Category Archives: Casinos

IPO of MGM China this quarter?

April 18, 2011 By in Casinos, Entertainment, Industry Analysis, Stock ideas, Uncategorized Tags: , , , , , , , , , , , , Leave a comment

MGM China, a new company

Last Wednesday MGM filed an 8k describing the formation of a new company, MGM China, which will be the listing vehicle for the Macau casino properties now held in a 50/50 joint venture by MGM and Pansy Ho.  Each will initially own 50% of MGM China.

an intended IPO

MGM and Ms. Ho intend to sell 20% of MGM China to the public in Hong Kong in an IPO that press reports say will happen next month.  The 8k notes that the parties will use their best efforts so see the IPO occurs before June 30th.

a secondary offering

The IPO will be a secondary offering, meaning no new shares will be created; rather the present owners will sell some of their existing shares.

all shares to be sold by Ms. Ho

The post-IPO ownership structure of MGM China will be somewhat of a change, though, because all the stock being sold to the public will come out of Ms. Ho’s portion.  In addition, Ms. Ho will sell another 1% of MGM China to MGM at the IPO price, giving MGM 51% ownership and clear control.  The underwriters of the issue will have an “overallotment” of 3%, meaning they have permission to sell up to 23% of the company.

post-IPO structure

Depending on the overallotment, the post-IPO structure of MGM China will be:

MGM     51%

Pansy Ho     26%-29%

the public     20%-23%.

One potential sticking point might have been that none of the money raised goes to cash-strapped MGM.  Ms. Ho has addressed this issue by agreeing to use US$311 million of the IPO proceeds to buy MGM convertible bonds.

The IPO will be coming at a good time

The Macau gambling market is booming, with revenues through the first three months of 2011 running over 40% higher than in 2010.  And so are the Hong Kong-listed gaming stocks.  Market leader SJM (0880) is up 35% year to date, Wynn Macau (1128) has gained 58% and Sands China (1928) is 26% higher.

The IPO solves a problem for Pansy Ho

The offering documents will doubtless make the situation clearer, but press reports say Ms. Ho resigned from the board of directors of the Macau joint venture at the end of last year.  I presume this was to allow her to vie for control of the much larger SJM, the flagship of the Ho family gambling empire, that has recently been taken out of the hands of Ms. Ho’s father, Stanley.  Macau law prohibits one person from controlling two gambling concessions.  Her reduced holding in MGM China may be sufficient evidence that Ms. Ho is a passive investor in the firm for authorities to allow her to become chairman of SJM.

One other plus:  MGM has agreed to explore co-investing in property on the mainland with Ms. Ho.

How will Hong Kong investors value MGM China?

I find this a hard one to figure.  As the recent performance of  1128 and 1928 suggest, I think Hong Kong investors are beginning to understand the value of the American casino operation model.  But I have no idea if the market will regard the withdrawal of Ms. Ho from MGM China as a plus or a minus (my guess is that it will be the latter).  At this point, I’d expect the IPO will raise well over US$1 billion, US$2 billion a possibility.  The offering documents, and the May report of the Macau Gaming Coordination and Inspection Bureau on gambling receipts, will make the situation clearer.

MGM’s stock went up 8% on the IPO announcement.

One reason is doubtless the US$300+ million cash infusion.  Another is that MGM gains control of MGM China.  More important, I think, is the tendency of the Las Vegas-Macau casino conglomerates to trade on the value of their listed Macau operations.  For example, WYNN’s holding in 1128 represents 75% of the parent’s market capitalization.  Establishing more firmly what MGM’s Macau interests are worth will likely give the parent stock more speculative appeal.

My very preliminary take is that a $14 MGM price already discounts a $2 billion IPO.  At the same time, this would make it clear that you’re only paying $3.50 or so for the rest of MGM, making the stock look like a turbo-charged warrant on improvement in the Las Vegas market.

