Monthly Archives: November 2012

how mature is the Macau gambling market today?

November 9, 2012 By in Asian economic development, Casinos, China, Current Market Thoughts, Entertainment, Industry Analysis Tags: , , , , , , , , , Leave a comment

A Hurricane Sandy note:  Still no internet at home–no sign of Comcast, either.  I’ve been using my phone as a mobile hot spot, but today Verizon failed as well.  Hence the late post.

maturing?

We have some indirect evidence from the recent actions of the Macau government, which has been especially careful to pace growth of casino operations in the SAR in order to avoid overcapacity.  The authorities have approved a total of five big new casino development plans for the Cotai area, with completion scheduled over the next three-five years.  That’s on top of projects already under way.  But although I think trust in the good sense of the government is justified by its behavior over the past decade, that’s a particularly slim reed to depend on in making an investment.

…not so much

a.  visitation

Luckily, there’s a substantial amount of tourist data compiled by the Macau Statistics and Census Service available to us.  The information below summarizing the casino penetration of various Chinese provinces is MSCS data that I’ve taken from the 3Q12 Las Vegas Sands quarterly earnings report.  I’ve reorganized the presentation a bit.

Over the 12 months ending September 30th,  11 million visitors came to the SAR from other parts of China.  Let’s assume they all came to gamble.

Guangdong:  Of that number, 8.1 million, or 74% came from neighboring Guangdong province.  Guangdong has a population of 104 million, so the number of visitors (I don’t think it matters that many people will have come more than once) equals 8% of the population.  The number of visitors from Guangdong grew over the past year, but by only 4%.

the rest:  Macau also draws from other provinces in eastern China, whose population totals 262 million, or 2.5x that of Guangdong. The number of visitors from those provinces last year amounted to 1.1% of their populations.  The visits break out as follows:

Hunan, 66 million people, 596,000 visits, 27% year on year growth

Zhejiang, 54 million people, 608,000 visits, 11% yoy growth

Fujian, 37 million people, 877,000 visits, 4% growth

Chongqing, 29 million people, 201,000 visits, 36% yoy growth

Shanghai, 23 million people, 422,000 visits, 11% yoy growth

Beijing, 20 million people, 426,000 visits, 14% yoy growth

Tianjin, 13 million people, 130,000 visits, 47% yoy growth.

The province that jumps out at me is Fujian, just to the northeast of Guangdong.  It seems to be showing the same flattening out of visitor growth seen with Guangdong, but at a visitation level  = 3% of the population vs. 8% in Guangdong.

If we think that the non-Guangdong provinces listed above will reach maturity at the Fujian level of 3%, then those provinces will yield another 5 million or so visitors over the next few years before growth flattens out.  That would imply close to 50% growth in visitors for the Macau gambling market before the industry would need to look to the other 2/3 of China for growth.

If we thought that Fujian is outlier of some sort, and Guangdong is a better model, then the non-Guangdong provinces could yield up another 17-18 million visitors, almost tripling the current size before the casinos have to look for new gamblers in the 2/3 of China Macau doesn’t yet service.

As with most things, the truth of the matter is probably somewhere in the middle.

One other note about the visitor numbers.  To some degree, the number of gamblers who come to Macau is a function of the amount of casino space available for them to use.  Until the past six months, the market seems to me to have been capacity constrained.  If so, the visitation numbers and growth rates we’re using could be uncharacteristically low.

In addition, the 12 months ending in September represent the worst period of the current post-Great Recession slowdown–another reason to think that the current visitation numbers represent less than the growth the market will see in coming years.

b. spending

Market revenue growth is a function of both the number of gamblers and of the amounts that they bet.  Growth in visitors over the past year was just under 5%.  But the amount won by the casinos over the same period was up about 15%, implying the average visitor bet 10% more than in the prior year.

In my experience, this makes sense.  The average amount bet in a given market rises in line with nominal GDP.  There’s no reason this should change.

c. adding a + b

If the number of visitors rises by 5% per year on average and the amount spent goes up by 10%, then the Macau market will experience 15% annual revenue growth.  If so, five years from now the number of visitors will still represent much less than 3% penetration of the six non-Guangdong, non-Fujian markets listed above.  And gambling revenue in the SAR will have doubled in size.  I think that’s a bare minimum.

the four-year “Presidential election” cycle in the US

November 7, 2012 By in Current Market Thoughts, Portfolio management, Presidential election cycle, Strategy, Vocabulary Tags: , , , , , 3 Comments

As a stock market rookie in the late 1970s, I started to absorb what was hen conventional wisdom.  Looking over charts of the movements of the S&P 500 over prior decades, investors had reached the conclusion that the US stock market traced out an irregular four-year pattern.  For roughly 2 1/2 years, stocks generally went up; for the following 1 1/2 or so, the went down.

