Monthly Archives: April 2011

IPO of MGM China this quarter?

April 18, 2011 By in Casinos, Entertainment, Industry Analysis, Stock ideas, Uncategorized Tags: , , , , , , , , , , , , Leave a comment

MGM China, a new company

Last Wednesday MGM filed an 8k describing the formation of a new company, MGM China, which will be the listing vehicle for the Macau casino properties now held in a 50/50 joint venture by MGM and Pansy Ho.  Each will initially own 50% of MGM China.

an intended IPO

MGM and Ms. Ho intend to sell 20% of MGM China to the public in Hong Kong in an IPO that press reports say will happen next month.  The 8k notes that the parties will use their best efforts so see the IPO occurs before June 30th.

a secondary offering

The IPO will be a secondary offering, meaning no new shares will be created; rather the present owners will sell some of their existing shares.

all shares to be sold by Ms. Ho

The post-IPO ownership structure of MGM China will be somewhat of a change, though, because all the stock being sold to the public will come out of Ms. Ho’s portion.  In addition, Ms. Ho will sell another 1% of MGM China to MGM at the IPO price, giving MGM 51% ownership and clear control.  The underwriters of the issue will have an “overallotment” of 3%, meaning they have permission to sell up to 23% of the company.

post-IPO structure

Depending on the overallotment, the post-IPO structure of MGM China will be:

MGM     51%

Pansy Ho     26%-29%

the public     20%-23%.

One potential sticking point might have been that none of the money raised goes to cash-strapped MGM.  Ms. Ho has addressed this issue by agreeing to use US$311 million of the IPO proceeds to buy MGM convertible bonds.

The IPO will be coming at a good time

The Macau gambling market is booming, with revenues through the first three months of 2011 running over 40% higher than in 2010.  And so are the Hong Kong-listed gaming stocks.  Market leader SJM (0880) is up 35% year to date, Wynn Macau (1128) has gained 58% and Sands China (1928) is 26% higher.

The IPO solves a problem for Pansy Ho

The offering documents will doubtless make the situation clearer, but press reports say Ms. Ho resigned from the board of directors of the Macau joint venture at the end of last year.  I presume this was to allow her to vie for control of the much larger SJM, the flagship of the Ho family gambling empire, that has recently been taken out of the hands of Ms. Ho’s father, Stanley.  Macau law prohibits one person from controlling two gambling concessions.  Her reduced holding in MGM China may be sufficient evidence that Ms. Ho is a passive investor in the firm for authorities to allow her to become chairman of SJM.

One other plus:  MGM has agreed to explore co-investing in property on the mainland with Ms. Ho.

How will Hong Kong investors value MGM China?

I find this a hard one to figure.  As the recent performance of  1128 and 1928 suggest, I think Hong Kong investors are beginning to understand the value of the American casino operation model.  But I have no idea if the market will regard the withdrawal of Ms. Ho from MGM China as a plus or a minus (my guess is that it will be the latter).  At this point, I’d expect the IPO will raise well over US$1 billion, US$2 billion a possibility.  The offering documents, and the May report of the Macau Gaming Coordination and Inspection Bureau on gambling receipts, will make the situation clearer.

MGM’s stock went up 8% on the IPO announcement.

One reason is doubtless the US$300+ million cash infusion.  Another is that MGM gains control of MGM China.  More important, I think, is the tendency of the Las Vegas-Macau casino conglomerates to trade on the value of their listed Macau operations.  For example, WYNN’s holding in 1128 represents 75% of the parent’s market capitalization.  Establishing more firmly what MGM’s Macau interests are worth will likely give the parent stock more speculative appeal.

My very preliminary take is that a $14 MGM price already discounts a $2 billion IPO.  At the same time, this would make it clear that you’re only paying $3.50 or so for the rest of MGM, making the stock look like a turbo-charged warrant on improvement in the Las Vegas market.

information for investors: avoiding information overload

April 17, 2011 By in Constructing a Portfolio, Getting financial advice, Information for investors, Portfolio management, Strategy Tags: , , , , , , , Leave a comment

In the US of eighty or a hundred years ago, one of the biggest problems facing individual investors was that information flowed slowly and was expensive and time-consuming to acquire.  Also, the government regulations that now require uniform financial reporting standards and regular disclosure by companies of specified operational data didn’t yet exist.  All this tilted the playing field sharply in the favor of the largest and wealthiest investors.  For lack of anything better, everyone else was reduced to studying price and volume patterns in daily trading, trying to figure out what the rich and powerful were doing.