Spring 2011 developments in Macau gambling

April 5, 2011 By in Casinos, Entertainment, Hong Kong, Industry Analysis, Lodging, Recent Market Action Tags: , , , , , , , , , , , Leave a comment

Three are noteworthy, in my opinion:

March market statistics

Last Friday the Gaming Inspection and Coordination Bureau of Macau released its report on gaming revenue for the SAR during March.  The market total was just over 20 billion patacas (roughly US$2.5 billion), a new all-time high.  It’s also up by 48% from the same period of 2010–indicating that the mainland government’s measures to slow down the economy continue to have little effect on Macau.

The revenue number can be a bit deceptive.  Customary casino accounting practice is to count as revenue the amount lost by customers, not the (much larger) amount that they wager.  Given that Macau is mostly a high-stakes baccarat market, where the win percentage averages a tad below 3%, the total amount of all bets placed in the former Portuguese colony last month was likely in excess of US$80 billion.  This suggests Macau may approach the US$1 trillion mark in amount gambled for the full year.

According to soundings taken by local magazine Macau Business, there were no dramatic shifts in market share during the month.  The Ho family’s SJM led the market with a 34% share, followed by Sands China with 16%, Melco with 14%–slightly ahead of  Wynn Macau, which also had 14%.

This news is the main reason WYNN and LVS rose sharply in New York last Friday and the publicly traded Macau casinos followed suit in Hong Kong yesterday.

the Sands China lawsuit

Last year, LVS fired the CEO of Sands China, Steve Jacobs (whom I take to be the executive Steve Wynn described in such unflattering terms in an earnings conference call last year).  Mr. Jacobs promptly sued LVS, maintaining among other things that LVS had instructed him to prepare dossiers on prominent members of the Macau government so it would be able to exert improper influence over them, if need be.  Mr. Jacobs’ allegations have sparked a number of investigations by state and federal agencies in the US.  Last Thursday, Hong Kong announced its Securities and Futures is launching a similar probe.  My instinct is that the affair will turn out to be a monumental case of sour grapes by a terminated executive.  Still, the investigations bear close watching for shareholders of either LVS or 1928.

more Ho sibling strife

This time it isn’t the children and spouses of Stanley who are squabbling with him.  It’s his sister Winnie, who maintains that her holding in the parent of SJM was illegally taken from her.  What I hadn’t realized until I read an article by Macau Business is that the dispute apparently stems from 2001.  In that year, the share registry of SJM’s parent company–that is, the physical book in which the names and ownership interests of all shareholders are recorded—disappeared.  Other than that it is the official record of who owns what, apparently it contained the only evidence of Ms. Ho’s ownership interest.  You can’t make this stuff up.

Two recent Macau gambling developments

March 8, 2011 By in Asian economic development, Casinos, China, Entertainment, Hong Kong, Industry Analysis, Securities regulation Tags: , , , , , , , , , , , , , Leave a comment

Pansy Ho has resigned from the board of MGM Macau

Macau Business reported on February 28th that Pansy Ho stepped down at the end of last year from the board of directors of the casino company, MGM Macau, that she and MGM Resorts International jointly control.  MB’s source is a Wall Street Journal article that says the Macau casino regulator confirmed the move.

Why do this?

As I posted on February 1st, Stanley Ho appears to have transferred his controlling interest in the largest casino operation by revenue in Macau, Sociedade de Jogos de Macau (SJM  HK:0880), to a number of relatives, including his daughter, Pansy Ho.  I say “appears” because Mr. Ho has since denied doing so more than once, and–depending on the day–is suing to have the interest returned to him.

The transfer forced Pansy Ho to make a choice, since Macau law bars anyone from having operating control over more than one casino concession.  Although Ms. Ho herself hasn’t said, as far as I’m aware, why she left the MGM Macau board, the move suggests she is going to try to recast herself as a passive investor in MGM Macau.  That way she may be able to keep her ownership interest in the venture (maybe as a safety net) while she actively engages in an intra-family struggle for operating control of the much larger SJM.