There was some macroeconomic sense behind this movement.  The mandate of the central bank, the Fed, has been, and continues to be, to maintain maximum sustainable, non-inflationary growth in the domestic economy.  If the economy started to grow too fast–meaning wage inflation was starting to occur–the Fed would raise short-term interest rates to cool the economy down.  In those pre- supply chain software days, the policy change might take six months to have any noticeable effect on corporate or consumer activity.  The economy might take another year or so to slow to the point that Fed felt justified in lowering rates to keep the economy from deteriorating further.

Wall Street linked this economic rhythm with a political one–the desire of the incumbent president to create favorable economic conditions during election year–so that either he could be reelected to a second term, or at least his party’s candidate would have a tactical electoral advantage.  How would the president do so?  He would pressure the Fed to take an inappropriately stimulative stance about a year before the election so that the domestic economy would be powering along just as voters would be going to the polls.  After the election, the inappropriate stimulus was to be removed through contractionary action by the Fed.

Stock market lore revealed that every modern president did this, with the sole exception of Gerald Ford, who paid a penalty for his economic honesty by not being elected.  …which, pundits argued, made every subsequent president that much more eager to try monetary policy manipulation.

Quaint, to our 21st century eyes, but true.

Nevertheless, that’s the genesis of the idea that the first year of the new presidential term is a testing one for stocks and bonds.  Interest rates are presumed to be rising as cleanup from the late-term party of the previous election cycle begins.

Even though we’re in a globalized world today, where the US is not the only industrialized power and where economic developments in Asia, Europe or Latin American can have important consequences for the domestic economy, many Wall Streeters haven’t advanced much beyond the clichés of over a half-century ago.

The present situation in the US differs markedly from the Presidential cycle in two main respects:

–the Fed has publicly announced that it won’t be changing its current ultra-stimulative stance for at least the next 2 1/2  years

–the major impediment to growth is fiscal, the inability of Washington to reach a compromise on how to begin to pay back the large amount of debt the federal government took on during the Great Recession.

If press accounts are to be believed, a large part of the Washington gridlock comes from President Obama’s unwillingness to enter into pragmatic and meaningful discussions with Republican legislators.  He’s promised to change his ways if reelected.   Let’s hope he carries through.

Macau gambling: October 2012 results = an all-time record high

November 6, 2012 By in Casinos, emerging markets, Entertainment, Industry Analysis, Recent Market Action, Stock ideas Tags: , , , , , , , , , Leave a comment

Last week, the Macau Gaming Inspection and Coordination Bureau released its report on “Monthly Gross Revenue from Games of Fortune” for October 2012.  Here are the figures:

* 1 HKD = 1.03MOP (Unit:MOP million )
Monthly Gross Revenue from Games of Fortune in 2012 and 2011
Monthly Gross Revenue Accumulated Gross Revenue
2012 2011 Variance 2012 2011 Variance
Jan 25,040 18,571 +34.8% 25,040 18,571 +34.8%
Feb 24,286 19,863 +22.3% 49,325 38,434 +28.3%
Mar 24,989 20,087 +24.4% 74,314 58,521 +27.0%
Apr 25,003 20,507 +21.9% 99,317 79,028 +25.7%
May 26,078 24,306 +7.3% 125,395 103,334 +21.3%
Jun 23,334 20,792 +12.2% 148,729 124,126 +19.8%
Jul 24,579 24,212 +1.5% 173,308 148,337 +16.8%
Aug 26,136 24,769 +5.5% 199,444 173,106 +15.2%
Sept 23,866 21,244 +12.3% 223,310 194,350 +14.9%
Oct 27,700 26,851 +3.2% 251,011 221,200 +13.5%
Source: Macau DICJ

Golden Week, an important celebratory and vacation period in China, comes in October.  So the month typically marks the yearly high point for casino revenues.  So, too, it appears, in 2012.  In fact, last month was the all-time high water mark for casino “win” (i.e., the amount lost by bettors, which is what the casinos count as revenue).

