Category Archives: Hong Kong

MGM China (HK:2282) came public on June 7

June 20, 2011 By in Asian economic development, Casinos, China, earnings conference calls, economics, emerging markets, Entertainment, Hong Kong, Industry Analysis, Stock ideas Tags: , , , , Leave a comment

the IPO price

The offering price for the 760 million shares in the offering was HK$15.34, at the absolute high end of the range of HK$12.36 -HK$15.34 determined by the Hong Kong Stock Exchange..

a secondary offering

As I’ve written in more detail in other posts, this IPO is unusual in that it does not involve the sale of primary shares (ones newly issued by the company).  Rather, it’s a secondary offering.  That is, all the shares being sold to the public come from the already-existing holdings of company equity holders.  In this case, the sole seller is Pansy Ho, who owned 50% of MGM China before the sale.

fundamentals

According to the offering documents, MGM China lost money in 2008 and 2009.  It earned HK$1.566 billion last year.  It projects that at a minimum it will have a profit of HK$1.4501 billion for the six months ending June 30, 2011.  This would equate to eps of $.38 per share.

Let’s assume MGM China earns $.80 a share for the full year of 2011.  The offering price would then represent a multiple of 19x current year earnings per share.  When the offer’s pricing range was being set in mid-May, a 19x multiple represented parity with, or perhaps a slight premium to, the multiple investors were awarding to Wynn Macau (HK: 1128), the company I regard as the market leader–and the highest multiple casino stock on the Hong Kong exchange.

early price action

After trading briefly above the offering price, 2282 ended its first day trading at HK$15.16, on volume of a tad below 77 million shares.  It closed overnight in Hong Kong at HK$13.12, or about 14% below the IPO level.

I don’t regard this decline as particularly surprising, since the entire casino sector in Hong Kong has under gone a sharp correction that began in early May (Wynn Macau, for instance, is now trading at about 15x earnings).  What’s more noteworthy is the investment bankers’ ability to get the MGM China issue off at an unusually high price.

my take on the stock

I haven’t seen any sell-side research on MGM China.  The offering documents suggest, however, that the sales pitch for the company is that it represents a blending of the best of East and West–the local market knowledge and connections of Ms. Ho and the technical know-how about glitzy upmarket gaming of MGM Resorts International, which now has a controlling 51% interest in MGM China.  There’s a whole laundry list of related-party transactions between Ms. Ho and 2282 in support of this idea.  The documents do refer to the regulatory problems Ms. Ho has encountered in the US.  But they point out that she has never formally been declared to be “unsuitable” to hold a casino license in the US–although MGM appears to have ceased operating in Atlantic City to avoid this result.

I’m not sure the synergies the market seems to expect will work out.  It’s not 100% clear to me how Ms. Ho will balance her obligations to MGM China with those to the much larger Ho family-controlled rival, SJM.  I’m also not convinced that many talented Las Vegas executives will want to link their fortunes to the Ho family.

Whatever qualms I may have about the Ho family connection, however, MGM and the Hong Kong market–where the price of MGM China shares will ultimately be decided–appear to have none.  In addition, the Macau gaming market appears to me to be still in the rapid growth phase where the rising tide lifts all boats.  So I suspect that despite the fact I won’t be a shareholder the stock will be an above average performer in the Hong Kong market from this point on.

Chinese companies with questionable financials–what a shock!

June 19, 2011 By in China, economics, emerging markets, Hong Kong, Strategy, Uncategorized Tags: , , , , , , , Leave a comment

Press reports over the past several months have outlined questions that have arisen about the financials of some Chinese companies, both ones where western hedge funds have made substantial investments and ones that have achieved “backdoor listings” in the US.

(Backdoor listings are  mergers of unlisted companies into already-listed corporations.  They come in two flavors:  merger into a shell company, created solely to be used in this manner; and merger into a once-vibrant firm that has an actual business that has fallen on hard times.  These are “reverse” mergers, in the sense that the acquired firm runs the combined entity.  Typically, the company name is immediately changed to reflect the new owners’ business.)

the more things change…

I don’t find this fact surprising.  This is a typical issue with any emerging market.  It has been a particular issue in China for at least twenty years.