The association between MGM and Pansy Ho is a controversial one.  The joint venture was the price MGM had to pay to get a seat at the lucrative Macau table.  The Nevada casino regulators decided, after extensive hearings, that Ms. Ho was a suitable business partner for a casino operating in that state.  But the New Jersey Casino Control Commission, considered the gold standard for regulatory compliance, decided otherwise last year.  It ruled that Ms. Ho was more or less an extension of her father, Stanley, whose ties to Chinese organized crime made him (and, therefore, her) “unsuitable” to hold a casino license in New Jersey.

The NJCCC gave MGM two options:  sever ties with Ms. Ho, or sell its casino interests in the Garden State and leave.  MGM chose the latter course, even though declaring oneself a forced seller isn’t a move calculated to get a good price for your assets.

To my mind, and based on the New Jersey finding, the association with Ms. Ho tarnishes MGM’s otherwise good reputation.  Certainly, in my opinion, there will be some American investors who won’t hold the stock because of this.  It may well be harder to get seasoned international casino professionals to work for MGM Macau, as well.

In Hong Kong and Macau, on the other hand, the Ho name isn’t a minus.  It may, in fact, be a plus.  Last summer, both LVS and WYNN voiced their opinion during earnings conference calls that they thought an unnamed competitor was preparing for an IPO.  Since all the other competitors are listed, I presumed the company referred to was MGM Macau.  If so, the departure of Ms. Ho is probably a negative.  And if she had any influence in getting high roller business to come to MGM Macau, one has to ask where she will steer these customers now. My answer:  to SJM.

In the long run, MGM may have a chance to buy Pansy Ho out.  It may be that if she gains control of SJM, the Macau government will require that she divest the interest.  That would be a good thing for MGM, in my view.  But I don’t think that’s likely until the Ho succession is settled.  And that may take a long time.  In the meanwhile, it seems to me MGM Macau has the worst of all possible worlds.

February reached an all-time high in revenue for the Macau gaming market

The previous record, 18.883 billion patacas (one pataca is roughly equal in value to one HK$), came last December.  February got off to a slow start, but that was more than offset by an extremely successfully New Year holiday period.  Overall, the month showed a 40% year on year gain.  The market shows no signs of a slowdown in growth, despite ongoing efforts by Beijing to cool off the mainland economy and an almost 60% expansion of revenue last year.

The following table comes 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%

why is Las Vegas Sands eyeing Spain?

February 24, 2011 By in Casinos, emerging markets, Entertainment, Industry Analysis, Recent Market Action, Securities regulation, Stock ideas Tags: , , , , , , , Leave a comment

the news on Spain…

I was very surprised when I read a newspaper article last week trumpeting LVS’s negotiations with the Spanish government to open a $13 billion-$20 billion casino resort project in that country.  After all, it wasn’t so long ago (late 2008) that LVS was:

–cutting back on expansion (the steel skeleton of the aborted Palazzo expansion still graces the Las Vegas Strip),

–cautioning that the company could be in violation of its debt covenants, and

–the Adelson family was injecting $1 billion of its own money into the company to help reduce its leverage.

…comes from Singapore

The report seems to have been based on a briefing by LVS of reporters in Singapore, although the company has issued no press release I can find, nor has it filed a statement of its plans, which may include casinos in Madrid and/or Barcelona, with the SEC.  LVS is apparently far enough along with that project to be meeting with contractors in Spain in a couple of weeks.

a rosy present

Of course, the situation for LVS is a lot better today than it was back then.  Las Vegas has turned cash flow positive (although it’s still losing money).  More important,  Macau generated ebitda (earnings before interest taxes depreciation and amortization) of $341 million in the fourth quarter.  And the recently opened Marina Bay Sands in Singapore produced ebitda of $306 million during the same period, even though the resort complex isn’t quite finished.  Business in both Asian regions is growing, with LVS thinking the Marina Bay might generate ebitda of $2 billion in 2011. (I’m pencilling in $1.5 billion for Macau.)

Spain makes some sense

In addition, the Spain idea may not be as far-fetched as it sounds at first.  How so?