The October figure can be taken in two ways:

1. the positive viewpoint:  It’s a staggeringly high amount.  Macau casinos in the aggregate took in $3.5 billion during the month.  This would imply that gamblers put down bets totaling $70 billion+ over the period.  That’s roughly the GDP of either Indonesia or the Netherlands.  It’s also an all-time record for Macau, achieved during a period of austerity in China.

2.  the negative:  The year on year comparisons of Macau’s gambling revenue appear to have bottomed in July, with a +1.5% gain.  That was followed by +5.5% and +12.3% in the two succeeding months.  One might have hoped that the accelerating trend would continue in October, thereby providing more evidence that a market rebound is in progress.  It didn’t.  The yoy comparison of +3.2% is the weakest in recent memory, save July.

From an investment point of view, I find it interesting that the market has chosen #1, the bullish interpretation.  All the casino stocks spiked up on publication of the figures.  Not only that, but other stocks tied to a rebound in Chinese high-end consumer spending, like Chow Tai Fook Jewellery, did as well.

At the very least, the DICJ figures from May onward appear to be saying that the Macau gambling market is bouncing along the bottom.  Stock price action seems to imply not only Hong Kong market belief that the situation won’t deteriorate from the current level, but that a period of stronger growth is imminent.  If so, the biggest beneficiaries will be companies like Galaxy Entertainment and Sands China (I own shares in Galaxy and in LVS), which have recently opened new casinos in Cotai.

LVS’s 3Q12: a mixed bag

November 5, 2012 By in Casinos, earnings conference calls, Entertainment, Industry Analysis, Stock ideas Tags: , , , , , Leave a comment

Still no power at home.  Neither hide nor hair of the local utility–which had promised full power restoration by yesterday– spotted since the storm.  Some action, though.  It took down the web page where it made its pledge.

LVS’s results

After the New York close on November 1st, LVS announced its 3Q12 results.  The company reported worldwide revenue of $2.71 billion, up 12.5% from the $2.41 billion it posted during 3Q11.  Company EBITDA (Earnings Before Interest Taxes Depreciation and Amortization), however, was down 5.1% yoy to $925.1 million.  The short story:  lower hold percentage around the world + higher allowances for doubtful accounts in Singapore.

Net income was $382.2 million, $.46 per share, vs. $444.8 million, $.55/sh, in the year-ago quarter.

LVS also announced an increase in the quarterly dividend from $.35/share to $.45, effective in 1Q13–implying a prospective dividend yield, based on pre-market prices today, of 3.9%!

details

strong in Macau

Sands China’s 3Q12 revenues came in at $1.64 billion, up 36.7% yoy.   EBITDA was up 24.3% at $485.6 million.  Net income, however, increased only 17.4% to $326.7 million.

The Macau market was up only in single digits during 3Q12, so there’s really nothing to complain about in the Sands China report.

The huge revenue increase comes principally from increased gambling capacity–the opening during 2Q12 of SC’s new property in Cotai.  Cotai Central produced revenue of $295.9 million in its first full quarter of operation, despite suffering from an unusually low winning percentage.  SC also benefited from a rebound from a bad-luck 3Q11 at the Venetian casino.

On the other hand, Cotai Central continues to lose small amounts of money as it slowly ramps up in the current environment of slow gambling growth in Macau.  And to some degree, it is drawing customers who would otherwise be patronizing SC’s other casinos.

My bottom line:  if–as I believe–the Macau gambling market has passed its cyclical low point and is beginning to expand again, SC is in a very strong position to benefit.

so-so in the US

Bethlehem, PA continues to perk along, posting EBITDA of $32.1 million, up 27% from the $25.2 million it recorded in the comparable period of 2011.

Las Vegas was also up somewhat, with EBITDA of $98.2 million vs. $94.3 million.  Table games play increased by 8.5% yoy, thanks to influx of baccarat players.  But those players were unusually unlucky, leaving behind $30-$25 million more than we should be counting on them to do on average.

My bottom line:  The way I look at it, Wall Street values the US operations of LVS as less than zero.  As long as the company can pay its bills and generate free cash flow–as it’s doing–the quarterly variations in EBITDA during the current prolonged slump in Las Vegas aren’t that important to the stock.

weakness in the Lion City

On the surface, gambling results from the Marina Bay Sands in Singapore look pretty ugly.  That’s mostly because the year-ago quarter was such a blockbuster.  It doesn’t help matters that Marina Bay’s winning percentage from the high roller market it caters to was a third less in 3Q12 than in 3Q11.  Less important in dollar terms, but still worthy of mention, Marina Bay increased its reserves against non-payment of gambling debts by an extra $15 million.

