Category Archives: Casinos

Wynn Resorts, Wynn Macau: a surprisingly (to me, at least) bland 3Q11

October 21, 2011 By in Casinos, China, Current Market Thoughts, earnings conference calls, economics, Entertainment, Hong Kong, Industry Analysis, Recent Market Action, Stock ideas Tags: , , , , , , , , , , , , , 1 Comment

the results

WYNN reported 3Q11 results after the closing bell for trading in the New York market on Wednesday.  Revenues were $1.3 billion, up 30% from the comparable period of 2010.  EBITDA (a measure I don’t particularly like but which some investors use) was $381.1 million, up 39% year on year.  Eps were $1.05 vs. $.39 in 3Q10.

The report came as a disappointment to Wall Street, which had been expecting a tripling of earnings per share to $1.18.

details

Wynn Macau

Revenues for Wynn in the SAR were $951.4 million for 3Q11, up 42% year on year.  What disturbed the market, however, was not that eye-popping number, but the fact that the figure was down slightly from the $976.5 million Wynn Macau posted in 2Q11–in a market that was up about 10% quarter on quarter.

Win percentages for various games were within normal ranges, so Wynn being unusually unlucky wasn’t the reason it lagged behind the market.  Rather, it seems that at least some high rollers who might otherwise have visited 1128 were instead checking out the newer casinos that have opened this year.  To some degree, 1128 benefited from this tendency when the Encore opened.  Now the shoe is on the other foot.

Typically gamblers ultimately return to the venues where they feel most comfortable and get the best service–which means Wynn.  The company says it is seeing this happen in October.

Nevertheless, it’s also possible that 1128 is bumping up against the limits of its ability to take in money in Macau with the hotels and casino space it has now.  That amount will gradually rise, with economic growth in China and with inflation.  But if capacity constraints are an issue, comparisons may be pedestrian (+10% or so?) until 1128’s new casino in Cotai opens in 2014-15.

Wynn Las Vegas

On the 2Q11 earnings conference call, WYNN was very enthusiastic about prospects for 3Q11, which in normal times (which these are clearly not) would be a seasonal low point.  Hotel bookings were unusually strong and the company was musing that its table games win percentage might be permanently drifting northward.

I guess non-casino revenues turned out to be pretty much as anticipated, at $266 million.  That was up 11% year on year and down slightly from the 2Q11 figure of $276 million.  From WYNN’s tone three months ago, though, I’d expected a bit more.

Casino revenue for WYNN came in at $126.9 million for the quarter.  The compares with $158.3 million in 2Q11.  It was also slightly less than in the comparable period of 2010.  But the amount bet in the WYNN Las Vegas casinos’ table games was up sharply.

What happened?  The company was simply very unlucky at baccarat last quarter.  The company’s win percentage on table games for 3Q11 was 18.3%.  That’s sharply below the expected level of 21%-24%, and the 27.6% achieved during 2Q11.

If table games win for the quarter had been normal, eps would have been about $.20 higher than actually reported;  win at the 2Q11 rate would have meant eps about $.45 higher.

The company says that win percentages have returned to normal in October.

my thoughts

1128 has lost about a third of its market value on worries about the mainland economy, and on concerns that Wynn and Encore may lose customers to newer casinos.  I still think that 1128 has a shot to make $1.50 a share this year, and (worst probable case) $1.65 next.  Maybe the subsidiary will come in $.10 short for both periods, but not much more than that.  12x earnings seems much too cheap to me.

1128 represents two thirds of WYNN’s market value.  The remaining $5 billion is the Las Vegas operations, which though still anemic are showing progressively stronger results.  Cash flow generation in the US is running at about $400 million, and rising–meaning that domestic operations would be yielding 8% if considered as a stand-alone income vehicle.  The US operations aren’t being run simply to generate cash.  In fact, it sounds as if WYNN would welcome the opportunity to build a casino in Miami, if asked.  But looking at them as a quasi-bond suggests (to me) that they have considerably more value than the market is now awarding them.

All in all, I’m happy to hold the WYNN and 1128 shares I own.  At the moment, however, it’s hard to see where near-term earnings acceleration is going to come from.

