the Macau gambling market continues to boom
It’s really late in the month for me to be writing about the recent strength in the Macau gaming market. Nevertheless, here are the latest figures from the Macau Gaming Inspection and Coordination Bureau:
* 1 HKD = 1.03MOP (Unit:MOP million )
|Monthly Gross Revenue from Games of Fortune in 2011 and 2010|
|Monthly Gross Revenue||Accumulated Gross Revenue|
Another (ho-hum) stunningly strong month for the market in April. Another all-time revenue record, surpassing March’s high water mark even though April has one fewer day in it. Early market chatter for May is that business is, if anything, better this month than last.
not all the stocks are following suit
Here’s the month-to-date performance of the US- and Hong Kong-based stocks:
S&P 500 -1.9%
LVS -12.0% (disappointing(?) 1Q11 earnings)
MGM +15.5% (IPO of MGM Macau priced–more on this tomorrow)
Hang Seng H-shares -5.1%
SJM +7.8% (reported strong 1Q11 results–up 85% yoy)
Galaxy +7.4% (opened a new casino, to mixed reviews)
Sands China -7.2%
Wynn Macau -7.5%
what to make of this?
The US first:
I don’t see any general pattern, other than possibly the market misinterpreting what casino revenues are, that is, that they’re casino winnings, not revenues, and thus can fluctuate randomly, quarter to quarter, around a longer-term average.
MGM is a star performer, on the idea that when we have a publicly traded yardstick to value its Macau holdings, the US parent will benefit. We’ll see.
I haven’t read the LVS 10Q carefully enough yet (although I bought a small amount on the selloff after the earnings report), but the market may be mistaking bad luck during 1Q11 for weakness in the company’s business. The earnings report is the main reason, I think, for the poor performance of LVS.
WYNN, in contrast, is benefiting from a misreading of its phenomenal good luck in 1Q11 in Las Vegas as being the new norm. That may be the reason the stock hasn’t been hurt by the fall in Wynn Macau shares.
In Hong Kong:
Here, I do see a pattern. There’s an enormous (around 15%) difference between the weak performance of the higher quality companies, Wynn and Sands, and the strong gains of the lower tier ones, Galaxy and SJM. Although I would find it hard to buy either of the latter two (I might be able to stomach Galaxy, but certainly not SJM), the fact that demand for gambling is so super-strong means that there’s a lot of business to be had by everyone in the market. So it’s hard to find too much fault with the market rotating into the lower multiple names. It’s also unreasonable to expect multiple expansion to continue for 1128 and 1928 without at least a sympathetic response from the others.
My sense is that the correction in Wynn and Sands is just about over. Still, while I perceive a quality difference worth paying up for in 1128 and 1928, the Hong Kong market disagrees.
what I’m doing
I’d sold about 10% of my 1128 holding at HK$27. I tried, unsuccessfully, to buy it back two days ago, below HK$24. Fidelity won’t let me buy 1928, and I won’t touch the others, so I’m going to do nothing for now.
I regard WYNN as the best company, but I think it’s a little pricey at the moment. I’m trying to work though the huge amount of data in the LVS 10K, to see if it might be a way to get slightly different exposure to Asia, exposure that includes Singapore. My biggest concern is LVS’s net US$7 billion in debt, and a repayment schedule that goes into high gear next year. Most of the borrowings are linked to the properties in Macau and Singapore, where all the cash flow is, so matching assets and liabilities isn’t an issue. At first glance, absent another recession, likely gross cash flow seems more than adequate to meet mandatory repayments. It’s the continuing large capital spending bill that I haven’t quite gotten my arms around.
Any thoughts on Asia Entertainment & Resources, Ltd. (AERL)? It is supposedly a pure-play in Macau VIP market – not an operator, but a promoter. Seems to make a lot of money and trade cheaply, but I rarely see it mentioned among the Macau plays – do you think it a Macau player worthy of consideration or two small or peripherial due to not owning a property – instead an operator of VIP gaming rooms in the Galaxy, MGM, and Venitian?
I have purchased some AERL and thank you for your thoughts.
Thanks for your comment. I don’t know the company, but I’ll take a quick look and add to this reply in the next day or two.
My addition: I can’t really help.
It’s hard for me to know what to make of AERL. The firm is incorporated in the Cayman Islands and trades on NASDAQ. Because it’s a foreign company, it doesn’t file a 10-K with the SEC. Instead, it files a form 20-F. The main difference is that the latter doesn’t have to conform to the strict disclosure requirements the SEC has for domestic companies.
I glanced at the 20-F last night. It has what appears to be an auditor’s statement, but I’m not 100% sure. The body of the report suggests the firm has been having trouble getting employees to record expenses in a way that satisfies GAAP. As a result, I find it hard to decide how heavily to rely on the financials.