Category Archives: Casinos

2Q12 for Wynn Resorts (WYNN) and Wynn Macau (HK:1128)

July 23, 2012 By in Casinos, China, earnings conference calls, Entertainment, Lodging, Stock ideas Tags: , , , , , , , , Leave a comment

the results

After the New York close on July 17th, WYNN reported its financial results for 2Q12.  Revenue for WYNN, which includes 100% of the revenue of Wynn Macau, was $1.253 billion vs. $1.374 billion in the comparable period of 2011.  Earnings were $139.0 million vs. $200.8 million in last year’s 2Q (before subtracting a $107.5 million charge for the present value of a planned charitable contribution by Wynn Macau to the university there).

EPS were $1.38 in 2Q12, compared with $1.60 in 2Q11.  The reason the eps comparison looks better than the net profit comparison is that the forced sale of Aruze USA’s 24.5 million shares in WYNN to the company reduced the number of shares outstanding to by about 25% 101.0 million.

The immediate reaction of the market to the results was relief that the numbers weren’t weaker than they were.  Of course, on the other hand, it’s not that long ago that WYNN was closing in on the $140 mark, as Wynn Macau received permission to build a new casino in Cotai.

details

Las Vegas

Business is up around 5% year on year, both in the gambling and non-gambling parts of WYNN’s operations.

The hotel/entertainment/shopping gain is straightforward.  It’s not so easy to see the improvement on the gambling side, however.  The industry accounting convention is not to measure revenue by the amount that gamblers bet–which was up around 5% yoy for Wynn in 2Q12–but rather by the share of that amount that the casino wins from them.

For slot machine play, which consists of huge numbers of small transactions, the odds almost always even out during a given quarter.  It’s not the same for table games, particularly for the high-roller segment of the market that WYNN specializes in.  The typical table game “win” percentage for Wynn is about 23%.  But in the June quarter of 2012 that figure was a mere 15%.  And the comparison is against 2Q11, when the win percentage was a whopping 27.6%.  The negative win comparison for high stakes baccarat was even worse.

I don’t think this is anything to worry about.  It’s just a fact of life.  Over the coming quarters, the win percentage will doubtless return to normal–and results will look more favorable than they do now.  The bottom line, however, is that the trend for WYNN’s Las Vegas operations is up.

Macau

Wynn Macau’s results are flattish.  That’s mostly because, for the moment, that market has run out of steam.

Two reasons:

–slowdown in the Chinese economy has translated into a flattening out in business for Macau casinos from mainland gamblers, and

–at the same time, casino floor space in Macau has expanded significantly as operators begin to develop Cotai.

The result is increasing, price-driven competition for junket operators to steer customers to a given casino.  Either customers are offered larger credit lines, or junket operators are offered higher commissions.  Wynn Macau’s position is strong enough that it isn’t compelled to participate.  However, until the economic environment in China improves, Wynn Macau will be doing well simply to maintain the current level of operating profit.

my take

WYNN is the strongest operator in an industry that I think has attractive investment characteristics.  On the other hand, I think LVS is the cheaper stock. And, although I have no desire to sell either WYNN or LVS (I have switched a little money from the former to the latter, however), I think all the Macau-related stocks will mark time until the Chinese market begins to pick up again–probably in early next year.

Macau gaming in May 2012: a small month-on-month gain

June 5, 2012 By in Casinos, China, economics, emerging markets, Entertainment, Hong Kong, Industry Analysis, Stock ideas Tags: , , , , , , , , , , 15 Comments

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:

* 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%

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).

WYNN’s 1Q12: good gaming revenue, bad gaming luck

May 17, 2012 By in Casinos, earnings conference calls, Entertainment, Industry Analysis, Stock ideas Tags: , , , , , , , , , Leave a comment

the report

WYNN reported 1Q12 earnings results after the close of stock trading in New York on May 7th.  Adjusted earning per share were $1.33 ($152.0 million) for the period, down by about 4% from the $1.38 ($173.4 million) the company earned in the opening quarter of 2011.  Actual net was down by $21.4 million, or 12% yoy.  The forced redemption of Aruze USA’s 22.5 million shares in February explains the smaller decline in the per share figures.

