftermarket trading as I’m writing this.

the details

In what follows, it’s important to remember that what a casino company reports as gambling revenue is not the total amount of money bet, but rather the portion of the money bet that it retains or “wins.”  Over a long period of time, the casino’s winning percentage is relatively steady.  In any given quarter, however, it can move away substantially from the long-run average.  In analyzing quarterly results, we should note any short-term deviations and at least mentally adjust for them.

Singapore

Year on year comparisons for the Marina Bay Sands aren’t that helpful, because the casino/resort complex is so new. I’m using quarter on quarter comparisons, instead.

Gambling activity continues to grow rapidly.  EBITDA, which was $413.9 million for 3Q11 vs. $405.4 million in 2Q11 doesn’t show this clearly, though.  That’s because the high roller winning percentage at Marina Bay was 2.99% in 2Q11 and 2.69% in 3Q11 (LVS thinks the normal range for quarterly win in the VIP segment, by far the casino’s largest, should be 2.8%-3.0%).  The q-on-q decline in winning percentage clipped about $35 million from 3Q EBITDA.  The real quarter on quarter growth rate is 10%+, not the 2%+ the accounts show.

VIPs bet an eye-popping $16.7 billion at Marina Bay during 3Q11.  This compares with $12.2 billion in 2Q11 and $10.2 billion in 3Q10–both breathtaking numbers in their own right.

Macau

Same story here.  EBITDA in 3Q11 was $388.3 million, down $3.3 million compared with 2Q11–at a time when market growth, quarter on quarter, was about 10%.  Adjusting Sands China’s winning percentage up to 2Q11 level adds $40 million to the EBITDA line.  This suggests that Sands China held its own in a growing market, despite not adding any casino space this year.

Sands China’s newest, 13.7 million square foot casino in Cotai is slated to open in five months.

US
I’m going to ignore Bethlehem, PA because it’s so small (EBITDA of $25.2 million in the quarter).

EBITDA in Las Vegas was $94.3 million for the seasonally weak 3Q, up slightly from $92.9 million in 2Q11 but up sharply from $58.3 million in 3Q10.   About $10 million of the increase on a year over year basis is due to higher royalty income from Macau and Singapore.  Most of the rest is a halving in the level of giveaways from the $40 million or so LVS needed last year to get customers to come to its Las Vegas properties.

 

In short, LVS is holding its own in the US and is making money hand over fist in Macau and Singapore.

valuation remains compelling, in my view

(Remember, I own LVS, WYNN and 1128 (if it weren’t for a software glitch Fidelity can’t find/fix, I’d own 1928, too)).

Look first at WYNN, which I consider to have the strongest gambling company management.  Its interest in 1128 is worth about $11.5 billion at today’s market price.  Therefore, the market is valuing the US interests of WYNN at about $5.5 billion.

Next, MGM, the weakest of the big firms.  Its interest in MGM China is worth $3 billion, implying its other interests, including its entanglement with Pansy Ho, are worth $2.7 billion.

What about LVS?  The market in Hong Kong values its interest in 1928 at $17 billion.  Arguably, Marina Bay should be valued at a premium to Sands China.  But capitalizing its earnings on the same basis as 1928 yields a value for the 100%-owned Singapore subsidiary of $25 billion.  This would mean the market values the rest of LVS–Las Vegas and Pennsylvania–at minus $9 billion.  LVS shares would have to be almost 30% higher just to get the needle out of the minus column.

is there a reason for the apparent undervaluation?

A friend who’s a regular reader of PSI asked about ongoing litigation involving LVS, based on a Wall Street Journal article a week or so ago.  I’ll write about this on Sunday.

The litigation may well be a serious issue.  I don’t know.  On the other hand, the stock price already seems to me to be discounting a very unfavorable outcome.

Also, arguably LVS’s leading position in two major Asian markets and its tourist/convention emphasis make it attractive to other countries interested in creating a tourism/gaming industry.  Both WYNN and LVS are seeing synergy effects in Las Vegas from their Asian exposure;  LVS is seeing this in Singapore.  One might therefore expect LVS to be trading at a premium to its competitors, not a steep discount.


