Category Archives: Casinos

Good (not great) June quarter from Wynn Resorts and Wynn Macau: negative stock market response

July 30, 2010 By in Casinos, China, Current Market Thoughts, earnings conference calls, emerging markets, Entertainment, Hong Kong, Industry Analysis, Lodging, Stock ideas Tags: , , , , , , , , 1 Comment

WYNN’s 2Q2010 results

WYNN reported second quarter earnings results after the market close in New York yesterday.  Revenue for the company during the three months ending June was $1.o billion.  Earnings per share, adjusted for unusual items, were $.52 vs. $.09 in the comparable quarter of 2009.  That’s way above analysts’ estimates of $.41 (even just using the back of an envelope, I don’t understand how the consensus could have been that low, however).

As has become usual, there’s a stark contrast between the performance of the WYNN casinos in Las Vegas and the operation in Macau.  The former continue to limp along, showing positive cash flow but bottom-line losses; the latter continues to rake in money at an astounding rate.

WYNN fell by about 3% in after-hours trading in the US.  1128 (Wynn Macau) dropped by about 3.5% in Friday Hong Kong trading (which began at 9pm EST on Thursday).  “Weak” results from Macau are probably the reason.

details

I should mention at the outset that I’ve tried a number of times to access the replay of the company earnings conference call, without success.  So what I’m writing comes just from looking at the numbers.

Macau

The amount gambled in the Macau market rose a mind-boggling 80% year on year in the second quarter.  That figure “sagged” to 65% in June, apparently as Asian high rollers decided to concentrate on watching the World Cup.  Don’t worry, though.  Business has recovered in July.

The market numbers aren’t a secret, by the way.  They’re posted on the Macau casino authority (in Chinese, Portuguese and English) on its website.  Each month, they also manage to be leaked early by a Portuguese news service.

If we look at the first quarter, the Macau market grew by 57% vs. the beginning of 2009 and the amount gambled at the Wynn casino almost doubled.  In contrast, despite the opening of the Wynn Encore in the former Portuguese colony, so Wynn had more capacity, the amount wagered at 1128 grew “only” by 72%.  WYNN’s win percentage in Macau during the June period, which is what the WYNN income statement shows as revenue, was higher than normal.  So the fact that 1128 lagged the market–while very clear from the company press release–is hard to see from the income statement figures alone.

The high roller market can be very quirky on a short-term basis.  So there isn’t really any reasonable conclusion to draw out of one quarter’s performance.  I think 1128 is still on track to earn at least HK$.80 a share this year, putting it on a multiple based on today’s price of under 17.  I think the stock would easily trade at twice that if it were a US stock–but, of course, it’s not.

Las Vegas

After eliminating unusual items, it seems to me that WYNN lost about $40 million in the first quarter and just over $30 million in the second.   Hotel occupancies were up by about 6% year over year but room rates were down by almost 10%–a reflection of the overcapacity that is affecting the market, and also of the juggling act between room rate and occupancy that hoteliers constantly perform in a time like this.

Table game play was down slightly and slot machine play (less important for WYNN) dropped by close to 20%.  But an increase in nightclub business and entertainment more than offset this.

The current lackluster situation for WYNN in Las Vegas should come as no surprise to investors, since the offering documents for a recently completed bond refinancing contain the essential information.

my thoughts

For WYNN, it’s thank goodness for Macau, where the company is waiting for government permission to build a third casino in Cotai.

1.  If we were to take an aggressive stance and project HK$1 in eps for 1128 for this year and assign a 20 multiple to that, then WYNN’s 72.3% interest in the subsidiary would have a value of just under US$10 billion.  This compares with a total market cap for WYNN (as I am writing this) of about US$10.5 billion.

That’s the optimist’s view.

2.  As reflected in the current 1128 stock price, however, WYNN’s holding is worth US$6.4 billion.  Add cash of US$1.7 billion on the balance sheet and you get an implied US$2.6 billion value for the Las Vegas operations.  This is too high, in my view.  As I mentioned in my post on WYNN’s March quarter 2010 results, US$1.8 billion would be a better estimate for today.

3.  A more realistic–maybe even conservative–assumption for 1128 would be earnings of HK$1 over the coming 12 months and a multiple of 18.  That would imply a value for WYNN’s holding of about US$9 billion.  Add to that mild recovery in Las Vegas that might boost asset value to US$2.3 billion, toss in the US$1.7 billion or so the company has in cash on the balance sheet and the total WYNN value would be US$13 billion.

What does this all mean?

Valuation #2 suggests that WYNN is fairly valued at today’s price if we incorporate just the here and now.  If we think nothing particularly good–or bad–will come out of Las Vegas in the foreseeable future, then WYNN should trade based on movements in 1128.  Each dollar change in the 1128 share price would imply a $500 million change in WYNN’s asset value.

