Category Archives: Casinos

Revel bankruptcy, a sign of Atlantic City’s continuing gambling woes

June 20, 2014 By in Casinos, Entertainment, Industry Analysis Tags: , , , , , , , Leave a comment

Maybe this shows I’m just not so inspired this morning  …because it’s the last day of Spring?

As I was collecting data for this post, I noticed that the Revel casino in Atlantic City filed for Chapter 11 bankruptcy protection yesterday.  The pipe dream of Morgan Stanley master-of-the-universe wannabees, the Revel was supposed to be the upscale entry in a market that caters to little old ladies with buckets of quarters.  Not only was the concept suspect, but the timing was awful, coinciding as it did with the peaking of the seaside town’s gambling win in 2006.  Oddly, in my view, the state government pumped more than a quarter billion dollars into Revel in 2011 to help get it open.  That’s a half-decade after the numbers began to show that the last thing the existing gaming operations needed was more capacity.

Revel is actually the second AC casino bankruptcy in recent months.  Last November, the Atlantic Club (which was, once upon a time, the Golden Nugget) entered Chapter 11; in January it closed its doors.

Aggregate casino revenue for Atlantic City has been dropping steadily since the legalization of casino gambling in nearby Pennsylvania (casinos have since opened in Maryland, Delaware and New York.  More are on the drawing board for NY and Massachusetts).  The current run rate is slightly above half of the peak.

As I wrote about at the time, last year Trenton tried to breathe some new life into Atlantic City, which even in its weakened condition will chip in $150 million – $200 million in tax revenue to the state, by allowing online gambling.

Early predictions by the politicians were that online gamblers would boost aggregate casino win (the amount lost by gamblers) by $1 billion.  Microeconomically minded might observe that some of this new-found money might come from gamblers betting online instead of in the physical casinos–so it might not be a pure gain.  In addition, any redistribution might deepen the plight of any casino that didn’t offer an online option.

But, since the state tax on online gambling revenue is almost double that for onsite betting (15% vs. 8%), Trenton would likely come out a winner no matter what collateral damage might occur.

results so far

Through May, online gambling has generated $53.5 million in casino win, or about $10 million a month.  On the same measure, physical casinos are down by 6.5% year-on-year, or about $74.0 million.   …Ouch.

significance?

While it’s still early days, online gambling in New Jersey so far seems to be a bust for everyone except the tax collector.  So Las Vegas may have little to worry about.

Also, in the Northeast US at least, there appears to be a relatively fixed amount of money that people are willing to spend on gambling in the local area.  New casino openings–of which there are plenty in the pipeline–don’t appear to add much to aggregate demand, but rather mostly shift money from one pocket to another–and add to overall industry costs.  This implies continuing trouble for overbuilt areas like Atlantic City, or, eventually, any of the other states that are adding capacity.

 

 

 

Macau gambling, May 2014

June 5, 2014 By in Casinos, China, Entertainment, Hong Kong, Macau, Stock ideas Tags: , , , Leave a comment

The day before yesterday, the Macau Gaming Inspection and Coordination Bureau (DICJ) posted the total monthly gambling “win” (the amount lost by gamblers) for the SAR’s casinos during May.  The results were below analysts’ expectations, causing a selloff in the US gambling stocks with Macau presence, and a minor negative ripple in the Hong Kong-traded Macau casino stocks themselves.

The year-to-date DICJ results are:

Monthly Gross Revenue from Games of Fortune in 2014 and 2013
Monthly Gross Revenue Accumulated Gross Revenue
2014 2013 Variance 2014 2013 Variance
Jan 28,739 26,864 +7.0% 28,739 26,864 +7.0%
Feb 38,007 27,084 +40.3% 66,746 53,948 +23.7%
Mar 35,453 31,336 +13.1% 102,199 85,284 +19.8%
Apr 31,318 28,305 +10.6% 133,517 113,589 +17.5%
May 32,354 29,589 +9.3% 165,871 143,178 +15.8%

Source: Macau Gaming Inspection and Coordination Bureau

What’s going on?

First of all, and least important, the market had been expecting a 10%+ year-on-year gain in aggregate casino win, based on weekly reports of business results provided by the casinos.  The falloff during the last few days of the month is most likely a random variation in the casino luck factor, one that will eventually be reversed.

More generally, the so-so rate of yoy gain in win is the result of two opposing factors.  On the one hand, increases is betting by mainland high-rollers, the almost exclusive focus of the Macau market over the past decade, have slowed to a crawl.  On the other, affluent mass-market gambling is rising sharply.  Mass market gamblers bet smaller amounts, but lose a much higher percentage of the amount bet than VIPs (who are more or less professional gamblers).  Mass market patrons want entertainment, not necessarily gambling profits, so they don’t watch what they’re doing so closely.  They also spend a lot more on things like restaurants, shows and shopping.  We’ll know more about non-gambling when June financial reports are released by the casinos, but non-gambling profits have been rising sharply from a small base.  It’s important to remember that in the salad days of Las Vegas, non-gambling amounted to half of casino industry profits.  So growth in Macau has potentially a long way to grow.

The overall Macau market is facing capacity constraints that will only begin to easy next year.  In a sense, the current lull in new capacity additions is ending up being luckily timed, since it coincides with a slowdown in the VIP market.

All in all, it seems to me that the March-May gains in casino win are more indicative of what the rest of the year will be like than January-February.

