Category Archives: Entertainment

WYNN’s 1Q12: good gaming revenue, bad gaming luck

May 17, 2012 By in Casinos, earnings conference calls, Entertainment, Industry Analysis, Stock ideas Tags: , , , , , , , , , Leave a comment

the report

WYNN reported 1Q12 earnings results after the close of stock trading in New York on May 7th.  Adjusted earning per share were $1.33 ($152.0 million) for the period, down by about 4% from the $1.38 ($173.4 million) the company earned in the opening quarter of 2011.  Actual net was down by $21.4 million, or 12% yoy.  The forced redemption of Aruze USA’s 22.5 million shares in February explains the smaller decline in the per share figures.

Wall Street was not impressed.  The stock had been declining somewhat already from the intraday high of $138+ it achieved early in the month, on the announcement that Wynn Macau had received a government go-ahead for its new Cotai casino.  The apparently weak earnings kicked the decline into overdrive.

The report even prompted a comment from the normally reliable Financial Times–which appears not to like the gambling industry much– to the effect that it might be the canary signalling bad times ahead in the Las Vegas casino coal mine.

The reported earnings don’t tell the whole story, however.  The reality is that WYNN had a good quarter, not a bad one.

drop vs. take:  i.e., gross revenue vs. net

What casinos count as revenue is not the amount wagered by customers.  Rather, it’s the portion of total wagering “held” or “won” by the casino.  That is, revenue is the amount customers lose on their wagers. This means casino revenue is not only a function of the amount bet but also of “luck,” or random variation away from theoretical or historical winning percentages.

Such variations–plus or minus–rarely show up in slot machine results, since there are so many transactions in a quarter.  But they often do with table games, especially in the high-roller segment that WYNN specializes in.

WYNN’s 1Q12 earnings comparisons in both Las Vegas and in Macau are skewed unfavorably because of such random factors.

Las Vegas

EBITDA was $100.9 million in 1Q12 vs. $132.1 million in 1Q11.

Table games drop was $654.4 million in 1Q12 vs. $634.0 million in 1Q11.  Win percentage was 22.8% in 1Q12 vs. 30.4% (historically, win has been between 21%-24%; on the 1Q12 conference call, Steve Wynn said he’d never seen a win percentage this high in his casinos).  because of this difference, win was $149.2 million in 1Q12 vs. $192.7 million in 1Q11.

At a 30.4% win percentage, this year’s results would have been $198.9 million.  So the comparison would have been $49.7 million more favorable had WYNN been able to repeat the same extraordinary luck it had last year.

Macau

VIP gamblers bet $33.5 billion (!!) at Wynn Macau’s tables during 1Q12.  This is up 14.6% year on year (partly due to Wynn Macau converting some mass market tables to higher-profit VIP use). Win percentage this year was 2.59%, down 10 basis points from 1Q11′s 2.69% (the normal range is 2.7%-3.0%).  Slightly worse luck in 2012 than in 2011 clipped $33.5 million from the subsidiary’s win.

together

Had WYNN had identical luck during the first quarter this year as last, revenue–and EBITDA–would have been $83.2 million higher.  On such an apples-to-apples basis, EBITDA for WYNN as a whole would have been up 17% instead of down by 3.5%.

Other stuff: hotels

Macau continues to boom.  Hotel occupancy is up to an extraordinary 91.3% vs. 88.6% a year ago.  Room rates are up 5.5% to $324 a night.

In contrast, in Las Vegas, a city drowning in empty hotel rooms, WYNN’s push to higher room rates seems to me to have met serious resistance.  The company achieved a room rate of $255 a night in 1Q12, up $5 from 4Q11 and $15 from 1Q11.  But customers balked.  Occupancy dropped from 85% or so, to 79.3%, yoy.  Greater spending on food and entertainment by less price-sensitive customers made up for this.  But my guess is that WYNN won’t be raising rates again for a while.

my thoughts

The stock is very close to its 52-week low.  The PE multiple is now a reasonable 18x this year’s earnings, with, say, 15%-20% growth in prospect for 2013.  In addition, about 90% of the market cap of WYNN is explained by its interest in Wynn Macau, despite the recent selloff in that equity in Hong Kong (by panicky Europeans, I think).  This leaves the company’s slowly recovering Las Vegas holdings–plus its big management fees from Macau–substantially undervalued, in my view.

I’m content to hold the WYNN shares I have.  At today’s prices I’d purchase LVS, 1128 or 1928 before I’d buy more.

how big is the Macau gambling market? …potential?