…the more they remain the same

What I do find surprising is that investors continue to fall for the same tricks today that they did back then.  This also happens despite the financial press being filled with stories that recount the fact that financial intermediaries who promote these companies to investors, both in general and in the particular case of emerging markets specialists, have very little regard for their clients’ well-being.  Their main concern is their own profits. The current disputes between government-controlled institutional investors and their custodial banks about systematic overcharges on their foreign exchange transactions is an especially telling example.

In addition, anyone who has read a book on developing countries or sat through the first day of an economics or finance course on this part of the globe knows that a key issue for governments in such areas is to avoid selling their economic crown jewels for a pittance to wealthy foreigners.

Why?

Why, then, do investors repeat the same kind of mistakes over and over again?  I think there are three main psychological factors:

1.  Successful professional investors  often tend to think that the same characteristics that made them winners in their home markets will make them successful elsewhere.  Every marketing person they associate with, from their in-house staff to the institutional salesmen who vie for their commissions business, encourage them in this belief.  So they end up not preparing well for potential differences in new markets they may enter.

2.  Rookie investors tend to underestimate the collective intelligence of the guys on the other side of the trade.  In a similar vein, even professionals entering developing markets sometimes think that because they are wealthier than local investors, they are somehow smarter. The opposite is invariably the case when it comes to securities in the local arena.  As a result, they don’t do enough research.

3.  Investors of all stripes tend to rely too much in developing markets on the advice of the brokers they do business with.  The latter group’s primary allegiance is normally to the political and corporate leaders of the developing country, for whom they hope to do amounts of financial business that dwarf what they can expect from any class of portfolio investors.

what to do?

I think there are for strategies you and I can use to participate in developing markets while limiting the risk of exposure to companies with questionable financial reporting.  They are:

1. use emerging markets index products.

2.  in emerging areas, use actively managed mutual funds run by seasoned management organizations with a long record of success.  The Matthews China-related funds are a good example.

3.  buy companies like TIF that are traded in developed markets and have accounts audited by well-known accounting firms, using accounting principles you understand, but which have significant exposure to–and success in–developing markets.

Macau gambling market results: another record high in May 2011

June 3, 2011 By in Casinos, China, Current Market Thoughts, emerging markets, Entertainment, Hong Kong, Industry Analysis, Portfolio management, Stock ideas, Strategy Tags: , , , , , , , , , , Leave a comment

The Macau Gaming Inspection and Coordination Bureau reported on June 2the monthly win for the SAR’s casinos during May 2011..  As the table below shows, thanks both to a successful Golden Week and to the opening of new venues, the take was a record $24.3 billion patacas, almost 20% ahead of the previous record posted just the month before, in April.


Monthly Gross Revenue from Games of Fortune in 2011 and 2010     MOP millions
Monthly Gross Revenue Accumulated Gross Revenue
2011 2010 Variance 2011 2010 Variance
Jan 18,571 13,937 +33.2% 18,571 13,937 +33.2%
Feb 19,863 13,445 +47.7% 38,434 27,383 +40.4%
Mar 20,087 13,569 +48.0% 58,521 40,951 +42.9%
Apr 20,507 14,186 +44.6% 79,028 55,137 +43.3%
May 24,306 17,075 +42.4% 103,334 72,211 +43.1%
 Source:  Macau Gaming Inspection and Coordination Bureau

The biggest winner during the month  appears to have been Galaxy Entertainment, which opened a giant new casino, the Galaxy Macau in Cotai, around mid-May.  The largest market share loser seems to have been Wynn Macau.

Reaction by Hong Kong investors to the May record  has, so far, been muted.  Several reasons why:

–There have already been a series of months of 40%+ year on year gains in casino win recently; the fourth no longer carries the same positive surprise value that the first did.