In fact, an aggressive trader–which I’m not–might think of switching some money into LVS.  I don’t think LVS is as strong a company as WYNN, but it’s cheaper and it has more potential near-term earnings momentum–coming from Singapore and its soon-to-open new casino in Macau.  But market sentiment can be a funny thing.  It’s tide can quickly reverse.  Even news on possible resolution of EU financial problems might be enough to swing investor attention back toward the Wynn family of companies.  For me, I’m content to be patient with what I consider two undervalued issues.

Macau market gambling results for September 2011

October 10, 2011 By in Casinos, China, economics, Entertainment, Hong Kong, Industry Analysis, Recent Market Action, Stock ideas Tags: , , , , , , , , , , , Leave a comment

Macau gaming results for September

On October 4th, while the Hong Kong stock market was closed, Macau’s Gaming Inspection and Coordination Bureau announced total gambling “win” for the SAR’s casinos for the month of September.  Brokerage house analysts in Hong Kong had hinted broadly that the number would be weak, due to supposed financial reverses being suffered by affluent mainlanders.  There was also the negative effect of Typhoon Nesat, which forced a shutdown of schools, businesses and most transportation (but not the casinos themselves) in Macau on September 29th, to consider.

Nevertheless, the reported figure was another excellent one, as can be seen from the chart below:

Monthly Gross Revenue from Games of Fortune in 2011 and 2010
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%
Jun 20,792 13,642 +52.4% 124,126 85,853 +44.6%
Jul 24,212 16,310 +48.4% 148,337 102,163 +45.2%
Aug 24,769 15,773 +57.0% 173,106 117,935 +46.8%
Sept 21,244 15,302 +38.8% 194,350 133,237 +45.9%

If we adjust the figures for the negative effects of the typhoon, on the idea that Macau lost a day’s gambling business (I think two days might be more realistic), then the gross gaming revenue for the SAR in September would be MOP 21.977 billion, and the year on year gain would be 43.6%.

massive selling ahead of the report

There has been huge selling of the Hong Kong-listed Macau gaming stocks since a report from a prominent analyst at Deutsche Bank predicted that a sharp slowdown in the growth of the Macau gaming market was imminent.  Even though Las Vegas Sands was quoted in the Wall Street Journal and the Financial Times on October 2nd as saying that the company saw no signs of weakness in September, selling in Hong Kong seems to have reached a crescendo on October 3rd.  On that day, most Macau gaming stocks fell over 10%; SJM, whose casinos generate about a third of Macau’s total gaming revenue, lost 25% of its market value.

Yes, this was a little (more than a little, in my view) crazy.  The only sense I can make of the sharp declines is that short-term traders feared weak revenue numbers would be released by the Macau DICJ while Hong Kong was closed on October 4-5.  Maybe they had no time to read the papers.

where to from here?

It seems to me that the recent selling in world equity markets, including Hong Kong, has been driven by fears of an implosion in the EU financial system, leading in Lehman-like fashion, to a freezing up of world trade and a consequent severe global economic turndown.  However unlikely this scenario may be, a turn in the mood of short-term traders will probably require concrete evidence that this won’t happen.  Hence the focus of eyes and ears on Germany and France.

For the Macau casino stocks, the idea that a substantial downshift in gambling by affluent mainlanders is “just around the next corner” is a difficult one to disprove, no matter how many corners are successfully negotiated.  In addition, the market participants who dumped out casino shares at, say, 5x normal volume and at prices 25% below today’s prices will have a hard time convincing either themselves or their clients that they should buy the stocks back any time soon.

So the bearish mood surrounding these stocks may remain for a while.

On the other hand, the companies seem to me to have excellent long-term (and short-term) prospects and to be trading at unusually low valuations.

slumping casino stocks

September 30, 2011 By in Casinos, China, Current Market Thoughts, Entertainment, Hong Kong, Industry Analysis, Stock ideas, Strategy Tags: , , , , , , , , , Leave a comment

a China-related selloff

In yesterday’s trading in New York, MPEL, a pure play on Macau casinos, fell steadily during the day end ended down 9.3%.  WYNN, down more than 10% intraday, closed with a loss of 7%+.  LVS, which had fallen almost 8% during the afternoon, closed down 5.3%.  MGM, the third Las Vegas/Macau conglomerate–but a company with other issues–shed a “mere” 3.3% of its value.