May 3, 2012 By in Asian economic development, Casinos, China, Entertainment, Industry Analysis, Stock ideas Tags: , , , , , , , , , , , Leave a comment

…a lot depends on how you measure.

the Nevada comparison

Let’s compare Macau with Las Vegas.

According to the Nevada State Gaming Control Board, during the three months ending February 29th (the latest figures available as I’m writing this) the Las Vegas strip casinos had revenue of $1.67 billion.  The downtown area of Las Vegas added about a tenth to that.

During the same three months, according to the Macau Gaming Inspection and Coordination Bureau, Macau casinos took in MOP 72.9 billion, which translates into US$9.1 billion.

On this measure, then, the Macau market is 5x the size of Las Vegas.

gross revenue vs. net

That’s not the whole story, however.

The official figures don’t report the total amounts that are being bet in the market.  Instead, they record the net amount that the casinos win from customers during the period..  The amounts bet are much larger.

We have precise figures for Las Vegas.  On average, gamblers lost 9.6% of the amounts they bet in Las Vegas during December, January and February.  So they actually bet $17.4 billion during that period.

We don’t have comparable official numbers for Macau.  So we have to estimate.  Conveniently, though, virtually the only game played in the SAR at present is high-stakes baccarat, where casino win typically ranges from 2.7% to 3.0% of the money bet.  To err on the conservative side, let’s say that the win over the winter for the Macau market was impossibly high at 4%.  Using that percentage will give us a low-ball figure for total wagers.

In Macau gamblers actually bet $228 billion during the three months.  On this measure, Macau is already 12x the size of Las Vegas.

…potential?

When I began following casino stocks in the early 1980s, casino operators regarded hotels, restaurants and shopping as regrettable necessities (cost centers, in accounting jargon).  They basically gave the food away to draw patronage.  And the more spartan the room, the better.  That way gamblers spent the maximum amount of time in the casinos and not lounging around watching TV.

Since then the Las Vegas industry has been transformed–with a large assist from Steve Wynn and Sheldon Adelson–into a resort destination.  Prior to the Great Recession (and the accompanying Great Overbuilding), non-casino operations in Las Vegas made up about half the total revenue–and about an equal amount of profit.  In other words, by developing Las Vegas as a resort/convention center, the casinos doubled the size of their market.  This is the model Macau wants to copy.

My guess is that, at present non-casino revenue is only about 15% the size of casino win in Macau.  So the nascent resort business in Macau could, if it’s successful in emulating Las Vegas, be at least 3x the current size.  That would mean that–even without market growth–visitors to Macau could be spending half a trillion dollars a quarter and company profits could be close to 2x the current level.

The Financial Times just wrote a good summary of the current supply constrained situation in the SAR.

but there’s more

In its latest quarterly reporting to shareholders, LVS included in its packet of earnings presentation slides an appendix that touches on growth potential for the Macau market.

–Slide 21 illustrates the proposed high-speed rail system that will connect all the major cities, including Macau, in eastern and central China.

–The more interesting slide is #22, which breaks out recent visitors to Macau by domicile.  It shows that 72% come from nearby Guangdong province, an area with a population of 95 million.  Hunan and Chongqing provinces, which together also have a population of 95 million, but which are somewhat farther away, represent less than 7% of visitors so far.   But that number is starting to grow at a much faster than 50% annual clip.  This implies, I think, that the Macau casino market has come nowhere close to tapping its entire Chinese potential.

1Q12 for Las Vegas Sands/Sands China: record quarters again

April 30, 2012 By in Casinos, China, earnings conference calls, emerging markets, Entertainment, Hong Kong, Industry Analysis, Portfolio management, Stock ideas Tags: , , , , , , , , , , , , Leave a comment

the results

After the New York close last Wednesday, LVS reported results for 1Q12.  Revenues came in at $2.77 billion, up 30.8% year on year.  Adjusted Earnings Before Interest Taxes and Depreciation/Amortization (EBITDA) was $1.07 billion, up 42% yoy.  Adjusted EPS were $.70.  That was a gain of 89.2% over results in the year-ago quarter.  The figure also came in $.01/share above the highest Wall Street estimate, and $.07/share ahead of the consensus.

the details

EBITDA breaks out into:

$456.4 million in Macau, up 20.6% yoy

$472.5 million in Singapore, up 66.1% yoy

$115.8 million in Las Vegas, up 77.9% yoy

$27.5 million in Bethlehem, Pa., up 24.4% yoy.

three unusual items (all in Macau)

The ” adjusted” figures exclude two of the items:

–$51.5 million in pre-opening expenses for the Sands Cotai Central which opened earlier this month, and

–a $42.9 million writeoff of costs linked to the closing of the Zaia show at the Venetian Macau.