–MGM is meeting with investors as part of its IPO process, and other publicly traded Macau casino companies have been presenting at investor conferences.  So the news of a strong Golden Week and the expansion of the market due to the Galaxy Macau has already been disseminated.

–I think we’re reaching, at around 20x current year results, the limits of the price-earnings multiple expansion that the Hong Kong market is willing to permit for Macau casino stocks.  Unless/until the market changes its mind, it seems to me that no stock will trade at more than 20x, no matter what current profit growth may be.  If so, the stocks will either tread water, or move simply in line with the market, until investors begin to discount 2012 prospects.

Tiffany’s dazzling 1Q11

May 27, 2011 By in China, Current Market Thoughts, earnings conference calls, economics, Hong Kong, Industry Analysis, Japanese development, Luxury goods, Retail, Stock ideas Tags: , , , , , , , , , , 1 Comment

the results

TIF reported results for its 1Q11 (TIF’s fiscal year ends on January 31st of the following calendar year) before the New York market opened on Thursday, May 26th.  The company posted earnings of $.63 per share on revenues of $761 million.  This compares with per share profits of $.50 in the year-ago quarter on sales of $633.6 million.  The Wall Street consensus was $.57.

The report represents a 26% gain in earnings on a 20% advance in sales.  TIF’s performance for the quarter was considerably better than these strong comparisons suggest, however.  TIF posted a one-time tax benefit worth $.02 a share in last year’s first quarter; this year’s income statement had in it $.04 in non-recurring costs for moving TIF’s headquarters.  Ex these items, earnings were up 39% year on year.

In its conference call, TIF raised its full year guidance by $.10 a share, to $3.45-$3.55 (excluding $.19 in non-recurring moving charges).  A few days before the report, the company upped its quarterly dividend by 16%, from $.25 a share to $.29.

The stock made an odd little rally in the closing hour of trading on Wednesday.  It gained another 8.6% on Thursday.

the details

Yes, analysts had penciled in $.57 a share in earnings, based, I think, mostly on company guidance.  But I can’t imagine anyone was super-comfortable with the number.  The two big imponderables:

1.  How would Japan perform in the aftermath of the earthquake and tsunamis that occurred on March 11th north of Tokyo?  How many stores would be damaged by the resulting power shortages, and for how long?  Would TIF’s sales be hurt by an attitude of “self-restraint” (jishuku), i.e., postponement of consumption, in sympathy with earthquake victims?  If so, would that be contained to the Tokyo area or would it spread to the rest of the country?

When TIF reported 4Q10 results on March 21st, the company said it expected Japanese sales to be down by 15% year on year in 1Q11, reducing total company eps by about $.05.  …but who knew?   …and the company had already booked half a quarter of “normal” sales–would 2Q11 be worse?

2.  Would the US business slow?  After all, the prevailing sentiment on Wall Street has been that domestic unemployment is still high, job growth is lackluster and the overall economy is being hurt, possibly more seriously than expected, by high gasoline prices.  Maybe economic doldrums would have an adverse effect on TIF customers–not only aspirational buyers but the wealthy as well.

Japanese results were unexpectedly good

Instead of down 15%, Japanese sales (which accounted for 17% of total company sales in the quarter) were up by 7%.  This was due completely to a 10% gain of the yen vs. the dollar during the quarter.  Nevertheless, same store sales were only down by 3%.  The Osaka area was relatively unaffected.  Nationwide comps were +3% in February, -16% in March (implying to me that Tokyo-area sales fell by about a third during the month), +6% in April.  Jishuku may have also had some unusual effects:  sales in Guam and Hawaii, traditional Japanese tourist destinations, were up 30% year on year for the quarter.

