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.

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.

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).

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.

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:

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.

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.

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:

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.

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.

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 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:

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.