Results did, however, include $13 million of costs associated with retailing–management declined to provide any detail.

market reaction

1928 and LVS have dropped about 5% each on the results announcement, despite the obvious strength in the numbers.  I don’t see why.

True, there are some nits to pick, namely:

–LVS is currently keeping 3¢ of every dollar high rollers are betting in Singapore and in Macau.  History says that should be more like 2.85¢, or 5% less.  at some point the company will have a sub-par quarter or two to make up for the current largesse.  But that’s the nature of the casino business.

–There is the mystery $13 million loss in Macau.  But that’s more like a rounding error than a serious dent in operating income.

–EBITDA margins fell qoq in Macau in March.

On the other hand,

–management wasn’t much more incoherent than usual on the conference call that accompanied the announcement

–US operations are much healthier than they were a year ago

–1928 appears to be gaining market share in Macau, even before the new casino opening. Revenues were up 9% qoq, in a basically flat market.

–the mysterious $13 million shortfall in Macau seems to explain all the EBITDA margin deterioration in the SAR vs. 4Q11.  If management is correct in its diagnosis, this is a non-recurring item.  In addition,

LVS is deleveraging   …fast

At December 31, 2010, LVS had $10.1 billion in debt on its balance sheet plus $710.7 million in preferred stock.  Against that, the company had $3.04 billion in unrestricted cash.

As of March 31st, 2012, LVS has accumulated an extra $1 billion in cash.  All the preferred stock has been redeemed and debt is $200 million lower.

That’s about a $2 billion shrinkage in net borrowings.  At the current level of $1 billion in cash generation from operations per quarter, LVS could be completely debt free by June 2013.  (LVS points out that it could be completely debt free today, if it wanted to be, by selling a chunk of its retail space in Macau.)

next stop Spain?

LVS confirmed that it is deep in negotiations with Madrid and Barcelona to develop a huge casino/resort complex in Spain over a decade.  No details as yet.  I wrote about the possible Spanish expansion a little over a year ago.

investment arithmetic

I think that LVS will earn about $3 a share this year.  So at Friday’s closing price, LVS is trading at 18.6x this year’s earnings and yielding 1.7%.

That’s not the right way to value the company, however, in my opinion.  I prefer sum-of-the-parts.

Based on its current market cap in Hong Kong, LVS’s share of 1928 is worth roughly $22.5 billion.  If we think the Marina Bay Sands in Singapore should trade at 80% of 1928′s EBITDA multiple, then it’s worth about $25 billion ($31 billion if MBS were to trade at parity with 1928).

LVS’s market cap (even though it’s up over 30% ytd) is $41 billion.  Therefore, LVS’s US operations are still trading at a value of negative $6.5 billion.

What should the value of Las Vegas + Bethlehem be?

There are, of course, two parts to US profits for LVS–casino operations and management fees collected from Asia.  For simplicity’s sake, lump them together.  Say they’ll generate $600 million in cash from operations this year.  Let’s cut that down to $400 million after taxes.  Now, let’s assume this business never recovers and should be evaluated as if it were a junk bond.  If we assume a that the cash represents a yield of 7.5%, then the principal value of the “bond” should be $5.3 billion.  Subtract $2 billion in debt (that may be excessive, but…) and we’re left with $3.3 billion.

Fair value for LVS, then, should be $3.3 billion + $22.5 billion + $25 billion  =  $50.8 billion, or 24% higher than where the stock is currently trading.

WYNN may be the highest quality casino company, but this analysis means for me that LVS is the most attractive casino stock (remember, I own both LVS and WYNN–more WYNN than LVS, though).

Wynn Macau’s Cotai project

April 28, 2012 By in Casinos, China, Current Market Thoughts, emerging markets, Entertainment, Hong Kong, Stock ideas Tags: , , , , , , , , , , , , , Leave a comment

Wynn on Cotai

The reason I see for the recent strength in the shares of both Wynn Macau and its parent Wynn Resorts is a press report that 1128 will receive government approval this coming Monday for its proposed new casino in the Cotai section of the SAR.  The news was first published in the Portuguese-language newspaper Jornal Tribuna de Macau and subsequently in Macau Business.

According to MB, the contract signing ceremony will take place while Steve Wynn is in Macau next week, but the official announcement will not come until the contract is published in the Official Gazette in mid-May.

oops!!