TIF now thinks that, while Japan won’t be a source of strength this year, it won’t be a significant drag on the rest of the company, either.  Sounds reasonable.

to me, the US was a bigger positive surprise

I know sales of luxury goods are going very well, and I expected that TIF’s sales in the Americas ( 48% of the company) would easily be up in double digits.  But the 19% gain TIF achieved was considerably higher than I expected. Comparable store sales at the flagship store in NYC were up 23%, year on year; comps in the rest of the US were up by 15%.  High-end jewelry did the best, as has been the case for some time.  However, there was even some strength in the silver jewelry that TIF’s less affluent clients favor.  US sales growth was “solid from coast to coast.”  Comps got better as the quarter progressed.

the rest of the world continues to show amazing gains

Sales were up by 37% year on year in Asia-Pacific (23% of TIF’s total) thanks mostly to Greater China.  Currency accounted for 6% of that, and new stores another 5%.  But comps were up 26%, after a 21% year on year gain in 2010.  Wow!

Sales in Europe (12%) were up 25%.  Currency gains made up 6% of the increase, and new stores 4%.  But comps were up 15%, due mostly to strength in continental Europe, after a 14% increase last year.

the stock

I haven’t changed my mind about TIF since I wrote about the stock after the 4Q11 earnings release.  I still think the company can earn $3.75 a share this year and $4.50 or so next.  Applying a 20x multiple to these figures gives us a $75 target based on 2011 eps and $90 on 2012.  Applying 25x gets correspondingly higher figures.

One thing is different, however.  TIF is no longer the sub-$60 stock it was in March.

TIF has exceptionally strong management, a wonderful brand name, and it’s also in the right place at the right time.  So I think it will continue to be an outperformer.  I’m happy to hold the stock.  I’ve trimmed my own position a bit, though, mostly because of its size.  I’d be an eager buyer on weakness.


the big three Las Vegas casino companies

May 23, 2011 By in Asian economic development, Casinos, China, economics, Entertainment, Hong Kong, Industry Analysis, Lodging, Recent Market Action, Stock ideas Tags: , , , , , , , , , , , , Leave a comment

My post last Friday outlined the upcoming IPO for MGM China, which will show us the Hong Kong market’s view of the value of MGM’s Macau exposure.  At the top of the price range for the IPO (already specified by the HKSE), and based on last Friday’s closing prices, a 51% stake in MGM China would be worth about $4 billion (all amounts are in US$) and would represent just over half of MGM’s market capitalization.

A reader asked what the rest of MGM–its Las Vegas interests–might be worth.  That’s not an easy question to answer.  So I thought I’d write about what I think are the significant issues for all three of the big casino operators in the Las Vegas market.

the basics of the big three Las Vegas gambling companies

All three have subsidiaries in the booming Macau market.

All three are situated on the Las Vegas Strip, where about half the city’s 149,000-odd hotel rooms are located.

In addition to their expansions into Macau, all three have made major hotel/casino capacity additions in Las Vegas over the past few years–just as the economy was peaking.  These were all multi-billion dollar projects, funded primarily with debt.

three points about Macau

1.  This market is already many times the size of Las Vegas, measured by the amount of money bet in the casinos.  So far this year, Macau gambling is expanding at a 40%+ rate.  I think the market will get to at least double the current size before it gives any sign of maturing.

2.  The obvious source of profits to each of the Las Vegas parents is its share of the Macau subsidiary’s profits.  But that money isn’t readily available for use in the US.  For one thing, it will likely remain in Macau to fund expansion there.  For another, the way shareholders receive income from their stocks is through dividends, which have to be declared by the management (only Wynn Macau has done so) and would be subject to US corporate tax if repatriated.

3.  WYNN, LVS and MGM all receive management fees from their Macau operations, in return for their operating expertise and for the use of their brand names.  This is the partents’ major source of cash from the subsidiaries.  In 1Q11 these fees amounted to $34.5 million for WYNN, $23.8 million for LVS and $38.0 million for MGM.  (The LVS number seems too low to me, but that’s what’s in the company release.)

the Las Vegas problem

It’s hotel room overcapacity, specifically in the high-end rooms on the Strip where the big three are.

