I’m going to cover this topic in three posts. Today I’m going to talk about why I wanted to buy Sands China. Tomorrow I’ll write about the troubles I encountered in doing so—and what I ended up doing. The final post will deal with the Macau government’s rejection of a Sands China expansion proposal.
the Macau (or Macao, as LVS spells it) gaming market
I’ve written about this market extensively elsewhere. You can find more details here and here. The executive summary:
Macau is a Special Administrative Region of China, like Hong Kong. That’s because, like Hong Kong, it was controlled by a foreign power—in this case, Portugal—and reverted top Chinese rule about the same time Hong Kong did.
Macau has been a gambling center for longer (since 1986) than I’ve been involved as an investor in Hong Kong. And because Macau is part of China, it has privileged access to gamblers from the mainland, a large, fast-growing market that has only partially been tapped.
The SAR government invited WYNN, and later LVS, into the market to bring it upscale and, in my opinion, to act as a counterweight to entrenched competitors reputed to be controlled by organized crime.
In other words, the Macau government wants WYNN and LVS to be successful.
the growth of China
Everyone knows the headline numbers—8%+ economic growth as far as the eye can see. I’ve recently written about the fact that the top 10% of Chinese earners may be much wealthier than the consensus thinks. I’ve also begun to believe that Beijing intends to address the wide gulf between haves and have nots, as well as reorient its economy toward more domestic-oriented growth, by aggressively pushing up the wages of most workers. This would be another way that the pool of potential gamblers aiming to visit Macau might expand.
the competitive situation in Macau
In their third quarter earnings conference calls, both WYNN and LVS mentioned that the other competitors in the market were beginning to rent space in their casinos to junket operators in return for a small fee. The junket operators would bear the gambling risk and would inevitably earn most of the rewards from the junkets. Both WYNN and LVS (who, by the way, don’t like each other very much) remarked that this was evidence of the (low) skill of the other casinos. Both mused that the government might step in to ban the practice.
Steve Wynn, never shy about giving his assessment of a situation, also spoke of former “dumbbells” managing a casino in Macau, who had been granting excessive credit in order to win business and had ended up stuck with large bad debt writeoffs instead of profits. Mr. Wynn mentioned that the unnamed operator had changed top management recently, gone back to a more sensible way of doing business, and that the market had become more profitable for all participants since. Fyi, 1928 changed top management around mid-year.
If I understand this information correctly, both 1128 and 1928 are gaining market share in Macau and are likely to continue to do so. It appears 1928 had an operations problem that LVS has fixed, so its results should increase by a greater degree than either 1128’s or the market’s. (Even an optimist like me will keep in the back of his mind, however, that these same people hired the dumbbells in the first place, and be quicker to take profits that he otherwise might be. This also says that 1928 is not for the faint of heart. Nor should it be the first or only casino exposure one has. That’s either WYNN or 1128, in my opinion.)
new Cotai space
Both 1128 and 1928 are planning to build new casinos in Cotai. The 1928 expansion will be done much sooner, and therefore contribute to profits acceleration much sooner, than 1128’s. A recent Macau government decision, which is the subject of post #3, raises questions, however, about the extent to which any casino company can expand in the SAR.
alternatives (for me)
I already own WYNN and 1128. I’ve been thinking I should trim my positions and put part of the sale proceeds back into other casino firms. Ideally, I’d like to own shares in the LVS casino in Singapore, but it’s not publicly traded. You can get indirect exposure to 1928 through LVS, but the company has a lot of debt. I suppose I could consider MGM or one of the smaller US-based casinos. But I have a hard time getting past MGM’s Pansy Ho situation. And the others require careful analysis I just haven’t done.
..which brings me to 1128.
so I tried to buy 1128
I trade internationally with Fidelity, which I think has the most professional international equity traders and the best on line trading software of the discount brokers. Tomorrow I’ll write about what happened.