Category Archives: Casinos

Macau gambling: leading indicator for China?

March 14, 2012 By in Casinos, Current Market Thoughts, Entertainment, Hong Kong, Industry Analysis, Portfolio management, Recent Market Action, Stock ideas Tags: , , , , , , , , , , Leave a comment

yesterday’s Hong Kong trading

In Hong Kong trading Tuesday, the major Macau gambling stocks moved sharply upward.  Wynn Macau, a recent market laggard, was the star, gaining 8.6%.  But even China Sands, which is up by over 40% since the Hang Seng peaked last August, rose by almost 6%.

Why?

the Karen Tang effect

According to Bloomberg, Karen Tang, a prominent Hong Kong-based leisure analyst who works at Deutsche Bank, reversed her relatively negative view on casinos in the SAR after meeting with company managements.

Ms. Tang sent these same stocks into a tailspin last August.  That’s when she issued a report arguing that a falloff in demand for high-end luxury cars that was then being experienced in China presaged an almost complete evaporation of growth in the VIP baccarat market in Macau.  Since high-stakes baccarat is the mainstay of the casinos there, this was an especially dire forecast.

Her idea was that the market would begin to slow in the autumn.  Economizing high rollers would make trips already planned–and possibly paid for–but wouldn’t book further visits.  The market wouldn’t contract.  But growth would nosedive, troughing late in the first half of 2012 at a year-on-year rate of, say, +15%, before beginning to rebound.

too pessimistic

I didn’t see the Tang report.  But it was extensively covered in the Asian press.  From those accounts, it seemed the evidence was flimsy and the conclusion much too pessimistic.  As it turns out, Ms. Tang was wrong.  That’s not the important thing (although I’ve been unable to refrain from inserting this conclusion in this post).

rebound already!

What is important is that after a mild slowdown to a “mere” 25% growth rate last December, Chinese high roller gambling in Macau is beginning to accelerate again.  That’s what Ms.Tang found out on her research trip to Macau and published in a note yesterday.

While I was looking at yesterday’s stock prices in Hong Kong while writing this post, I noticed an article from Forbes.com.  It reports the results of a research trip to Macau by a Citibank (never to be mistaken for a research powerhouse) analyst, who says the casinos indicate gambling in the SAR grew by about 40% year on year during the first 11 days of March. That’s substantially ahead of the 28% year on year growth of the market during January-February.  And it’s not that far below the 42% gain the market put up for full-year 2011.

According to Forbes, Nomura Securities (which makes Citi look good) thinks March gaming win will be up by about the same rate as the average of January/February (a two month average corrects for variable timing of the New Year holiday).

The bottom line, though, is that the market is a lot better than the consensus had thought–and is looking up.

stock market implications

casino stocks?…

Given all the lawsuits flying around, this may not be the time to load up on the Las Vegas gambling companies.  Personally, the litigation bothers me enough that I won’t buy more, but not enough to sell what I have.  It seems to me that the Macau subsidiaries are relatively insulated.  I like Steve Wynn.  And Las Vegas Sands is still cheap.

…or indirect plays?

The most important aspect of yesterday’s trading may be the signal that corporate magnates in China are starting to feel a lot better about themselves and their businesses.  The safer way to go is probably to look for sold-off US firms that have a lot of Chinese exposure.

Macau gaming in February 2012: important signs of market strength

March 2, 2012 By in Casinos, China, Current Market Thoughts, Entertainment, Industry Analysis, Stock ideas Tags: , , , , , , , , , , , , Leave a comment

Macau gaming results

Yesterday, the Macao Gaming Inspection and Coordination Bureau released its report of Gross Revenue from Games of Fortune for the SAR’s casinos during the month of February.  Results were:

* 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%

Source: Macau Gaming Inspection and Coordination Bureau

The monthly figures require a little interpretation, since the important New Year holiday, which prompts a surge in casino visits, fell in January this year vs. February in 2011.  Sure, bears were apparently saying, January looks good.  But that’s only because of the holiday.  Wait until you see how ugly February will be.