In 2006, the Las Vegas market had 132,600 hotel rooms and served 38.2 million visitors.  By last year, visitor numbers had shrunk to 37.3 million, but expansion projects had increased the number of hotel rooms to 140,429.  Together, the need to repay construction debt and the fact that the out-of-pocket costs to a hotel from having a room occupied for a night are less than $20, mean price competition to sign up guests has been wicked. The Strip accounts for about half the room base, but virtually all the expansion—so the trouble has been most acute there.

Although the situation for the big three is gradually improving, I think it could be several years before the market grows into the existing capacity.

valuing the big three (all capitalization figures are as of the close on 5/20/2011)

  • WYNN:  The company’s market cap is $18.1 billion.  Its Macau holdings have a market value of $12.6 billion, leaving a $5.5 billion value assigned by the markets to the Las Vegas operations.  In 1Q11, WYNN was right around breakeven in the US, with $60 million in cash flow.  IN the US, WYNN has $87 million in cash on the books and $2.6 billion in long-term debt.
  • MGM:  The company’s market cap is $7.5 billion.  Its Macau holdings are likely worth $4 billion, leaving $3.5 billion in value assigned by the markets to the US operations–which are all over the place, but mostly in Las Vegas.  In 1Q11, MGM operated at a loss but had positive cash flow from operations of about $24 million.  The balance sheet showed $431 million in cash and $12.1 billion in long-term debt.  Until the IPO documents are available in the US, we won’t know how much of either of the last two figures is attributable directly to MGM China.
  • LVS:  The company’s market cap is $30.4 billion.  Its Macau holdings have a market value of $15.1 billion, leaving $15.3 billion in value assigned by the markets to Singapore + the US.  In 1Q11, US operations appear to me to have made a loss but hovered around breakeven on a cash flow basis.  The balance sheet shows $3.1 billion in long-term debt against US operations and just under $800 million in preferred stock.  The biggest issue with LVS is how to value the Singapore operations, which are in their infancy and which are wholly-owned by LVS–so there’s no separate market quote.  A very simple approach would be to say that Singapore is earning about 20% less than Macau, and apply a Macau multiple to Singapore operations.  Since LVS owns 100% of Singapore vs. about 70% of Macau, this would imply all the $15.3 billion is being allocated to Singapore and the US is in effect worth zero.

my thoughts

Take WYNN first.  It’s the strongest company of the three, with its finances under much better control than the other two.  Still, are the Las Vegas operations, generating $250 million in cash flow at an annual rate, but servicing $2.6 billion in debt, worth paying 22x cash flow for?  I’d prefer 10x.

I see two possible justifications for the current WYNN valuation:  the consensus expects a faster recovery in Las Vegas than I’m thinking, or (more likely, in my view) US investors regard WYNN as a more liquid and easier to buy version of Wynn Macau, and are willing to pay a premium to the Hong Kong price, simply to get exposure.

MGM.  If you’ve read any of my previous posts about gambling in Macau, you know I find having to be a business partner with the Ho family to be a deal-breaker.

The hedge fund Paulson & Co has recently become a large shareholder in MGM, apparently betting on the large upside leverage MGM will have as/when Las Vegas turns for the better.  After all, the company owns a ton of Strip real estate.  Over the years, it bought the former Mandalay Bay as well as Mirage Resorts, and has built the gigantic CityCenter complex.  Still, $12 billion in debt and cash flow of $110 million a year are a very risky cocktail to be involved in.  Too risky for me.

LVS.  This company’s financials are almost as complex as MGM’s, but I find it much more intriguing.  Depending on how you value the Marina Sands in Singapore, you could think–as I suggest above–that the present stock price gives you the US operations for free.  …less than that, if you buy the argument that LVS should trade at a premium to the value of its Asian holdings because its the only liquid and convenient way for Americans to buy them.

Yes, there’s $3.1 billion in debt linked to the US casinos + construction obligations that were suspended during the darkest days of 2008.  But management fees from Macau and Singapore seem to me to be potentially large enough to service the debt, even without an uptick in the US business.  Not for widows and orphans, however.

By the way, I own WYNN, Wynn Macau and a little bit of LVS.