Wall Street is a futures market, though.  Valuation #3 is my base case.  This would imply about 20% upside for WYNN in the coming year, with better potential–but greater risk–for 1128.

Las Vegas Sands: an interesting June 2010 quarter

July 29, 2010 By in Casinos, earnings conference calls, Entertainment, Industry Analysis, Stock ideas Tags: , , , , , , , Leave a comment

LVS 2Q2010 results

LVS reported 2Q2010 results after the close yesterday.  On a GAAP basis, the company was just slightly below breakeven vs. a loss of $.34 a share in the second quarter of last year.  Operating income was $166.8 million for the three months vs. a loss of $171.3 million in the comparable period of 2009.  Removing non-recurring items, net income was $129.3 million or $.17 per share vs. $8.8 million, $.01 per share, in the year-ago quarter.

The biggest reason for the improvement was the huge increase in income from the company’s casinos in Macau, where the overall market revenues in the first half grew strongly enough to eclipse the full-year 2007 results, with only about a 10% increase in the number of slot machines and table games.  LVS was also helped by the opening of its Singapore casino during the quarter.

my takeaways

I don’t have an investment opinion about LVS.  It’s a complex, highly financially leveraged company, with a lot of moving parts, and I haven’t studied it enough.  My thumbnail sketch:  LVS is a highly competent casino operator, with an emphasis on middle market and convention business.  The company overstretched itself in expanding aggressively–in Las Vegas, Macau, Singapore and Bethlehem, PA–going into the recent economic downturn and was hurt badly by that decision.  Conversely, although risky, it stands to be an outsized beneficiary of economic recovery, as it progressively gets its debt under better control.

Because of its geographical diversity, LVS can give good insight into global gaming trends.  That’s what I’m writing about today, based on the 2Q financials and the earnings conference call.

1.  The Singapore gaming business is off to a better start than expected.  The mass market is very strong, thanks in part to the efforts of LVS’s competitor in the market, Genting.  The highroller business is showing a greater geographical reach, and better credit experience, than LVS thought it would. The company is attracting gamblers from Malaysia, Indonesia, Vietnam and Thailand, as expected, but also from Hong Kong, China, Taiwan and Korea.  It’s still early days for this market, but so far, so good.

2.   In Macau, LVS’s high roller business was good and its stores sold a lot.  The mass market segment lagged, though.  Despite its two main casinos posting operating income up 155% and 44% year on year, LVS seems to think it should be doing even better.  Recently, LVS fired its Macau chief executive, Steve Jacobs.  Commenting on this in the conference call, LVS CEO Sheldon Adelson said he would “opt for him to go to a direct competitor.”  The company also said the Macau “problem” was not in the layer of staff below Mr. Jacobs.  The Hong Kong market reaction to the Sands China earnings was muted.  Despite opening up about 4%, 1928 closed down HK$.04.

3.  Convention business is beginning to revive in Las Vegas.   Demand from groups for convention/meeting space is strong.  The biggest issue is that there’s so much overcapacity in Las Vegas that rates remain depressed.  (LVS, WYNN and MGM all launched major expansions just as the downturn was beginning.  The last of these, MGM’s mammoth City Center, only opened late last year.)

WYNN reports tonight.  We already know from offering documents for a proposed bond refinancing that WYNN’s results in Las Vegas were weaker in the second quarter of this year than last.  Hotel occupancies were up but rates were down.  It will be interesting to compare the Macau results of WYNN with those of LVS< however.

Wynn Resorts and Wynn Macau: a strong March 2010 quarter

April 30, 2010 By in Casinos, earnings conference calls, Entertainment, Industry Analysis, Stock ideas Tags: , , , , , , , Leave a comment

the results

WYNN reported surprisingly good March quarter results after the market close yesterday.  Earnings per share were $.26 vs an analyst consensus of $.14 and a loss of $.27 a share in the year-ago period.  (Remember, I own both WYNN and 1128, Wynn Macau.)

The main reasons for the strong performance were a huge increase in table games revenue from Wynn Macau (coming from basically the same facilities as a year ago–the new Encore in Macau opened earlier this month); and, in Las Vegas, higher table games revenue and a rebound from last year’s abnormally low “win” percentage (amount retained by the casino per dollar bet) of 17.7% to 23.2% (21%-24% is normal).

While it’s striking that Wynn could post operating profit up 82% year on year from Macau, the firm’s performance is actually better than that.