Now February is in.  Despite the difficult comparison, gambling revenue grew 22%+.  Looking year to date, and thereby avoiding the issue of the timing of the New Year holiday, the Macau market is growing at 28%+, almost 3x the rate the gloomier analysts in Hong Kong had been predicting.

stock market reaction

The biggest stock market beneficiaries of the Macau government announcement have been Wynn Resorts in the US and Wynn Macau in Hong Kong.  This, despite the uncertainty–and the negative publicity–stemming from the break between Steve Wynn and Kazuo Okada.

The market moves do make some sense.  1128 is the main source of WYNN’s profits, so what’s good for the subsidiary is good for the parent.  And the continuing rapid growth of Macau suggests for 1128 that:

–regulators may approve its application to build in new casino in Cotai more quickly, since possible oversupply of gambling space is less of a worry, and

–the clear appeal of rivals just-opened casinos–just to see them, if nothing else–won’t mean that 1128 will struggle to find customers of its own.

NOTE:

Earlier today, WYNN filed an 8k saying that it had, in effect, received Macau government approval for a proposed new casino to be built in Cotai.  WYNN almost immediately retracted the filing, saying only that it had been made in error.  The stock, which had risen about 7%, was suspended for almost two hours for dissemination of the retraction news.  It hit a new intraday high after reopening but is sagging a bit as I’m writing this.

My guess is that the retracted 8k will prove to be factually correct, but that WYNN’s agent jumped the gun on making the announcement.  If so, what’s most striking to me would be how quickly the approval would have come after Kazuo Okada was removed from the WYNN share register.  Of course, it’s also possible that the approval has been prompted by the absence of the market slowdown Deutsche Bank analysts have been predicting for some time.  It could be that the timing is just coincidence, but I’m not sure that’s the right way to roll.

breakup at Wynn Resorts (WYNN): what happened last Saturday

February 22, 2012 By in Casinos, earnings conference calls, Entertainment, Industry Analysis, Stock ideas Tags: , , , , , Leave a comment

a little history

Steve Wynn is an iconic figure in the casino gaming industry.  Among other feats, he almost single-handedly re-glamorized the Las Vegas Strip while he was CEO of Mirage Resorts.  During the economic downturn of 2000, however, the board of that company accepted a takeover bid from MGM and showed Mr. Wynn the door.

Mr. Wynn then joined forces with Kazuo Okada, owner of a Japanese slot machine company, to develop a new upscale resort on nearby land.  Mr. Okada invested $380 million to obtain a 50% share of the venture.  Needing more money to advance his plans, Wynn Resorts went public in 2002.  So doing reduced Wynn’s and Okada’s ownership shares to 20% each.  Mr. Okada became the largest shareholder in WYNN when Mr. Wynn’s ex-wife received half of his stock in a divorce settlement.

the past year or so

The Compliance Committee of the WYNN board is led by board member Robert Miller, a former district attorney who served as governor of Nevada for ten years.  In February 2011, its investigation into the feasibility of opening a casino in the Philippines uncovered questions about possible violations of the Foreign Corrupt Practices Act (FCPA) by Mr. Okada in the Philippines while obtaining a casino license for himself there.

The board’s concern:  having a major shareholder and board member who could be deemed “unsuitable” to hold a casino license would put existing licenses in jeopardy.  As well, it would likely rule WYNN out as a candidate for new licenses (think:  Singapore, or permission to build a new casino in Macau).

In February 2011 the Compliance Committee opened an investigation of Mr. Okada.  Board worries were apparently heightened by Mr. Okada’s comments at board meetings, his unwillingness to participate in board FCPA training and his refusal to sign the company’s code of conduct.

(Reading between the lines, it also sounds like Mr. Okada continued to pressure the board to participate in his Philippine casino venture–something the board had ruled out–and had been intimating in the Philippines and elsewhere that he was secretly carrying out the board’s wishes.)

In September 2011, WYNN concluded there was a threat to WYNN’s business if Mr. Okada remained a board member/shareholder of WYNN and pursued his Philippine project.  The WYNN general counsel and compliance officer outlined the company position to Mr. Okada’s lawyers.  Mr. Okada said he didn’t see any conflict and declined to take any action.