EBITDA for the three months was $260.8 million vs. $413.9 million during what we now know was a cyclical high point this time a year ago.  Adjusting for the abnormally low winning percentage in the higher roller business, EBITDA was flat, quarter on quarter.

My bottom line:  Singapore is a fledgling gambling market.  We have very little past experience to generalize from.  To perhaps state the obvious, the market appears to be considerably more economically sensitive than I would have imagined.  That’s a negative.  If, however, a “bad” year means generating EBITDA of $1 billion and a “good” year means EBITDA of $2 billion–which would be my best guess at present–then Singapore is still a market that casino operators should be pounding down the door to get access to.

the stock

At current market prices, LVS’s ownership interest in Sands China is worth about $24 billion.  Its holding in Marina Bay is worth $18 billion, if we assume that it would trade at a 25% PE discount to Sands China and based on average annual EBITDA of $1.5 billion.  If so, the market is still valuing the US operations of LVS at around negative $5 billion.  This is way too cheap, in my view, especially given that the Macau operations, the largest single source of value for LVS, appear to be at or near the start of a cyclical upturn.

the October 2012 Employment Situation Report: surprisingly good news

November 2, 2012 By in economics, employment, Employment Situation report, Recent Market Action, Strategy Tags: , , , , , , , , , Leave a comment

the report

At 8:30 am Eastern time this morning, the Bureau of Labor Statistics of the Labor Department released its monthly Employment Situation for October.  The report contains surprisingly good news, on two fronts:

–the Establishment Survey

This survey is wider-reaching and generally considered more reliable.  It’s the one usually referred to when talking about employment in the US (see my post on the ES from last month for more details).

This month’s report shows that the economy added 171,000 new jobs, about 50,000 more than consensus expectations.  That’s comprised of +184,000 in the private sector and -13,000 in the government.

In addition, the August payroll numbers were revised up by +50,000 to +192,000.  September figures were also raised by +38,000 to +148,000.

In total, then, the number of people employed in the US economy is about a quarter-million higher than we thought a month ago.

–the Household Survey

The unemployment rate figures aren’t derived from the Establishment survey.  Instead, they come from a systematic set of telephone interviews done for the Labor Department by the Census Bureau called the Household Survey.  Last month’s HS was controversial because it showed a sharp drop in the unemployment rate to below 8%.  This result was the combination of two bullish factors:  the workforce rose by +418,000 (meaning a lot of people became enthused about finding new jobs–a typical phenomenon as an upcycle starts), and +873,000 people actually found work.  True, the bulk of that was part-time, but still a very positive development.

Democrats proclaimed this was the first sign that their policies were working; Republicans–including Jack Welch, the Paris Hilton of former big company CEO’s–claimed the administration was cooking the books.  My own thought was that this was an anomaly that would likely be reversed in the October data.

Not so, however.

The October Household Survey results are similar in direction, though not as strong in scope, as those of September.  Based on the Census Bureau interviews, the Labor Department estimates that another +578,000 people entered the workforce last month and that  +410,000 found jobs.  The difference–168,000–was enough to cause the unemployment rate to tick up from 7.8% to 7.9%.  But, as I mentioned before, this is what usually happens in a job upturn.

investment implications

Although the initial Wall Street reaction I see as I’m writing this can scarcely be considered enthusiastic, the ES report seems to me to be very good news for the US economy.  The disconnect is likely due to the fact that the bullishness of the ES hasn’t been reflected so far in the 3Q12 earnings reports from publicly traded companies.

This is partly due to the fact that some of the corporate weakness we’re seeing comes from companies’ international operations.  Pry may also be, in effect, the inverse of what we were seeing a few years ago.  At that time, strong retail results reflected continuing spending by the wealthy, while average Americans were still watching their pennies.  Maybe now we’re seeing the spread of recovery to workers who patronize Wal-Mart and Home Depot, not Tiffany and Coach.  It may take careful stock selection to benefit from the employment trend that may be developing.

On the other hand, the Wall Street reaction may simply be that traders in New York are more preoccupied with Hurricane Sandy’s damage to their homes and towns.