Category Archives: Casinos

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.





MGM China’s IPO in Hong Kong

May 20, 2011 By in Asian economic development, Casinos, China, Current Market Thoughts, Entertainment, Hong Kong, Industry Analysis, Stock ideas Tags: , , , , , , , , , , , , , 2 Comments

the IPO details

According to Bloomberg, details, including pricing, for the IPO of MGM China, have been set.  MGM China is currently a 50/50 joint venture between MGM Resorts International and Pansy Ho, daughter of Stanley Ho.   The stock is going to debut on the Hong Kong Stock Exchange–presumably next week–through a secondary offering of 760 million shares by Ms. Ho.  The IPO price will be set by underwriters at between HK$12.36 and HK$15.34.

If we assume that the high end of the range represents a 20x multiple on expected 2011 earnings per share, which is where I view Wynn Macau as trading today, that would mean MGM China could earn HK$.75-HK$.80 this year.

timing of the offer is very favorable

The Macau gaming market is booming.  The publicly traded stocks have been exceptionally strong performers, year to date.

the IPO means cash for Pansy Ho, not MGM

In this respect, the offering is different from the listings of WYNN’s and LVS’s Macau gambling subsidiaries, where the shares sold in the offering came from the US-based parent.

a bit of history

Stanley Ho, Pansy’s father, controlled the monopoly casino company in Macau when it was a Portuguese colony.  After the handover to China in late 1999, the government of the new Macau SAR decided to end the monopoly.  It issued a new gaming concession to Mr. Ho, but also awarded one to Wynn Resorts and to Galaxy Entertainment.  Subsequently, each of the three was allowed to sell a sub-concession to another party.  Mr. Ho chose MGM.  He originally proposed a 50/50 joint venture between himself and MGM.  The Nevada gaming authorities apparently told MGM this was unacceptable because of Mr. Ho’s alleged underworld connections, and Pansy Ho replaced her father as the Ho family partner.

structure of the sale

Pansy Ho will provide all the stock being sold.  1% will go to MGM, giving it a 51% stake and making it the majority owner of MGM China.  Another 20% will go to the investing public (Paulson & Co. and Kirk Kerkorian, the largest shareholders of MGM, are together putting in for about 8% of the issue).  It also appears that Ms. Ho has agreed to a 3% overallotment, meaning that the underwriters can increase the size of the issue by that amount, if demand is strong.

So, rather than having a large cash inflow from selling stock, MGM will pay Ms. Ho about US$75 million to gain legal control of the venture.

The news isn’t really so bad for MGM, however.

Not content with keeping the transaction simple, Ms. Ho has apparently agreed to invest several hundred million dollars of her IPO proceeds in securities of MGM Resorts.

Also, pricing at the top end of the range (which is where I would guess the IPO will end up) implies that MGM’s stake in MGM China is worth just under US$4 billion, or about half of the parent’s market cap.  From now on, we’ll probably see the same sort of “tail wagging the dog” effect on MGM shares as we’ve witnessed over the past year with WYNN and LVS.  Given the still parlous state of the Las Vegas market, this is perfectly understandable.  I interpret the recent strength in MGM shares as the start of this behavior.

Pansy Ho’s role in MGM China?

The IPO will confirm Ms. Ho’s status as a multi-billionaire.  Other than that, your guess is as good as mine–maybe better.

As I wrote in more detail a little while ago, in a bizarre sequence of events earlier this year, control of the Ho family gambling concession–by far the largest in Macau, accounting for about a third of the market–appears to have been taken away from Stanley Ho by, among others, Pansy.  Press reports suggest Pansy has resigned from the board of MGM China–though I understand the IPO documents say otherwise.  As I indicated in my earlier post, my reading of the situation is that Ms. Ho wants to present herself as a passive investor in MGM China while she fights for control of the family company.

It’s ironic if the IPO is the vehicle Ms. Ho is using to distance herself from MGM China.  That’s because the IPO seems to me to undermine the argument of the New Jersey gaming authorities that Ms. Ho is completely financially dependent on her father–and therefore unsuitable to hold a casino license.

My guess is that a smaller role in MGM China by Ms. Ho will make little operational difference, and may make both MGM and MGM China more palatable to US investors.



Macau gambling, Macau gaming stocks: May 2011

May 19, 2011 By in Asian economic development, Capital-intensive firms, Casinos, China, Current Market Thoughts, Entertainment, Hong Kong, Industry Analysis, Stock ideas Tags: , , , , , , , , , , , , , 2 Comments

the Macau gambling market continues to boom

It’s really late in the month for me to be writing about the recent strength in the Macau gaming market.  Nevertheless, here are the latest figures from the Macau Gaming Inspection and Coordination Bureau:

     * 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%

Another (ho-hum) stunningly strong month for the market in April. Another all-time revenue record, surpassing March’s high water mark even though April has one fewer day in it.  Early market chatter for May is that business is, if anything, better this month than last.

not all the stocks are following suit

Here’s the month-to-date performance of the US- and Hong Kong-based stocks:

S&P 500     -1.9%

WYNN     -1.4%

LVS     -12.0%  (disappointing(?) 1Q11 earnings)

MGM     +15.5%  (IPO of MGM Macau priced–more on this tomorrow)

Hang Seng H-shares     -5.1%

SJM     +7.8%  (reported strong 1Q11 results–up 85% yoy)

Galaxy     +7.4% (opened a new casino, to mixed reviews)

Sands China     -7.2%

Wynn Macau     -7.5%

what to make of this?

