Monthly Archives: May 2012

how big is the Macau gambling market? …potential?

May 3, 2012 By in Asian economic development, Casinos, China, Entertainment, Industry Analysis, Stock ideas Tags: , , , , , , , , , , , Leave a comment

…a lot depends on how you measure.

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.

TSMC’s 28 nanometer problems: significance

May 2, 2012 By in Industry Analysis, semiconductor manufacturing, Stock ideas, Technology Tags: , , , , , , , , 1 Comment

Rumors have been swirling for some time in tech circles about difficulties the Taiwanese foundry, Taiwan Semiconductor Manufacturing Company (TSMC), is having in bringing its latest cutting-edge chip fabrication lines into full production.  The stories were confirmed when QCOM warned in its latest earnings conference call that over the next quarter or two it would be unable to supply customers with all the most advanced chips they wanted. (Interestingly, in its quarterly earnings call, AAPL said it would be unaffected because it isn’t using 28 nm chips.)

Why is this important?

background

1.  For many semiconductor chips, the history of their manufacture is one of constant attempts to make more complex and faster speed, but also smaller, less power-hungry and cooler output.  One of the main ways of accomplishing all but the first of these goals has been to shrink the spacing between the lines of the chip patterns written onto silicon.

2.  A nanometer is a billionth of a meter.   The 28 nanometer spacing that TSMC is having trouble with is, therefore, a distance between lines of 28 billionths of an inch.

3.  About twenty years ago, the foundry–or third-party manufacturing–business began to come into prominence, as several positive factors for that industry converged.  The increasing complexity of semiconductor “fabs” meant that it cost $3 billion to build one.  Even worse, a fab churned out $7+ billion in output, far beyond the sales of all but the largest companies.  At the same time, a generation of ambitious chip designers wanted to break away from stodgier established firms and develop chip designs on their own. Many focused on customizing templates provided by ARM Holdings (ARMH).

4.  The unquestioned leader in the foundry arena is TSMC.

a paradigm shift in the offing?

There are two big integrated semiconductor designer/fabricators left–INTC and Samsung.  Neither is having fabrication problems.  INTC is beginning to produce 22nm chips in volume, and promises 14 nm for 2013.  In addition, it is using a new production technique that it calls “3-D,” that gets an unusually large benefit from its current linewidth shrink.  Most important, in my view, is that the company seems increasingly concerned with providing customers with products they want, rather than just the latest engineering tour de force.

Samsung already provides foundry services to others–it builds many AAPL chips, for example.  And INTC’s mammoth capital spending campaign of 2011-12 has analysts asking–and the company denying–that it intends to offer similar foundry services in the future.

my thoughts

ARMH, which has–with justification–been an immense market outperformer as the one-stop-shopping way to play the mobile device chips that the design firms/foundry model has been churning out.  But the stock (at 55x historic eps) is down about 20% over the past year, a time when INTC shares (12x) is up by 25%.  Over the same period, Samsung Electronics (5930.KS) (15x) is up 50%.

Yes, the issue with ARMH may just be the high PE multiple.  And, yes, Samsung isn’t just chips.  It’s a force in smartphones and dominant in TVs.  And it trades in a market that marches to its own drummer.  But I think the market is saying that the old integrated model has more going for it than the consensus appreciates.  I also think the market is right.

TSMC’s fabrication difficulties may be the trigger that gets a wider group of investors to focus on the change.