That was just a warmup act for Hong Kong overnight.  Wynn Macau fell more than 17% overnight and Sands China 14%.  The “best” of the Macau casino performers among Hang Seng stocks was SJM Holdings, which lost 8.4%.

All these issues have given up about a third of their value in the past couple of months–although almost all remain strong year-to-date outperformers.

Why?

The ostensible reason is that growth in China may be slowing–maybe even to the point where, at the bottom, the country will be posting only a 5% GDP advance in a year or two.  Casinos weren’t the only decliners on this worry.  TIF fell almost 7% yesterday, after having been down over 10% intraday.  In contrast, Signet Jewelers, which has only US and UK operations, rose slightly.

my thoughts

It seems to me that there’s no rational basis for the declines.  Affluent Americans haven’t stopped buying at TIF, for example, despite the fact that the US economy is barely north of zero.  Quite the opposite.  Jewelry comps throughout the industry are at 10%+–and rising.  So I don’t see the logic to the argument that because affluent Chinese citizens will have “only” 20% more income next year rather than being up 35%, their consumption patterns will change markedly.

Two caveats:

Bad markets aren’t rational.  They’re emotional.  In hindsight, they may make little sense.  But that’s cold comfort if you get run over by a runaway locomotive barreling down a track where nothing logically should be.

The depth of these declines has got to suggest to a growth investor like me that I might be wrong in my assessment of future earnings.

what to do

A value investor would add to his positions.

A growth investor who owned none of these stocks would buy a little–and then watch for a while.  A growth investor like me, who has a large enough holding in this sector already, tries to take the point of view of the seller to try to discover what he knows that I don’t.

On that score, I’m coming up empty so far.  For me, then, the best course is to stay on the sidelines.

The next important data point will be the release of September Macau gaming revenue by the SAR government, possibly over the coming weekend.

 

WYNN/Wynn Macau (HK:1128)’s new Cotai casino gets government okay: implications

September 15, 2011 By in Casinos, China, Current Market Thoughts, emerging markets, Entertainment, Hong Kong, Industry Analysis, Lodging, Stock ideas Tags: , , , , , , , Leave a comment

the WYNN Cotai project

Last Monday in Hong Kong, Wynn Macau announced that it had received a 25-year concession from the government of the SAR to develop a new casino in Cotai.  The concession consists of 51 acres of land.  1128 will pay a land premium of US$193.4 million and annual rent of US$771,738.

The planned casino, which WYNN has been talking about for the past six months, will likely cost US$3.0-$3.5 billion and will probably debut in 2014 (the concession requires the casino to be in operation within five years).  Given that 1128 already has about US$ 1 billion in cash on the balance sheet and will probably earn another US$2 billion from its existing Macau casino operations before the new venue opens, financing the project will not be a problem.

market implications

I think there are four:

1.  Macau, which I think has done an excellent job of developing the casino industry in the SAR, has been very careful in recent years grant new casino concessions slowly enough that supply doesn’t outpace demand.  The WYNN concession indicates that it believes strong demand from the mainland will continue for at least the next several years.

2.  There had been speculation in Hong Kong that Beijing was upset at the relatively greater success of US casino groups in Macau vs. the incumbent Ho family.  The WYNN concession shows me that this isn’t the case.  All along I’ve believed that the SAR has actually been eager to have US casino operators (why else give an initial concession to WYNN?), for two reasons:  to get the convention/resort expertise of Las Vegas, and to break the power of the triads in the market.

3.  The Hong Kong stock market has apparently begun to worry about what happens to the casino industry in Macau after the concessions granted to current operators end in 2022.  I think these worries are silly–as if Macau would set onerous new terms that would compel operators either to leave or to run their casinos to extract capital rather than expand.  That would turn the SAR from the Las Vegas of China into its Atlantic City–an outcome that would be disastrous both for the casino operators and for Macau.