WYNN then hired an outside law firm, run by a former head of the FBI, to conduct a detailed investigation.  According to Governor Miller, the inquiry turned up a pattern of violations of the FCPA by Mr. Okada and his companies.  Mr. Okada also told the investigators during a lengthy interview that he strongly believes he can continue to give valuable “gifts” to foreign officials, despite the fact this violates US anti-bribery laws.

last weekend

Last Saturday, after consulting with two sets of outside legal experts on gaming law, the WYNN board met.  It removed Mr. Okada as a director.  And it used the power given to it in the corporate charter to cancel Mr. Okada’s shares in WYNN.  It issued him a 10-year promissory note for $1.9 billion, bearing interest at 2% (payable in arrears), in compensation.

my thoughts

…just when you thought you’d seen everything!!

1.  I’m an investor, not a lawyer.  So I have to remind myself that I don’t have the specialized knowledge and training that may be needed to evaluate this situation correctly.

Still, given the array of prominent experts WYNN has assembled, I’d be shocked if the Nevada regulators don’t declare Mr. Okada to be “unsuitable” to hold a casino license in that state once it conducts its own investigation.  If so, I’d guess that undercuts possible legal action by Mr. Okada.

2.  WYNN’s charter apparently gives it the right to immediately revoke the shares of any owner the company finds to be “unsuitable,” which is a determination the board made about Mr. Okada on Saturday.

There’s no question of asking Mr. Okada to sell his holding; as of Saturday those shares no longer exist.

3.  The company charter apparently specifies the manner of compensation for cancelled shares.  Payment is supposed to be based on fair value and can be through a promissary note of at most ten-year maturity, paying an annual coupon of 2%.

Mr. Okada’s shares are “certificated,” meaning there’s either an electronic notation or a stamped notice, if they’re physical shares, saying that the stock has restrictions on sale.  WYNN didn’t say what the restrictions are, but they probably give WYNN the right to vet any potential buyer.  The certification would presumably bind any buyer, not just Mr. Okada.  It stands to reason that restricted shares aren’t as valuable as unrestricted ones.  …but by how much?

WYNN hired yet another expert firm, to determine “fair value” for the Okada holding.  Its conclusion:  fair value is a 30% discount to last Friday’s closing price.

4.  WYNN’s market capitalization was $14 billion last Friday.  So the market value of the Okada holding, were the shares unrestricted, would have been $2.8 billion.  In a sense, remaining shareholders make a gain of $900 million ($2.8 billion minus the $1.9 billion note), or about 8%, on their holdings through the share cancellation.

My guess is that the benefit to remaining shareholders is greater than that, if for no other reason than that the increasingly public tussle between Mr. Okada and the rest of the WYNN board was depressing the share price.  Because this situation is so unusual, however, I doubt Wall Street will assign even 8% extra to WYNN shares.

5.  Can Mr. Okada say he’s been harmed by the WYNN action?  Over the past decade, he’s received almost twice the value of his initial investment in dividends.  He’s now getting a note for 5x that amount.  My layman’s hunch is that his would be a hard case to make in court.

We’re in a wait-and-see situation now, in my opinion.  WYNN has asked the Wynn Macau board to remove Mr. Okada as a director, which I presume it will do.  It would be very interesting if the Macau authorities were to okay 1128′s pending new casino application once Mr. Okada is gone.  Another potential positive would be a speedy determination by Nevada regulators that Mr. Okada is indeed an “unsuitable” individual.

Las Vegas Sands: strong 4Q11…and beyond

February 8, 2012 By in Casinos, China, earnings conference calls, Entertainment, Hong Kong, Industry Analysis, Stock ideas Tags: , , , , , , , , Leave a comment

results

LVS reported 4Q11 and full-year 2011 results after the close of New York trading on Thursday February 1st.  Quarterly revenue for the company was $2.3 billion, up 26.3% year on year.  Net income was $460.9 million, or $.57 a share.  That was up 38% year on year.  EPS exceeded the average analyst estimate by about $.03.