Making the very crude (but probably still accurate enough) assumption that depreciation and amortization (an addition to cash flow) and interest expense (an outflow of money) cancel each other out, Macau + Singapore could together generate $3.5 billion in cash, before taxes, this year.  Presumably 2012 would be stronger, at the very least because the Marina Sands will have been completed. But business there is also continuing to grow so rapidly that LVS is worried about running out of hotel rooms.

We’ll have a much better sense of LVS’s financial obligations and its debt repayment schedule when the 2010 10-K comes out, but my numbers are at least directionally correct.  They illustrate three emerging characteristics of LVS:

–the company is generating a ton of cash

–most of that is outside the US

–LVS’s mountain of debt doesn’t look so bad anymore.

What does LVS do with its cash?

Well, we know what LVS doesn’t do.  It doesn’t repatriate any more of this money to the US than it has to, since the funds sent stateside become subject to federal income tax at up to a 35% rate.  Burning the money in the street instead would at least allow you to roast hot dogs.

To my mind, it also doesn’t keep a lot of spare cash in the bank in Singapore.  Why not?  Although Singapore’s economic development model is based on Japan, its legal and political systems grew their roots during Singapore’s time as a British colony.  For the British, no monopoly–like LVS and Genting have in the casino business in Singapore–lasts forever.  And the faster a monopolist makes money, the sooner the rules that are allowing windfall profits change.  No, I’m not worried that the decade or so LVS and Genting have as exclusive casino developers will be altered.  My question is about taxes.  I think having bank balances in the billions in Singapore just invites the government to raise the gaming levy.

Interestingly, apparently in response to a question from the audience in Singapore, LVS management also said it has no intention of taking the Marina Bay Sands public, citing the illiquidity of the Singapore and Hong Kong stock markets (arguably true in Singapore’s case, but not relevant, in my opinion).  I draw three conclusions from this answer:

1) LVS doesn’t need the money,

2) LVS would like to keep 100% of the Singapore cash flow potential, which could be mind-bogglingly high, for itself,

3) Marina Sands could easily be the vehicle LVS uses to establish and fund Spanish operations, since there are no potentially pesky minority shareholders to object.  Also, Sands China will likely have its hands full with further expansion in China.

it’s how they roll

Once you get past the headline shock and realize the LVS has the looming problem of how to reinvest its Asian cash flows, Spain doesn’t look so crazy after all.  An aggressive move, yes.  But that’s just how LVS rolls.

 

 

 

Wynn Resorts’ 4Q10: spectacular results from Wynn Macau

February 13, 2011 By in Casinos, China, Current Market Thoughts, earnings conference calls, emerging markets, Entertainment, Hong Kong, Industry Analysis, Stock ideas Tags: , , , , , , , , , Leave a comment

the results

WYNN reported 4Q10 and full year 2010 earnings results after the market close in New York on February 10th.

On February 1st, the company announced it would release its figures on February 24th, but a week later moved the date up to the 10th.

(I read this as signalling that the results were extremely good and WYNN was worried about their somehow leaking out in the intervening two weeks.  I appear to have been the only one to do so, however, since the stock traded flat on the two days before the conference call.)

Wynn reported revenues of $1237.2 million for the December quarter, up 52% year on year.  Earnings were $114.2 million, or $.91 per share.  That compares with  loss of $5.2 million or -$.04 per share in the closing three months of 2009.  Wall Street analysts had been estimating $.66, so the actual number was over a third higher.

Interestingly, the stock initially sold off by several percent in the aftermarket Thursday night, both before and after an upbeat conference call.  Stock price weakness continued in early-morning Friday trade.  Selling abated quickly, however, and WYNN ended the day up 7.45%.

the details

Macau

As I pointed out on January 5th, the Macau market experienced record gambling business in the December quarter.  Wynn Macau also gained market share, implying–at least in part–that it was unusually “lucky” during the period (what casinos report as revenue is not the amount bet by customers but the (small) portion of that figure that the casino wins).  In that post, I said I thought quarter on quarter revenues might be up by a third, and that (like any other well-run company) WYNN would encourage its accountants to find ways to tamp down the windfall gain.