For those who think that pieces of paper are more important than common sense in these matters, the WYNN Cotai concession agreement requires the company to remain in Macau and run a casino for the next twenty-five years.

4.  There have also been market worries that, because current concessions end in about ten years, western banks won’t finance casino expansion.  For the incumbent operators, this is not a big issue.  For one thing, casinos are so cash generative that a company like 1128 won’t need financing.  For another, mainland Chinese banks are likely the preferred lenders to the casinos.

thoughts on WYNN and 1128

Both WYNN and Wynn Macau have been spectacular performers, year to date.  I don’t think anything is “wrong” with either stock.

WYNN hasn’t participated in the market rebound of the past few days, mostly, I think, because it resisted the preceding downdraft.  1128 is suffering from (misplaced, in my opinion) jitters in the Hong Kong market about the possible rapid deceleration of growth of the Macau gambling market.

For the moment, the US market is, understandably, concentrating on stocks that have been severely beaten down in the market’s fall.  I expect investor interest will return to WYNN soon enough (although I have written October $170 calls on a small part of my holding).

1128, which I also hold, is a more difficult situation to assess.  To US eyes, it’s a fabulous stock.  It’s trading on well under 20x forward earnings, with easily 25-30% earnings growth is prospect–much more if the Macau gambling market remains as strong as I think it will. And there’s the capacity expansion in a couple of years, as well.  Yet Hong Kong investors, who will make or break the market in the stock, appear unwilling so far to differentiate 1128 from its much weaker competition.  And they’re clearly worried about a possible downturn in Macau gambling.  More patience may be required here.

Macau’s August 2011 gambling results: another record

September 2, 2011 By in Casinos, China, Entertainment, Hong Kong, Industry Analysis, Lodging, Stock ideas, Strategy Tags: , , , , , , , , , , , , , Leave a comment

August gaming results for Macau

Prior to the opening of Friday trading in Hong Kong, the Macau Gaming Inspection and Coordination Bureau released its monthly report for August on the gambling “win” of the casinos in the SAR.   Here are the fig

* 1 HKD = 1.03MOP (Unit:MOP million )
Monthly Gross Revenue from Games of Fortune in 2011 and 2010
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%
Jun 20,792 13,642 +52.4% 124,126 85,853 +44.6%
Jul 24,212 16,310 +48.4% 148,337 102,163 +45.2%
Aug 24,769 15,773 +57.0% 173,106 117,935 +46.8%

Source: Macau Gaming Inspection and Coordination Bureau

Interestingly, despite this unexpected good news all the major Hong Kong-listed casino companies, except China Sands, went down by more than the market (the Hang Seng was off by 1.8% overnight).

The prevailing sentiment in Hong Kong seems to be that the Macau gaming market’s gains will never be any better than this and that a slowdown to 20% growth rate or less is imminent.  The reaction to today’s GICB announcement just confirms the same market reaction–selling–that a recent Deutsche Bank research report expressing the same sentiments provoked.

If extensive press reporting of the researcher’s reasoning–a falloff in Chinese buying of German luxury cars presages a general reduction in spending–are correct, her conclusion is a little loony.  So the DB report probably isn’t the reason for the selling.  But it apparently did voice worries that investors have had, perhaps on general principles, perhaps simply because the stocks have been such spectacular performers over the past year or two.

It is true that 2011 will be a tough act for Macau to follow.  My own feeling, however, is that the SAR has at least a couple of more years of substantially above normal growth before it settles down to an expansion rate more in line with that of China’s nominal GDP.  I think “settle down” would mean 10%-12% annual revenue growth for the market and a 15%-18% annual gain in aggregate profit.

Investment interest would then presumably turn to sorting out relative winners from relative losers. That may be happening now.  My pick for top of the winners’ column is Wynn Macau (1128); my sense is that Hong Kong’s is SJM (0880).

Ultimately, relative earnings growth will determine who’s right and who’s wrong.  For now, it seems to me that the selling of the past week or so among the Macau casino stocks already pretty well discounts the imminent maturity of the industry.  In Wynn Macau’s case, I think the price suggests Hong Kong views it as an average performer–no worse, but certainly no better.