Today, investors in most world equity markets face the opposite problem.  The industrial structure of any developed economy is now much more complex than in those days, and the reach of many economic agents is global, not just national.  In addition to newspapers and trade journals, radio, TV, cable and above all, the internet, bombard us with much more information than any individual can hope to absorb and make sense of.

How do you cope?

Many professional investors, particularly among brokerage houses and hedge funds, have turned to computer analysis of fundamental or technical data to speed their decision-making.  In both cases, they’ve approached the challenge of the plethora of information now available by finding ways to continue to collect all of it.  In the second, they’ve returned to technology-enhanced versions of the primitive tools of several generations ago.

Others, mainly on the buy side, have built elaborate (and expensive) research organizations with analysts stationed in the major investing centers of the world.   Again, this is to be able to collect all the data the world generates about investing. Brokers have tried this approach as well, but have laid off many of their most highly skilled (and most highly paid) analysts during the recession.  The decentralized approach, although it sounds good on paper, risks creating an in-house bureaucracy and a resulting “designed by committee” portfolio that doesn’t stand for much of anything.

As individuals, however, this approach simply isn’t open to us.  We’ll drown in a sea of data, taking our portfolios down to Davy Jones’ locker with us, if we try to follow everything.  What do we do?

1.  Figure out how much time you’re going to devote to your investments.  If you’re going to spend, say, an hour a week and no more, stick with a passive approach.

When I was working, I thought I could spend 50 productive hours a week on my portfolio.  More time than that and I would be too tired and would just be spinning my wheels.

Let’s say I spent half that time on general research, administrative stuff and interacting with clients.  That leaves 25 hours.

My portfolio might have 60 positions in it (typical of growth investors; value investors usually have double that or more).  The largest five would make or break my performance.  The next 10 were stocks I thought would do well but didn’t have (yet) the same degree of confidence I did in the first five.  I’d allocate my time at maybe three hours a week thinking/studying about the biggest positions and one hour each for the other ten.  This is probably a good approximation for how informed the guy on the other side of the trade from you is.

My rule of thumb for individuals like us would be that we should expect to spend at least an hour a week on average on investments for every significant–meaning more than 2% of total assets–equity position we hold.

2.  Focus.  One of the occupational diseases of professional investors is thinking that you need to, or actually can, have an informed opinion about everything.  That’s a terrible mistake.  It spreads you much too thin.  What you do need to have is a few areas (or even one) that you know a lot about.  Myself, I like retail, hotels/casinos, and technology.  Actually, it’s a little more specific than that.  I like luxury goods, business/convention hotels, cellphones and semiconductors.

I find consumer-related industries particularly appealing because you can use the products, visit the stores, talk with salespeople.  You can also get feedback from your friends and acquaintances.  I like tech gadgets.  As an investor, though, the IT industry reminds me of the oils, where I got my first investing experience.  In both cases, I think, analysts make the mistake of spending all their time on the technical aspects of making the products rather than on who will buy them and how much will the customer pay.  It makes some sense that they act this way, because, they’re mostly electrical or petroleum engineers.  But this gives the generalist like me an advantage I arguably shouldn’t have.

You may have background, experience or interests that give you a special insight into an industry.  This would be a natural area to focus on.  In general, it’s much better to have one stock you know really well than a dozen that you’ve bought only because you got a “hot tip.”

3.  Find (a few) reliable sources of information. 

I like the Financial Times, the Economist and the business section of the New York Times.  Sometimes the Los Angeles Times has interesting articles, especially either about the west coast or about Asia, but I usually only read it when a search engine brings me to the paper.

Once you’ve focused on an industry, government and trade group websites can be extremely useful.  If you have access to a college research library, you can often find information there–with the help of a research librarian–that’s not widely known on Wall Street.  Company websites, their annual reports and 10ks, are extremely important, too.  And don’t forget to look at a company’s competitors’ filings/websites.

If you have access to research reports from traditional brokers, make sure you get the longer versions aimed at institutional investors, not the abbreviated versions brokers some time prepare for retail clients.  As brokers have pared back on research as a cost-cutting measure, however, I find it’s harder and harder to locate good research reports.