As it turns out, 1128 reported revenues of $912.1 million, up 36% quarter on quarter.  Win percentage at high-stakes baccarat, the staple of the Macau market, was 3.15% of the amount bet for 1128 during the December period vs. 2.88% in the third quarter.  (WYNN thinks a normal range for that percentage to be from 2.7% to 3.0%.)

Yes, 1128 did increase its reserve for bad debts by $11 million but its operating income still rose from $124.5 million in the September quarter to $214.5 million in the December period.  (That’s what operating leverage is all about.)

Las Vegas

Slow recovery continues.  Convention business is gradually coming back.

But there’s still a glut of hotel rooms in Sin City, a fact that is holding room rates down.  CityCenter and the Cosmopolitan, the last venues to open in a flurry of capacity expansion, added almost 10,000 new rooms, or 15%, to the total on the Strip in a little more than a year.  Ouch!  That’s especially bad for the Las Vegas casino companies because their properties have been built with the idea of generating  half the firms’ operating revenue from being resort hotels, not from gambling.

So in Las Vegas, WYNN remains cash flow positive but earnings negative. For the December quarter, WYNN had an operating loss of $13.4 million.  At least that’s better than a year ago, when the red ink crested on the operating line at $56.7 million.

2011 to date

–Macau continues to boom, with the market growing by about a third, year over year, in terms of casino “win” in January.  1128’s win percentage for the quarter to date, however, has dropped from its recent highs to an unusually low 1.9%–meaning the company’s gaming profits aren’t much better than flat for the month v.s 2010.

That’s just a fact of life when dealing with high rollers, and has no investment meaning.  Nevertheless, this is the likely reason 1128 has sold off by 20% or so in Hong Kong over the past few weeks.

WYNN clearly thinks that the best is yet to come, as transportation links with Hong Kong and the mainland are improved.

–Chinese New Year was good for WYNN.  It produced the biggest night in the history of the Wynn Resort in Las Vegas, with table win of $16 million +.  And it yielded one-day casino win in Macau of $46 million +.

–In contrast with Macau, WYNN’s casino win percentage is Las Vegas is unusually high at the moment.

–1128 is planning to add two more to its current roster of ten junket operators (who bring groups of high-rollers to the casino) during the spring.  It hopes to receive final permission before summer to begin construction work on its new $2.5 billion casino in the Cotai section of Macau.  That would mean opening in early 2015.

the stocks

1128’s current market capitalization is HK$96 billion.  WYNN’s ownership interest in 1128, therefore, is worth about US$9 billion.  Wynn itself, which has outperformed 1128 by about 10% over the past year, has a market cap of just over $16 billion.  In simple terms, this means investors are paying $7 billion for:  the company’s Las Vegas operations, the royalties/management fees WYNN receives from 1128 and exposure to possible new ventures outside of Macau.  My guess is that this works out to cash flow return of 5% or so, assuming Las Vegas breaks even on the operating income like this year.

I hold both, with about a 3:1 ratio of WYNN:1128.  My overall holding is big enough that I’ve been forcing myself to sell bits and pieces just to control risk.

Neither stock is exactly undiscovered.  Still, I think that both will be at least mild outperformers of their markets in the year ahead.  If both stocks traded in the US, growth investors would gravitate toward 1128 and their value counterparts would tend to select WYNN.  The latter might even short 1128 to get “pure” exposure to the parent company.

The reality, though, is that the two trade in different markets (see my post on this topic), with different investment preferences and knowledge bases.  So the either/or strategy has risks that are not obvious.  In particular, it’s possible that 1128 could get caught up in a general asset shift away from emerging economies toward developed ones.  I don’t see that yet with 1128, and I don’t expect it will happen, but it’s possible.

My only useful thought in this regard is that a negative market reaction to 1128’s current run of bad casino luck in 1Q11 could present a buying opportunity.  I think that’s happening now with 1128.  Given that Wall Street analysts and US investors don’t seem to assimilate this kind of information very quickly (look at how badly they missed 4Q10 eps), the same may occur with WYNN when the 1Q11 earnings report comes out.