overnight rally in Macau casino stocks

In trading today, the Hong Kong stock market was up by around 1.3%.  But the Macau casino stocks traded there all rose by 5% or more.  One exception–the former monopoly casino operation, SJM (I’m not a fan), which rose by “only” 2.5%.

The near-term situation for the Macau casinos isn’t good.  Francis Tam, the SAR’s finance minister, has recently said that October will be a particularly weak month for casino win and that he doesn’t expect recovery until the second half of next year.

The reasons for the slump are also clear:  the mainland crackdown on corruption in general and conspicuous consumption in particular; protests in Hong; and, for October, the difficulty in matching the mammoth month (second-best in history) the casinos had this time a year ago.

Why the rally?

Two reasons, I think:

–the Macau casino stocks have been beaten down this year, are relatively cheap, and enjoy considerable support from their above-average dividend yields.  The group, ex SJM, had been up by 10% or so from its lows in late September – early October, even before today.

–the third-quarter earnings report from Wynn Resorts (WYNN), which contains information about its subsidiary Wynn Macau (HK: 1128), shows that the situation isn’t quite as bad as the consensus had been expecting.

what the WYNN report brings home

WYNN is a high-roller specialist.  In theory, then, 1128 should be hurt the most of all the casinos in Macau by the current slow contraction of the VIP gambler business.  Nevertheless, the Wynn Macau EBITDA (earnings before interest, taxes, depreciation and amortization–more or less, its cash generation) was basically flat with 3Q13!

Two reasons for this favorable outcome:

–the replacement of high rollers in Macau by the mass affluent (read:middle class, upper middle class) gamblers, who are much more profitable

–gamblers gravitating toward the better casino operators.  When the market was very hot a year ago, gamblers had trouble just locating a place to stay, so they ended up wherever they could find a bed and a seat at the table.  Now they have choices–and the market is sorting itself out into relative winners and losers.  In my view, this benefits the operators with Las Vegas experience.

what to do

For some time, I’ve been writing that I’ve been nibbling at Wynn Macau and Sands China–I already own a lot of Galaxy.  October win figures will likely be poor.  I’d use any weakness to add to those three.

 

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