On the minus side, I find the talking heads on TV to be pretty useless.  I’ve come to like the Wall Street Journal‘s sports, and the paper has interesting gossip in it, but I no longer find it a useful investing tool.

information for investors: 10K, annual, proxy–what to read?

April 15, 2011 By in Information for investors, Portfolio management Tags: , , , , , , , , 1 Comment

the 10k and annual

Let’s put the proxy to the side for now, and consider the annual report and the 10k.  They’re both once a year reports of a publicly traded company’s performance.

what they have in common

Sometimes, the annual and 10k are just about one and the same document.  Some companies complete the 10k, wrap another cover on it, include the chairman’s letter and a picture or two, and call that the annual.  It’s not the norm, but it happens.  It tells you something about the company that does this, as well:  no-nonsense, spartan, don’t think they have much need for marketing, the record speaks for itself.

In most cases, the 10k and annual are separate documents, however.  They do have two features in common.  Both contain:

–detailed audited financial statements, complete with many pages of footnotes, and

–the auditing firm’s “opinion,” or statement about the conformity of the financial statements to Generally Accepted Accounting Principles.

Understanding the financial statements requires knowledge of financial accounting, which every serious investor must sooner or later acquire.  Checking out the auditor’s opinion, however, is relatively straightforward.  Look for three items:

–by most far the most important factor is that the opinion  be “unqualified,” that is, that the auditor state the accounts are fully in accordance with GAAP.  A “qualified” opinion, on the other hand, one that says that in some respect the accounts are not in accordance with GAAP, is a gigantic red flag.

–who the auditor is.  Any large company should hire a major accounting firm to do its audit.  For a microcap stock, this may not be possible.  But one of the more obvious long-term signs of trouble with Bernie Madoff was the fact that his auditor was a small, obscure firm that was radically dependent on Madoff’s business.

–how long the current auditor has held the position.  A change of auditor is always worrying.  Frequent changes almost always signal trouble.

how they differ

10k

The 10k is the annual filing required by the SEC.  It contains a detailed description of the company’s operations, line of business by line of business.  It has an assessment of the competitive environment, the positioning of all the firm’s major products and the most important variables influencing earnings.  There’s also a comprehensive discussion of the profit performance of the company during the year.

The company analysis can easily run 50 pages or more.  A comforting fact for investors (at least, for me):  any material misstatement or omission can be a cause for government prosecution of the offending parties, which can result in possible jail time.  Therefore, I regard the 10k as completely reliable.

There may well be material information that a company would rather not make well-known.  In my experience, such data will never find its way into the annual report.  But because it’s material it must be in the 10k.  It may not necessarily be easy to find–but it’s got to be there.

The one drawback I find in the 10k is that it is fundamentally backward looking.  There won’t be a discussion of new products or changes in strategy or other plans that may affect the company’s profits in the coming year and beyond.

the annual report

The annual report is an information document.  But it’s a marketing document, as well.  It’s not only aimed at shareholders as its audience.  It also wants to build morale among present employees, to help to recruit new talent, and to keep suppliers and customers content to do business with the firm.

The annual is usually shorter in length than the 10k, and contains lots of pictures and upbeat prose.  While what the annual says must be true, it need not be as complete and as blunt about miscues as the 10k.

To my mind, the main plus of the annual is that, despite its positive bias, it’s the best place to find out what the company’s plans and ambitions for the next few years are.  There is, of course, no certainty that the company will be able to achieve its goals.  But this future orientation is, by design, almost completely lacking in the 10k.

the proxy

The proxy statement contains information on the structure of the company’s board of directors, and the background and compensation of its members.  It lists major owners of the company’s stock.  It also contains details of any proposals that will come up for a shareholder vote at the annual meeting, along with the company’s recommendation for or against.

For individual investors, the proxy statement might well be best regarded as a cure for insomnia.  But there’s a section that’s crucial to read, especially when dealing with smaller companies.  It’s called “Related Person Transactions” or something similar.  It deals with any business the company may do with other firms in which directors have a financial interest.

Why is this important?  It’s to make sure your economic interests and those of the directors/management of the company you’re interested are aligned.  For example, suppose Director A is the largest single shareholder of your company, with a 10% interest.  Director A owns 100% of another company that either supplies your company or buys its products.  You have to consider whether these dealings are arm’s-length transactions, or whether Director A’s 100%-owned firm is getting a better deal than it should.  The proxy is the only place this potential conflict of interest will be disclosed.