For 2011 as a whole, LVS posted $9.4 billion in revenue, up by 37% from the %6.9 billion taken in in 2010.  EPS more than doubled to $2.02 vs. $.98 in the prior year.

details

Sands China in Macau took in $1.33 billion in revenue during 4Q11.  Ebitda (earnings before interest, taxes, depreciation and amortization) was $430.1 million.  These figures were up 22% and 29% year on year, respectively.  3Q11 ebitda was $388.3 million, meaning 4Q results were up 10.7% qonq.

Marina Sands in Singapore had revenues of $806.9 million for the quarter and ebitda of $426.9 million, aided by an unusually high win percentage at table games.  These were yoy increases of 44% and 40%.  3Q11 ebida was $413.9 million, so the qonq gain was 3%.

Las Vegas operations had revenues of $339.5 million and ebitda of $80.9 million.  Revenue was up 9% yoy, ebitda was about flat.  3Q11 ebitda was $94.3 million.  Qonq, 4Q ebitda was down 16%.

my thoughts

earnings

Let’s assume US operations will be flat year on year in 2012, ex management fees from Singapore and Macau.  I think there will be some small gains, but the main issue is not the economy.  It’s the severe overcapcacity of hotel rooms and gambling space in Las Vegas.  Dividends from Sands China will probably add close to $1 billion–covering the parent’s dividend payout.

HK: 1928 will soon be opening the first phase of its newest Macau casino, Macau Cotai Central, shortly.  In a market that will likely expand by 25% this year, 1928 will likely easily grow by 30%–probably considerably more.

I don’t know any good way to estimate growth for the MS Singapore.  The casino hasn’t been open that long, for one thing.  For another, after posting continuous increases in ebitda since opening, income seems to have flattened out in 4Q11.  Is this seasonal?  …or something else?   No one knows.  If we assume no organic growth but that the casino continues to generate revenue at the 4Q11 rate throughout 2012, ebitda would grow by 15% yoy.

Repayment and restructuring of debt at lower interest rates will chip in, as well.

Put all this together and I think the analysts’ consensus of $2.50 in eps for this year is a reasonable guess.  We’ll be able to tell more when the official year-end financials are published.

asset value

At today’s level, the market value of LVS is about $38 billion.

Its ownership interest in publicly traded Sands China (1928:HK) is worth around $21 billion.

If we assume that wholly-owned Marina Sands should be valued at 80% of 1928′s ebitda multiple–because of less clear near-term growth prospects–then MS is worth $24 billion.

If so, Macau and Singapore are together worth $7 billion more than the market cap of LVS–implying that, in the mind of Wall Street, the $424 million in annual US ebitda subtracts a ton of value.  That’s silly.  LVS would need to rise above $60 a share in order for the stock price to reflect no value for the US operations.

dividend

Both LVS and 1928 have declared initial dividends and signaled their intention to sustain them at at least the current level.  LVS will be paying $1 a share annually, meaning a yield of slightly below 2%.  1928 will be paying HK$1.16, a 4% yield.

Three implications:

–dividends are supposed to be paid from profits.  Both LVS and 1928 are saying they expect to remain at least as profitable as they are now.

–both companies believe they’ll be generating enough free cash flow to sustain the payout

–the companies’ lenders (LVS has about $10 billion in debt) are satisfied that they’ll be repaid and have okayed the dividends.

conclusions

LVS  isn’t the best casino operator in the world.  That’s WYNN, in my opinion.  But at the moment I think it’s the best casino stock.

Management is highly competent.  And the company is nearing the end of a very ambitious (read: risky) multi-year, multi-billion dollar Asian expansion.  The financial crisis came at the worst possible time for LVS.  Nevertheless, the company has completed its plans.  It’s now entering a period of potentially immense free cash flow generation that will transform the financial structure of the firm over the next two or three years.  I don’t think Wall Street has worked this out yet, as shown by the undervaluation of LVS on a sum-of-the-parts basis.


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

December 5, 2011 By in Casinos, China, Current Market Thoughts, Entertainment, Hong Kong, Industry Analysis, Recent Market Action, Stock ideas Tags: , , , , , , , , , , , , , , Leave a comment

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.

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