Wall Street was not impressed.  The stock had been declining somewhat already from the intraday high of $138+ it achieved early in the month, on the announcement that Wynn Macau had received a government go-ahead for its new Cotai casino.  The apparently weak earnings kicked the decline into overdrive.

The report even prompted a comment from the normally reliable Financial Times–which appears not to like the gambling industry much– to the effect that it might be the canary signalling bad times ahead in the Las Vegas casino coal mine.

The reported earnings don’t tell the whole story, however.  The reality is that WYNN had a good quarter, not a bad one.

drop vs. take:  i.e., gross revenue vs. net

What casinos count as revenue is not the amount wagered by customers.  Rather, it’s the portion of total wagering “held” or “won” by the casino.  That is, revenue is the amount customers lose on their wagers. This means casino revenue is not only a function of the amount bet but also of “luck,” or random variation away from theoretical or historical winning percentages.

Such variations–plus or minus–rarely show up in slot machine results, since there are so many transactions in a quarter.  But they often do with table games, especially in the high-roller segment that WYNN specializes in.

WYNN’s 1Q12 earnings comparisons in both Las Vegas and in Macau are skewed unfavorably because of such random factors.

Las Vegas

EBITDA was $100.9 million in 1Q12 vs. $132.1 million in 1Q11.

Table games drop was $654.4 million in 1Q12 vs. $634.0 million in 1Q11.  Win percentage was 22.8% in 1Q12 vs. 30.4% (historically, win has been between 21%-24%; on the 1Q12 conference call, Steve Wynn said he’d never seen a win percentage this high in his casinos).  because of this difference, win was $149.2 million in 1Q12 vs. $192.7 million in 1Q11.

At a 30.4% win percentage, this year’s results would have been $198.9 million.  So the comparison would have been $49.7 million more favorable had WYNN been able to repeat the same extraordinary luck it had last year.

Macau

VIP gamblers bet $33.5 billion (!!) at Wynn Macau’s tables during 1Q12.  This is up 14.6% year on year (partly due to Wynn Macau converting some mass market tables to higher-profit VIP use). Win percentage this year was 2.59%, down 10 basis points from 1Q11’s 2.69% (the normal range is 2.7%-3.0%).  Slightly worse luck in 2012 than in 2011 clipped $33.5 million from the subsidiary’s win.

together

Had WYNN had identical luck during the first quarter this year as last, revenue–and EBITDA–would have been $83.2 million higher.  On such an apples-to-apples basis, EBITDA for WYNN as a whole would have been up 17% instead of down by 3.5%.

Other stuff: hotels

Macau continues to boom.  Hotel occupancy is up to an extraordinary 91.3% vs. 88.6% a year ago.  Room rates are up 5.5% to $324 a night.

In contrast, in Las Vegas, a city drowning in empty hotel rooms, WYNN’s push to higher room rates seems to me to have met serious resistance.  The company achieved a room rate of $255 a night in 1Q12, up $5 from 4Q11 and $15 from 1Q11.  But customers balked.  Occupancy dropped from 85% or so, to 79.3%, yoy.  Greater spending on food and entertainment by less price-sensitive customers made up for this.  But my guess is that WYNN won’t be raising rates again for a while.

my thoughts

The stock is very close to its 52-week low.  The PE multiple is now a reasonable 18x this year’s earnings, with, say, 15%-20% growth in prospect for 2013.  In addition, about 90% of the market cap of WYNN is explained by its interest in Wynn Macau, despite the recent selloff in that equity in Hong Kong (by panicky Europeans, I think).  This leaves the company’s slowly recovering Las Vegas holdings–plus its big management fees from Macau–substantially undervalued, in my view.

I’m content to hold the WYNN shares I have.  At today’s prices I’d purchase LVS, 1128 or 1928 before I’d buy more.

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.