The US first:

I don’t see any general pattern, other than possibly the market misinterpreting what casino revenues are, that is, that they’re casino winnings, not revenues, and thus can fluctuate randomly, quarter to quarter, around a longer-term average.

MGM is a star performer, on the idea that when we have a publicly traded yardstick to value its Macau holdings, the US parent will benefit.  We’ll see.

I haven’t read the LVS 10Q carefully enough yet (although I bought a small amount on the selloff after the earnings report), but the market may be mistaking bad luck during 1Q11 for weakness in the company’s business.  The earnings report is the main reason, I think, for the poor performance of LVS.

WYNN, in contrast, is benefiting from a misreading of its phenomenal good luck in 1Q11 in Las Vegas as being the new norm.  That may be the reason the stock hasn’t been hurt by the fall in Wynn Macau shares.

In Hong Kong:

Here, I do see a pattern.  There’s an enormous (around 15%) difference between the weak performance of the higher quality companies, Wynn and Sands, and the strong gains of the lower tier ones, Galaxy and SJM.  Although I would find it hard to buy either of the latter two (I might be able to stomach Galaxy, but certainly not SJM), the fact that demand for gambling is so super-strong means that there’s a lot of business to be had by everyone in the market.  So it’s hard to find too much fault with the market rotating into the lower multiple names.  It’s also unreasonable to expect multiple expansion to continue for 1128 and 1928 without at least a sympathetic response from the others. 

My sense is that the correction in Wynn and Sands is just about over.  Still, while I perceive a quality difference worth paying up for in 1128 and 1928, the Hong Kong market disagrees.

what I’m doing

I’d sold about 10% of my 1128 holding at HK$27.  I tried, unsuccessfully, to buy it back two days ago, below HK$24.  Fidelity won’t let me buy 1928, and I won’t touch the others, so I’m going to do nothing for now.

I regard WYNN as the best company, but I think it’s a little pricey at the moment.  I’m trying to work though the huge amount of data in the LVS 10K, to see if it might be a way to get slightly different exposure to Asia, exposure that includes Singapore.  My biggest concern is LVS’s net US$7 billion in debt, and a repayment schedule that goes into high gear next year.  Most of the borrowings are linked to the properties in Macau and Singapore, where all the cash flow is, so matching assets and liabilities isn’t an issue.  At first glance, absent another recession, likely gross cash flow seems more than adequate to meet mandatory repayments.  It’s the continuing large capital spending bill that I haven’t quite gotten my arms around.

the Lex column on Macau gambling

April 27, 2011 By in Asian economic development, Casinos, China, Current Market Thoughts, emerging markets, Entertainment, Industry Analysis, Recent Market Action, Stock ideas Tags: , , , , , , , , , , Leave a comment

The Lex column of the Financial Times is noted for its pithy–and very accurate–assessments of current economic or financial matters.  In its commentary about the Macau gambling market a couple of days ago, however, I think Lex has made a rare miss.  In particular:

–the column does note that the advent of casino gambling in Singapore has not diverted business from Macau.  On the other hand, there’s no reason it should be.  Singapore has only two casinos.  Of them, one is oriented toward the mass market, leaving a single venue–run by LVS–catering to the high-roller baccarat players Macau specializes in.  LVS has little incentive to market Singapore to its Macau clientele.  Past evidence in Las Vegas suggests that offering multiple venues to big customers doesn’t increase the portion of their business that a casino company gets.  It just runs up costs.  (In any event, to my mind, if LVS were to sell another location, conflict of interest  worries aside, it would more likely be ailing Ls Vegas).

Also, the Macau market is closely linked with junket operators, who help collect markers in mainland China.  Singapore is not a fan, and has already barred some from the island’s gambling palaces.

–Lex also worries about overexpansion of the type that is now plaguing Las Vegas.  But Macau appears to have absorbed that lesson as well.  The government has made it plain that it wants every operator in the market to be profitable.  It stepped in a couple of years ago to set maximum levels of compensation to junket operators (the key metric for profits in the high roller market) when weaker casinos seemed bent on starting a price war.  There’s also a cap on the total number of table games allowed in the market.  The government controls the supply of construction labor carefully.  And it has already turned down LVS’s request to begin building on a site where the company had spent $100 million on preparation work–presumably because it was concerned about the rate of floor space additions.