For casinos that cater to typical bettors or that have a large percentage of slot machines (which may be the same thing said another way) individual wins and losses almost always even out during a quarter, so that the casino’s overall win percentage stays relatively steady.  Not so with casinos, like WYNN’s, that cater to high rollers.  Their individual customers can win or lose millions of dollars at the tables in a single night.  While clients’ “hot” or “cold” streaks even out over, say, a year, they can make a noticeable difference to quarterly results.  Win in the first three months of this year for Wynn Macau was 2.7% from its high roller VIP segment.  That’s at the low end of the normal range of 2.7% – 3.0%.   And it compares with a win percentage of 3.55% a year ago.  That may not sound like much, but it’s a 30% negative swing.

the numbers

Operating income from Wynn Macau was $125 million vs. $68.7 million a year ago.  Las Vegas had an operating loss of $34.5 million vs. a loss of $58.4 million in the opening quarter of 2009.

EBITDA (earnings before interest, tax and depreciation and amortization), which is basically the cash the properties generate from operations, was $181.6 million for Macau vs. $114.6 million.  It was  $60.3 million vs. $43.9 million for Las Vegas.  The main difference between EBITDA and operating earnings in Las Vegas is adding depreciation for the casinos back in.  For Macau, it’s depreciation plus management fees paid to WYNN.

From an operating earnings perspective, then, Wynn Macau now accounts for more than 100% of WYNN’s results.  Looking at EBITDA, Macau is “only” 75%.  As Steve Wynn has often said, WYNN is now a Chinese company.  In fact, WYNN is planning to move parts of its corporate headquarters to Macau when it completes an anticipated new resort in Cotai.  Assuming WYNN gets government permission, construction will begin in 2014.

Macau

It sounds like good news will continue to come for WYNN from the SAR.  For one thing, the win percentage from its VIP tables, which produce the vast majority of the company’s operating profit there, will likely return to normal.  For another, WYNN’s revenue per table is continuing to expand at a faster rate than the market’s–evidence that the WYNN high roller strategy is working in Macau.  Also, the newly-opened Encore will begin to make a contribution to results in the current quarter.

In addition, the government of Macau is determined to run a market that grows in an orderly–and profitable–manner.  It has already slowed down the pace of new construction–Encore got in just under the wire–and set a (low) limit on the total number of table games permitted in the market through the end of 2013.  And, when a bidding war began to break out a while ago over the fees paid to managers of high-roller junkets to Macau, the SAR stopped it by setting a legal cap on these payments.  All of these moves favor WYNN.

In a short –and sometimes slightly testy–conference call, Steve Wynn made an interesting comment about why he thinks the mass-market strategy in Macau will not be the best one.  In his view, China has 300 million affluent citizens that the central government wants to encourage to spend more.  The country also has a billion poorer citizens that it doesn’t want to see gambling their money away.  Therefore, a high-roller strategy is in line with what Beijing wants; a mass-market approach runs counter to government policy.

Las Vegas

In my experience, casino revenues in any market are a function of available market floor space and of the rate of GDP growth.  Las Vegas has just seen the last of a series of huge increases in floor space come on line in MGM’s CityCenter–whose novelty has taken customers, at least temporarily, from other casinos, including WYNN’s.   Although the worst is over on this front, it will take years for the market to absorb all the new floor space now in operation.  In addition, while GDP growth has resumed, the pace of advance is likely to continue to be slow.

My guess is that WYNN will continue to gain market share and steadily march back toward operating breakeven.  As smaller, less proficient and less well-capitalized competitors fall by the wayside, WYNN’s business in Las Vegas will also benefit.  The real question is how long this process will take.

An addendum, a couple of hours after I first published this:

How to value WYNN and 1128

A lot depends on how you allocate overheads, debt and the value of the brand name.  Here’s one approach:

From the minority interest line, we can see that 1128 earned HK$864 million in the quarter, or about HK$.17 a share.  I think HK$.80 is a reasonable guess for the full year, but HK$1 isn’t out of reach.  If we apply a 20x multiple to the HK$.80, that would mean a price of HK$16 by yearend.

That would make WYNN’s interest in 1128 worth about US$7.5 billion.

What do we say about the Las Vegas business, then?  My instinct would be to consider this on a cash generation basis, as if the company were split into two parts, one (Macau) for growth investors, the other (Las Vegas) for income investors. I think this produces a fairly conservative value.

Las Vegas generated about $60 million in cash flow this quarter.  Against that, let’s apply the interest expense for 3/4 of the overall company debt, or about $37 million (the rest is on the 1128 balance sheet). This leaves $23 million, or maybe $100 million for full-year 2010.  If we capitalized this flow at 6%, a low number but we’re also hopefully at a very low point for cash generation, that would yield a value of about $1.7 billion.

WYNN has about $2 billion in cash.

Add the three pieces up and we get about $11 billion, or about the current market cap.