Twice before during the past several months, parties associated with WYNN have, prematurely, announced that the company had received approval for the project.  These breaches of protocol appear to have offended the Macau government and resulted in further delay each time.  In the current case, it appears to me that the leak must have come from the government itself, so the article shouldn’t matter.  When questioned about it, Mr. Wynn said nothing, just that he was hopeful of approval but that the decision was up to Macau.

The Wynn Cotai project, whose design was complete over a year ago, will include hotels, casino(s), restaurants, retail and convention/meeting space.  The size of the casino floorspace isn’t clear, although we know the Macau government is eager to see new projects contain a greater percentage of area devoted to non-gambling activities than has been the case to date.  The project will probably end up costing close to US$3 billion.  Opening could be in early 2016.

The Cotai casino would be good for WYNN and 1128…

Cotai, Sheldon Adelson’s idea for recreating the Ls Vegas Strip in Asia, is becoming the hot new gaming location in Macau.  Also, it’s increasingly evident that both Wynn and Encore in Macau are closing in on the limits of their capacity.  So the new project will provide a concrete (no pun intended) path for future earnings growth–both for 1128 and, by implication, for its parent WYNN.

…and for the SAR as well

After all, Steve Wynn is the premier casino designer in the world.  And his company is a master at catering to high roller gamblers.  It would make no sense for the SAR to deprive itself of his expertise.

approval for another firm coming later this year

The government’s overall idea is to continue to expand its tourism business, but at a controlled rate.  It has announced that this means approving two new projects in 2012.

The two prominent other applicants for permission to build a new Cotai casino complex are MGM China and SJM.  If they’re the two finalists, as they probably are, this presents an interesting–and possibly revealing– decision for the SAR.  SJM, the former monopoly casino operator when Macau was a Portuguese colony, which continues to control about a third of the market, is owned by the Ho family.  Pansy Ho also continues to have significant influence over MGM China, where she has about a 20% equity interest.  Declaration of the winner may give some insight into the direction of government gambling policy.

Macau gaming in March 2012: an okay, but not eye-popping, month

April 4, 2012 By in Casinos, China, emerging markets, Entertainment, Hong Kong, Industry Analysis Tags: , , , , , , , , , , , Leave a comment

March results

On Monday April 2, the Macau Gaming Inspection and Coordination Bureau published on its website monthly results for March in the SAR.  Here they are:

* 1 HKD = 1.03MOP (Unit:MOP million )
Monthly Gross Revenue from Games of Fortune in 2012 and 2011
Monthly Gross Revenue Accumulated Gross Revenue
2012 2011 Variance 2012 2011 Variance
Jan 25,040 18,571 +34.8% 25,040 18,571 +34.8%
Feb 24,286 19,863 +22.3% 49,325 38,434 +28.3%
Mar 24,989 20,087 +24.4% 74,314 58,521 +27.0%

Source: Macau DICJ (Gaming Inspection and Coordination Bureau)

what they say to me

Yes, it’s the strongest non-holiday month ever in Macau.  Only last October (with Golden Week) and this January (New Year) had higher monthly win for the casino industry.

On the other hand, we don’t see anything like the almost manic surge in the size of the market that we experienced throughout 2011.  We may see some upward bounce in the April and May figures, as the new Las Vegas Sands casino on Cotai opens this month.

There isn’t enough evidence yet to draw firm conclusions.  However, if the right way to read the current figures is that the market is plateauing for the moment around the MOP 25 billion level (this is my guess), year on year growth comparisons should begin to narrow as the second half starts.

Although, again, there’s no clear evidence, I’m reading this potential growth slowdown to be the result of economic slowdown on the mainland.  If so, as the current expansionary measures Beijing is enacting bear fruit, I’d expect the growth rate to begin to expand again.  Timing is the only question.

It’s possible, though, that the plateauing I see is being induced by the leading casinos having reached full capacity–in which case, second-choice casinos should enjoy their day in the sun over the coming months.  And the Macau government should accelerate the pace of its approval of new casino permits.

One other point:  prior to the mammoth overcapacity the Las Vegas casinos by aggressive new construction during the past five years, only about half of that industry’s profits came from gambling.  The rest was food, lodging and entertainment.  One would expect that at least the American-owned casinos would follow the same development model in Macau–a move the Macau government is strongly encouraging.

Over the next five years, then, one could expect the gambling market to grow by at least the rate of Chinese GDP, or by close to 50%, and the industry’s profits to expand by a minimum of another 50%–and maybe much more–as non-gambling businesses expand.

Over the next five months, on the other hand it’s less clear how much there will be to cheer about.  I don’t see any need to sell the stocks;  I just don’t think they’ll run away to the upside.

 

 

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