1Q12 for Las Vegas Sands/Sands China: record quarters again

April 30, 2012 By in Casinos, China, earnings conference calls, emerging markets, Entertainment, Hong Kong, Industry Analysis, Portfolio management, Stock ideas Tags: , , , , , , , , , , , , Leave a comment

the results

After the New York close last Wednesday, LVS reported results for 1Q12.  Revenues came in at $2.77 billion, up 30.8% year on year.  Adjusted Earnings Before Interest Taxes and Depreciation/Amortization (EBITDA) was $1.07 billion, up 42% yoy.  Adjusted EPS were $.70.  That was a gain of 89.2% over results in the year-ago quarter.  The figure also came in $.01/share above the highest Wall Street estimate, and $.07/share ahead of the consensus.

the details

EBITDA breaks out into:

$456.4 million in Macau, up 20.6% yoy

$472.5 million in Singapore, up 66.1% yoy

$115.8 million in Las Vegas, up 77.9% yoy

$27.5 million in Bethlehem, Pa., up 24.4% yoy.

three unusual items (all in Macau)

The ” adjusted” figures exclude two of the items:

–$51.5 million in pre-opening expenses for the Sands Cotai Central which opened earlier this month, and

–a $42.9 million writeoff of costs linked to the closing of the Zaia show at the Venetian Macau.

Results did, however, include $13 million of costs associated with retailing–management declined to provide any detail.

market reaction

1928 and LVS have dropped about 5% each on the results announcement, despite the obvious strength in the numbers.  I don’t see why.

True, there are some nits to pick, namely:

–LVS is currently keeping 3¢ of every dollar high rollers are betting in Singapore and in Macau.  History says that should be more like 2.85¢, or 5% less.  at some point the company will have a sub-par quarter or two to make up for the current largesse.  But that’s the nature of the casino business.

–There is the mystery $13 million loss in Macau.  But that’s more like a rounding error than a serious dent in operating income.

–EBITDA margins fell qoq in Macau in March.

On the other hand,

–management wasn’t much more incoherent than usual on the conference call that accompanied the announcement

–US operations are much healthier than they were a year ago

–1928 appears to be gaining market share in Macau, even before the new casino opening. Revenues were up 9% qoq, in a basically flat market.

–the mysterious $13 million shortfall in Macau seems to explain all the EBITDA margin deterioration in the SAR vs. 4Q11.  If management is correct in its diagnosis, this is a non-recurring item.  In addition,

LVS is deleveraging   …fast

At December 31, 2010, LVS had $10.1 billion in debt on its balance sheet plus $710.7 million in preferred stock.  Against that, the company had $3.04 billion in unrestricted cash.

As of March 31st, 2012, LVS has accumulated an extra $1 billion in cash.  All the preferred stock has been redeemed and debt is $200 million lower.

That’s about a $2 billion shrinkage in net borrowings.  At the current level of $1 billion in cash generation from operations per quarter, LVS could be completely debt free by June 2013.  (LVS points out that it could be completely debt free today, if it wanted to be, by selling a chunk of its retail space in Macau.)

next stop Spain?

LVS confirmed that it is deep in negotiations with Madrid and Barcelona to develop a huge casino/resort complex in Spain over a decade.  No details as yet.  I wrote about the possible Spanish expansion a little over a year ago.

investment arithmetic

I think that LVS will earn about $3 a share this year.  So at Friday’s closing price, LVS is trading at 18.6x this year’s earnings and yielding 1.7%.

That’s not the right way to value the company, however, in my opinion.  I prefer sum-of-the-parts.

Based on its current market cap in Hong Kong, LVS’s share of 1928 is worth roughly $22.5 billion.  If we think the Marina Bay Sands in Singapore should trade at 80% of 1928’s EBITDA multiple, then it’s worth about $25 billion ($31 billion if MBS were to trade at parity with 1928).

LVS’s market cap (even though it’s up over 30% ytd) is $41 billion.  Therefore, LVS’s US operations are still trading at a value of negative $6.5 billion.

What should the value of Las Vegas + Bethlehem be?

There are, of course, two parts to US profits for LVS–casino operations and management fees collected from Asia.  For simplicity’s sake, lump them together.  Say they’ll generate $600 million in cash from operations this year.  Let’s cut that down to $400 million after taxes.  Now, let’s assume this business never recovers and should be evaluated as if it were a junk bond.  If we assume a that the cash represents a yield of 7.5%, then the principal value of the “bond” should be $5.3 billion.  Subtract $2 billion in debt (that may be excessive, but…) and we’re left with $3.3 billion.

Fair value for LVS, then, should be $3.3 billion + $22.5 billion + $25 billion  =  $50.8 billion, or 24% higher than where the stock is currently trading.

WYNN may be the highest quality casino company, but this analysis means for me that LVS is the most attractive casino stock (remember, I own both LVS and WYNN–more WYNN than LVS, though).