In other words, assuming Macau perks along and Las Vegas stays at the status quo, WYNN is fairly valued now.

What could go right, in a way that would make this number too low?  1128 could earn HK$1 instead of HK$.80, which would raise our sum of the parts by about US$ 2 billion.  Or, Las Vegas operations could get better, faster than anticipated, either by the market starting to grow again or WYNN taking market share.

Either could happen.  I think the first is more probable, but the second would have more positive leverage on profits and would come as a bigger surprise.

Personally, I’m content to watch and wait–though my wife and I may donate some stock we bought a year ago to charity.


MGM Mirage’s choice: leave Atlantic City rather than sever ties with “unsuitable” Pansy Ho

March 19, 2010 By in Casinos, Entertainment, Industry Analysis, Stock ideas Tags: , , , , , , , Leave a comment

Why the New Jersey Casino Control Commission is important

The New Jersey Casino Control Commission came into prominence as the most vigilant of the state government agencies overseeing legalized gambling in the Seventies, when Atlantic City was establishing itself as a gaming destination.

At that time investors generally avoided what publicly traded casino companies there were, fearing that the industry had associations with organized crime that would express themselves in money laundering, underreporting of profits or other illegal activities.   But the rigorous application process established by the Commission and the careful screening by its Enforcement Division were, I think, the main vehicles in reversing investor opinion to its present, casino-friendly state.

What it decided about MGM

MGM entered the Macau gambling market through joint venture.  The original concept was to have Stanley Ho as a partner, but even typically less rigorous US regulators voiced strong opposition, given Mr. Ho’s links with organized crime in Asia.  So the company decided to do a deal with Pansy Ho, one of Stanley Ho’s daughters, instead.

This change was enough to allow MGM to get the approval from Nevada regulators for the expansion into Macau–but not from New Jersey.

The local Trenton newspaper, the Trentonian, has a good summary of the New Jersey Casino Control Commission’s findings.  The 70+ page report from the Commission’s Division of Gaming Enforcement–released with the most sensitive data edited out–also has interesting information, although the reading is a bit tedious.

The Gaming Enforcement findings:

1.  Stanley Ho is “unsuitable” to hold a casino license in New Jersey because ” numerous governmental and regulatory agencies have referenced Stanley Ho’s associations with criminal enterprises, including permitting organized crime to operate and thrive within his casinos.” , and

2. “upon concluding that it could not partner with Stanley Ho or entities under his control, and without conducting adequate due diligence on her suitability, MGM simply substituted Pansy Ho as its joint venture partner despite her financial dependence upon Stanley Ho and his companies.”  In other words, Ms. Ho was little more than a figurehead representing her father’s interests.  In addition, the top management of MGM also seemingly “forgot” to supply the regulators or its own internal compliance department with negative suitability information they learned about Ms. Ho.

The Casino Control Commission’s decision

The Commission, in a decision rendered last May but just made public this week, told MGM to either sever its ties with Ms. Ho or it could no longer operate a casino in the state.

MGM’s response?

It has decided to sell its 50% interest in the Borgata casino and leave New Jersey.  I assume that this is a purely commercial decision–based on the idea that MGM’s Macau interests are more profitable and have better growth prospects than its Atlantic City holdings.

about Stanley Ho

He’s never been indicted for, or convicted of, any offense relating to his asserted underworld connections.  There’s no proof that he ever was, or is now, a triad member.  Of course, given Mr. Ho’s advanced age, initiation rites might have been three-quarters of a century ago.

It seems to me that this is a taboo subject among securities analysts in Hong Kong.  In twenty-five years of watching that market, I’ve never read an analyst report or met privately with an analyst where the subject of triad links ever came up.

On the other hand, gaming authorities in Australia, Singapore and the United States are convinced enough about Mr. Ho’s associations that they have made it clear that no one associated with Mr. Ho will receive a casino license.

In response to the release of the New Jersey report, Mr. Ho has denied any triad involvement.

Why, then, would MGM partner with the Ho family in Macau?

In the initial round of concession-granting, the Macau government selected Mr. Ho, the incumbent, plus WYNN and LVS.  MGM submitted an application but reportedly finished fifth.  One might reasonably defend this decision by pointing out that WYNN, a specialist in high-end gambling, and LVS, a specialist in conventions, both have more focussed skills than MGM.

In the second round of concession-granting, which involved sub-concessions being issued by the original three, MGM elected to partner with Mr. Ho rather than one of its Las Vegas rivals.  I imagine that MGM regarded this as purely a commercial decision to select the lesser of two evils, since Mr. Ho has no (and can have no) competing Las Vegas interests.  I disagree with the choice.

Investment implications: Continue reading →