Wynn Resorts, Wynn Macau: a surprisingly (to me, at least) bland 3Q11

Published October 21, 2011 Industry Analysis , Stock ideas , Recent Market Action , Current Market Thoughts , economics , Hong Kong , China , earnings conference calls , Entertainment , Casinos 1 Comment
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the results

WYNN reported 3Q11 results after the closing bell for trading in the New York market on Wednesday.  Revenues were $1.3 billion, up 30% from the comparable period of 2010.  EBITDA (a measure I don’t particularly like but which some investors use) was $381.1 million, up 39% year on year.  Eps were $1.05 vs. $.39 in 3Q10.

The report came as a disappointment to Wall Street, which had been expecting a tripling of earnings per share to $1.18.

details

Wynn Macau

Revenues for Wynn in the SAR were $951.4 million for 3Q11, up 42% year on year.  What disturbed the market, however, was not that eye-popping number, but the fact that the figure was down slightly from the $976.5 million Wynn Macau posted in 2Q11–in a market that was up about 10% quarter on quarter.

Win percentages for various games were within normal ranges, so Wynn being unusually unlucky wasn’t the reason it lagged behind the market.  Rather, it seems that at least some high rollers who might otherwise have visited 1128 were instead checking out the newer casinos that have opened this year.  To some degree, 1128 benefited from this tendency when the Encore opened.  Now the shoe is on the other foot.

Typically gamblers ultimately return to the venues where they feel most comfortable and get the best service–which means Wynn.  The company says it is seeing this happen in October.

Nevertheless, it’s also possible that 1128 is bumping up against the limits of its ability to take in money in Macau with the hotels and casino space it has now.  That amount will gradually rise, with economic growth in China and with inflation.  But if capacity constraints are an issue, comparisons may be pedestrian (+10% or so?) until 1128′s new casino in Cotai opens in 2014-15.

Wynn Las Vegas

On the 2Q11 earnings conference call, WYNN was very enthusiastic about prospects for 3Q11, which in normal times (which these are clearly not) would be a seasonal low point.  Hotel bookings were unusually strong and the company was musing that its table games win percentage might be permanently drifting northward.

I guess non-casino revenues turned out to be pretty much as anticipated, at $266 million.  That was up 11% year on year and down slightly from the 2Q11 figure of $276 million.  From WYNN’s tone three months ago, though, I’d expected a bit more.

Casino revenue for WYNN came in at $126.9 million for the quarter.  The compares with $158.3 million in 2Q11.  It was also slightly less than in the comparable period of 2010.  But the amount bet in the WYNN Las Vegas casinos’ table games was up sharply.

What happened?  The company was simply very unlucky at baccarat last quarter.  The company’s win percentage on table games for 3Q11 was 18.3%.  That’s sharply below the expected level of 21%-24%, and the 27.6% achieved during 2Q11.

If table games win for the quarter had been normal, eps would have been about $.20 higher than actually reported;  win at the 2Q11 rate would have meant eps about $.45 higher.

The company says that win percentages have returned to normal in October.

my thoughts

1128 has lost about a third of its market value on worries about the mainland economy, and on concerns that Wynn and Encore may lose customers to newer casinos.  I still think that 1128 has a shot to make $1.50 a share this year, and (worst probable case) $1.65 next.  Maybe the subsidiary will come in $.10 short for both periods, but not much more than that.  12x earnings seems much too cheap to me.

1128 represents two thirds of WYNN’s market value.  The remaining $5 billion is the Las Vegas operations, which though still anemic are showing progressively stronger results.  Cash flow generation in the US is running at about $400 million, and rising–meaning that domestic operations would be yielding 8% if considered as a stand-alone income vehicle.  The US operations aren’t being run simply to generate cash.  In fact, it sounds as if WYNN would welcome the opportunity to build a casino in Miami, if asked.  But looking at them as a quasi-bond suggests (to me) that they have considerably more value than the market is now awarding them.

All in all, I’m happy to hold the WYNN and 1128 shares I own.  At the moment, however, it’s hard to see where near-term earnings acceleration is going to come from.

In fact, an aggressive trader–which I’m not–might think of switching some money into LVS.  I don’t think LVS is as strong a company as WYNN, but it’s cheaper and it has more potential near-term earnings momentum–coming from Singapore and its soon-to-open new casino in Macau.  But market sentiment can be a funny thing.  It’s tide can quickly reverse.  Even news on possible resolution of EU financial problems might be enough to swing investor attention back toward the Wynn family of companies.  For me, I’m content to be patient with what I consider two undervalued issues.

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