In short:  read the 10k for facts, the narrative part of the annual for aspirations, and the proxy for potential conflicts of interest.

information for investors: Edgar vs. the company website

April 14, 2011 By in Information for investors Tags: , , , , , , , , , Leave a comment

EDGAR

The Electronic Data Gathering, Analysis and Retrieval (EDGAR) system of the SEC is maintained in an online database that contains all the filings the regulator requires from publicly traded companies–and some others.  The top 10,000 companies by market capitalization can be searched for by ticker symbol.  Documents, including 10Ks and 10Qs (annual and quarterly earnings statements, respectively), can also be searched for by industry or by time period.  Since most companies make all their filings electronically directly into the database, EDGAR is up-to-date, as of the prior day at 5:30 pm.  Most important, the database is available to anyone, and is free.

Bookmark this site. It probably the single most important source of information a US-based investor can have.

accessing EDGAR

1.  The link above will bring you to a page on the SEC website titled “Filings and Forms.”

2.  Click on the second choice in red, “Search for Company filings.”

This will take you to a page titled “Search the Next-Generation EDGAR system.”

3.  From the first list in red, click the first item:  “Company or fund name, ticker symbol….”

This brings you to the Company search page.

4.  Enter the company name or ticker symbol in the appropriate place in the blue search box to access all company filings in time order, with the most recent filings first.

You can also get a general introduction to the EDGAR system by clicking the red link under the topic “Other Resources” on the Search the Next-Generation EDGAR system page.

why is EDGAR so valuable?

It’s the wealth of detailed company information it contains (in tomorrow’s post I’ll go into more detail about the 10K and proxy, which I consider the most important).  In the early 1990s I was hired by a fund management company to reestablish a global equity investing effort that had suffered through a long period of underperformance.

In those (pre-internet) days, companies filed their SEC-mandated disclosures in Washington, DC, in person and on paper.  Brokerage houses stationed research or trading assistants armed with cellphones at the SEC to make copies of expected filings, read them quickly and phone information to their research departments or trading desks.  Sounds crazy today, but that’s what people did.

On the buy side, people like me thought this was an unnecessary expense.  Instead, we would receive the reports, about six weeks after filing, on microfiche from a third-party data service that had a contract with the SEC.  A library of past filings + updates cost $125,000 a year.  In today’s dollars, that would be about $250,000.  And, of course, you’d have to be at work to access the data.

The high cost of data access represented a huge competitive disadvantage for individuals, no matter how intelligent or highly motivated, versus professionals whose size allowed them to afford it.

That’s no longer the case.  Anyone with internet access can look at the data any time of night or day–for free.

vs. the company website

The investor relations section of most company websites provides a direct link to EDGAR. Some companies, however, provide only PDFs of selected documents.  This really doesn’t make much difference, since EDGAR is only a couple of clicks away.  It’s just something to be aware of.

The company website does have a number of items of interest that I think are useful and that would be hard to find elsewhere.  They include:

–a description, with pictures, of company products and services.  This can be helpful if they are highly specialized or technical in nature.  Remember, though, that the website is a marketing tool.  So you have to take what’s said their with a grain of salt.  There probably won’t be a comparison with competitors’ offerings.  Take a peak at the Nokia site, for example.  I haven’t looked hard, but I don’t see anything about GOOG or AAPL eating their lunch.

–a place to sign up for email receipt of documents and press releases, and notification of webcasts,

–a library of webcasts of past presentations at investor conferences and earnings conference calls, plus a place to listen to upcoming ones in real time.  There may be PDFs of handouts, as well.  Webcasts are particularly useful, although you can easily find transcripts at, say, Seeking Alpha.  Seeking Alpha has pretty weak analytic content, in my opinion, but you can’t complain about a free transcript of an hour-long call that you can read in 10-15 minutes.

–a library of past press releases, plus PDFs of past annual reports, all in one place (more about annuals in tomorrow’s post),

–the name, email address and phone number of an investor relations contact.   I’ve found that IR departments vary greatly in their attitude toward individual investors who call with questions.  If you can demonstrate that you have an intelligent question, that you’ve read the pertinent company documents and are sincerely interested in the answer, you’ll probably be treated well.  If you’re not, it may be an expression of the company attitude toward shareholders.  But it could equally well be that the IR people don’t know much.  In either case, you’ll have learned something.

