the May DICJ report

Last week the Macau Gaming Inspection and Coordination Bureau released its monthly report on the gambling “win” achieved by the casinos in that market.  The figures are as follows:

Source: Macau DICJ

Month on month, the Macau gaming market expanded slightly, continuing the pattern of recent months.  What makes the May figures noteworthy, however, is the year on year comparison, which is very weak by recent standards.  There is an issue of the timing of the Golden Week holiday, which occurred in April this year and May last.  That’s typically an extra-strong period for the casinos.  We can easily correct for the calendar by averaging April and May results.  This gives a 14% year on year gain for the casino business over the two month period.  A little better, yes, but not what we’ve become used to.

stock market implications

This is a situation with lots of moving parts.

On the plus side,

1.  Let’s start with the Macau market.  If we assume the market is mature, then it will likely grow in line with nominal GDP in China.  Let’s put that at +10%.  Let’s also assume that the Macau government continues to have a policy stance that encourages profit growth, so that massive overcapacity like that no in Las Vegas doesn’t emerge.

If so, then operating profit growth from casino operations will likely be around 15% annually.  The development of non-casino operations–conventions, shows, dining…–probably boost the overall profit growth rate to +20%.

2.  There’s considerable evidence that the Macau gaming market isn’t mature and will continue to grow at a (considerably) higher than +10% rate, as better transportion links bring in gamblers from farther-away provinces, and gamblers in larger numbers from nearby locations.

3.  The Macau-related casino stocks have lost 1/4 to 1/3 of their market value over the past two months and are trading at about 15x trailing earnings.  The numbers are actually much messier than that, due mostly to costs of newly-opened capacity, but I think 15x is a reasonable yardstick to use.

1-3 suggest to me that earnings growth prospects are good and valuations are very reasonable.

On the negative side,

1.  If we’re bouncing along a cyclical bottom caused by a slowdown in the Chinese economy, monthly casino win may not rise much from the current rate over the remainder of 2012.  If so, several months of flattish–or even negative–year on year comparisons are in store for the second half.

2.  This may not be the bottom for the gaming market.  I’m willing to guess that it either is or is close, but…  The speed at which the Macau government acts on pending applications for construction of new casinos–one more has supposedly been in Macau’s plans for 2012–could be a reasonable indicator.

3.  Competition is beginning to emerge from other Asian countries.  The Philippines, focus of a legal dispute involving WYNN, is an example.  I tend to think, however, that other than Singapore, other areas will probably not be able to offer the combination of a high level of service in the casinos and physical safety elsewhere that Macau offers.  Still, competition is a potential risk.

4.  This may not be the bottom for the stocks.  During the panicky days early last October, Hong Kong-traded gambling stocks reached much lower lows.  Their US counterparts, however, are at or very close to the October levels where they stopped falling .

Like most situations, what to do in this one comes down to risk preferences.  None of these stocks are for the very risk averse.  My favorite continues to be LVS (I bought a small amount yesterday).