–the column is, as usual, a bit vague about investment advice.  It suggests that in a time of excess capacity (which I think is unlikely anytime soon) one should buy the stocks of firms that are growing at above average rates but trading at below the sector multiple.  If only it were that easy.  All the firms now public are family-controlled enterprises (although as/when MGM goes public, that may change).  In my view, they are all tigers who are unlikely to change their stripes.  If so, market laggards are likely to stay that way-with lower growth rates and lower PEs.  Aside from the “usual” problems of working for a family-owned firm, competent international casino executives may be hesitant to risk the reputational damage that may go along with working for a firm that has encountered regulatory problems elsewhere in the world. My guess is that this is a market where turnarounds won’t happen.

WYNN: 1Q11, strong numbers (again!)

April 20, 2011 By in Casinos, China, Current Market Thoughts, earnings conference calls, Entertainment, Industry Analysis, Stock ideas Tags: , , , , , , , , Leave a comment

the results

WYNN reported 1Q11 financial results after the close in New York last night.  Earnings per share were $1.38 vs. $.27 in the opening three months of 2010.  The results substantially exceeded  the Wall Street analysts’ consensus for the quarter of $.79.

The main factors behind the blowout earnings?  …continuing superior performance in the fast-growing Macau market; and the gradual recovery of Las Vegas, where WYNN also had unusually good luck at its tables during the quarter.

WYNN announced an increase in the quarterly dividend from $.25 to $.50, as well.

the details

Macau

WYNN has had enormous success with its slot machines and its non-gaming attractions–hotels, restaurants, retail.  Nevertheless the key to profits in this market is high-stakes baccarat.  During the 4Q10 conference call, management indicated that, while customers were still coming through the doors in record numbers, its “win” (gross profit) for 1Q11 to that date was barely a third of normal.  This is a fact of life in the high-roller market–and eventually straightens itself out.  The comments suggested, however, that 1Q11 earnings from the SAR might be sub-par.

They weren’t.  Wynn Macau seems to have had a run of good luck later in the quarter just as strong as the unfavorable streak disclosed in the January conference call.  For the three months as a whole, win percentage for 1128 was 2.69%, just below the 2.7%-3.0% range WYNN considers normal.

Overall, Wynn Macau earned $190 million for the three months, up 70% year to year.  Remember, though, that the 2011 figures include the Encore in Macau that opened during 2Q10.  So future earnings comparisons won’t be quite so strong.

Las Vegas

WYNN earned about $36 million in Las Vegas during 1Q11, compared with a loss of around $54 million in 1Q10.  Operations are clearly on the mend.  Non-casino operations are doing especially well.  However, WYNN had an exception run of good luck during the quarter at its tables in Nevada.  The company thinks the normal range of table win is 21%-24% of the amount wagered.  It achieved a 30.4% win rate during the opening three months of 2011, which added about $50 million above normal to the bottom line.  

So, while 1Q11 shows tremendous improvement over the dark days of recession, it’s probably better to think of WYNN’s Las Vegas operations as being strongly cash-flow positive, but around profit breakeven and on a slow upward trajectory.

“fair share“

This is WYNN’s fundamental internal measure of the health of its gaming operations.  It’s a company’s share of market revenue divided by its share of the market’s gambling equipment (or floor space) for slot play or table games.  If, for example, you have 10% of the table games or slot machines in a market and do 10% of market revenue, you have a “fair share” of 1.  If you have less than that, all of your marketing and promotion efforts to bring customers to your premises in effect subsidize your competitors.  You act as a “dormitory” for them, as Steve Wynn puts it.  If you have a “fair share” over 1, the others are subsidizing you.

How does WYNN fare on this measure?  …extremely well.

The specifics:

–In Macau, the company has 10% of the table games and a 14% market share;  it has 8% of the slots and a 22% market share.

–In Las Vegas, it has a “fair share” of 2.5 in table games and 1.0 in slots.

In a nutshell, that’s the WYNN story.

the stock

I think WYNN will continue to be a mild outperformer in the US market over the year ahead.  To my mind, Macau is at least several years away from investors having to seriously consider whether the market is maturing.  And the question of Las Vegas recovery has changed itself during 2010 from “if” to “how fast” –meaning that the worry of further weakness there has all but disappeared.

Valuation is the chief investment issue.  1128 is up 58% year to date and is nearly triple its IPO price of late 2009.  It’s trading at 22x earnings for this year, assuming Macau market revenues stay at the 1Q11 level for the rest of the year.  So it’s hard to say that the subsidiary’s superior operating model is still a secret, yet to be worked out by the Hong Kong market.

WYNN’s share of 1128 is worth about $13.5 billion currently, and represents almost 75% of the value of the parent company’s stock.  That leaves $4.7 billion for the rest of the company (Las Vegas operations + royalties and management fees from 1128), suggesting that non-Macau is trading at a little over 10x cash flow.

I don’t think any of these figures are outrageously high.   I don’t have any inclination to sell. ( I own both WYNN and 1128.  I’ve trimmed the latter a bit recently and sold covered calls on a small part of the former, but that’s because my position sizes have become too big.)  But I also don’t feel a strong need to buy either 1128 or WYNN at today’s prices.