As a simple contrast between the two, the EDGAR data are intended to inform and the website data are intended to persuade.  More about this difference in tomorrow’s post about the 10K vs. the annual report.

 

 

 

 

 

 

Beijing’s renminbi experiment

April 13, 2011 By in Asian economic development, China, economics, Hong Kong, Japanese development, Strategy Tags: , , , , , , , , Leave a comment

emerging market development

The standard road to economic development for emerging economies in the post-WWII era has been to emulate Japan …that is to say, to provide cheap labor and a supportive working environment to foreign firms in return for technology transfer.  To ensure the emerging country keeps its labor cost advantage, it typically pegs its currency to that of its largest target market (read: the US) or to a basket of currencies representing the bulk of potential customers.

As I’ve commented in more detail in other posts, the crucial testing point for this strategy comes when the emerging nation runs out of cheap productive resources.  Usually, the factor is labor–although it could equally be water or something else.  At this point, labor-intensive firms can no longer expand operations by turning farmhands into assembly workers.  They can only grow by poaching workers from each other, causing wages to rise and an inflationary spiral to begin.

letting the local currency rise

The orthodox solution to the problem is to dissolve the peg and allow the local currency to rise.  Doing so lessens or eliminates the labor cost advantage that has helped the emerging nation develop.  In theory, it also forces industry to evolve toward higher value-added production, and requires the labor force to learn new skills.  In practice, allowing the currency to rise is strongly opposed by industrialists who have become wealthy and politically powerful under the existing regime.

The rising currency solution has other characteristics, as well:

–overall growth slows, at least for a time,

–development reorients itself away from export-oriented manufacturing and toward the domestic economy,

–the real earning power of workers rises, but nominal wages do not necessarily change, and

–the real value of asset holdings increases for all.

This last characteristic is especially important.  In a rising currency environment, the wealthy make out like bandits.  Ordinary people get a boost to their earning power, but since they may not hold property or have a large amount of accumulated savings, they probably lose economic ground to the wealthy.

a different route

Of course, currency appreciation is not the only way to raise real wages.  Why not take the direct route and raise nominal wages?  Two considerations:  1) the mechanics of getting this done could be difficult, and 2) whoever mandates higher wages is clearly responsible for the consequences–there’s no possibility of blaming evil currency speculators for any negative effects.

Singapore

I can think of only one instance where an emerging nation tried this route.  Decades ago, when Singapore was primarily a textile manufacturer, the government there raised the cost of labor–through an increase in mandatory employer contributions to the government-run pension plan.  Singapore wanted to encourage higher value-added manufacturing.  What it got instead was textile firms fleeing and a recession–which lasted until the government rescinded the pension payment increases.

Hong Kong

Hong Kong might be seen as another case in point, although the currency peg there was instituted as a political measure–to lessen flight capital in advance of the handover of the former British colony back to Beijing–not an economic one.

The Hong Kong experience, created more by necessity than economic planning, had several important characteristics:

–economic/mobility increased significantly; power shifted quickly from the existing, mostly British, elites to new, mostly ethnic Chinese, players ,

–Hong Kong was forced to become a cauldron of entrepreneurial development, just to deal with the pressure of rising wages,

–nearby Guangdong province benefited greatly from the shift of more labor-intensive manufacturing there.

China

The large across-the-board wage increases for ordinary workers recently mandated by Beijing seem to me to be the clearest signal that China has decided to try to duplicate the beneficial effects of the Hong Kong currency peg.  The eastern seaboard will play the role of Hong Kong, western China that of Guangdong, and the “princelings,” the sons and daughters of former Communist Party leaders, that of the British.

The development of the offshore renminbi market may be a new twist in the plot, but I think that otherwise the story remains the same.  If this is correct, calls for Beijing to allow the renminbi to rise against the US dollar will continue to fall on deaf ears.  From a stock market point of view, the interesting consequence might well be surprisingly strong spending by middle- or lower-end consumers.  The big question is whether to play this through already prosperous retailers or to look for the emergence of new concepts tailored specifically to this audience.  The latter route promises much bigger payoffs; the big problem is identifying the correct stock/stocks to buy.