The related stocks have sold off by about 20%–more than I would have expected–in a flat Hong Kong market over the past few months.  Stocks like Sands China and Galaxy Entertainment, which have little VIP exposure and lots of mass market, have declined at least as much as Wynn Macau, which is in the opposite position.

I find the Macau stocks hard to figure out.  It’s not their profit potential, it’s the way they trade in the Hong Kong market.  The current situation of little capacity addition was well-known a year ago.  The VIP slowdown could equally well have been anticipated.  I think the mass market and non-gambling profit development has been much more positive this year than the consensus expected.  In other words, the negatives are no worse, and the positives are a lot better.  Yet the stocks went up last year and have sold off so far in 2014.

My take?  I’m in this for the long haul.  I sold my Wynn Macau quite a while ago and have been looking for a reentry point.  Not yet, though.  I continue to own Galaxy Entertainment and would own Sands China as well, if it were easier for a US citizen to buy.  I’m looking to add to my holdings, but am in no rush.

Macau casinos, after their stock market decline

May 7, 2014 By in Casinos, China, economics, Entertainment, Hong Kong, Industry Analysis, Japanese development, Macau Tags: , , , , , Leave a comment

a weak few months

Macau casinos, and their foreign parents, have been bludgeoned in the stock market over the past couple of months.  Several reasons:

–general worry about stocks that had gone up a lot

–the Ukraine situation, which has unnerved European investors

–fear that the the current anti-corruption/anti-excessive consumption drive by Beijing will hurt the VIP business which has been the heart of Macau casino profits, and

–the possible proliferation of casino openings elsewhere in China, or in other Asian countries like the Philippines or Japan.

what, me worry?

Every portfolio investor acts on small amounts of imperfect information.  That’s why we don’t put all our eggs in one basket (Bernard Baruch to the contrary).   From where I sit, a lot of the negative things now being said about Macau seem to be (mistaken) attempts to explain the stock price drops.   I don’t think they have much factual basis.  Of course, even the best stock market investor is wrong 40%+ of the time.

For what it’s worth, here’s my take:

–So far there’s no hard evidence so far that Beijing’s anti-corruption campaign is having any negative effect on the VIP gambling business in Macau.

–More important, the Macau gambling market is no longer being driven solely by VIPs.  The new sweet spot is the mass affluent, a market segment that’s now the source of most of the SAR’s growth.  How so?  VIPs bet huge amounts, but they’re semi-professional gamblers.  They lose on average about 3% of the amount they bet; the casino rebates half of that, either to the high roller himself or to the middlemen who has brought him there.  So margins are razor-thin.  The mass affluent, on the other hand, are seeking entertainment.  At table games, they make much smaller bets, but they lose about a quarter of what they wager–and they don’t care that much.   A mass affluent pataca bet is worth 15x-20x in casino operating profit what a high roller pataca is.  Hordes of them are now descending on Macau.  (There’s also a shift among winners and losers within the market, but that’s another story.)

The mass affluent also want non-gambling entertainment.  In the salad days of Las Vegas, shows, concerts, restaurants…brought in just as much profit as the casino operations.  In Macau, this business is still in its infancy.  But I see no reason why Macau in the end will be any different.

–Transportation links are still being built to allow more far-flung areas of China to reach Macau, meaning market saturation is still years off.

–It makes no sense to me to believe both (1) that Beijing’s crackdown is aimed squarely at casinos and (2) that the government will give permission for more casinos to open in other areas of China.  But this is what some bears are saying.

–Macau has critical mass and lots of amenities.  Chinese is the dominant language.  Kidnapping high rollers isn’t an issue.  Japanese casinos, whatever they may eventually look like, are years away.  Singapore has already been up and running for a considerable while–and Chinese junket operators aren’t welcome there anyway.  Some VIPs will certainly try out the Philippines or other venues.  I just don’t see this as a big deal.

 

Yes, I trimmed my Macau exposure significantly last year–because my position size was much too large.   At this point, I’m a potential buyer, not a seller.

 

the evolution of Macau gambling

February 5, 2014 By in Casinos, China, Entertainment, Hong Kong, Industry Analysis, Macau Tags: , , , , , Leave a comment

an old fashioned winter here

We woke up to see  two foot snow boulders blocking our driveway this morning, a product of the second of three snowstorms hitting the northeast US this week.

Macau gambling stocks sold off sharply in Hong Kong overnight on reports that the year-on-year revenue gains are starting to shrink in percentage terms.  I find this a little weird.  Of course the comparisons are narrowing.  We’re cycling past the period of weakness surrounding the change in Communist Party leadership in later 2011 – early 2012.  Who didn’t know this?  In particular, who didn’t know this when the stocks were shooting through the roof less than a month ago?

Anyway, on to today’s topic, the evolution of Macau gambling.

— When Macau was a Portuguese colony, it had a single monopoly casino operator, Stanley Ho.  Although I’ve visited a lot of Asian casinos, I never made it to Macau.  Friends told me operations were dull, potentially dangerous and with a strong influence from the Chinese underworld.  …sort of  like Las Vegas in the very early days.

–When Macau reverted to Chinese rule, the new government decided to remake its gambling industry into a Pacific clone of present-day Las Vegas.  To do so, it invited in WYNN–and later LVS–among others, to set up shop.

–The early focus was on the high-roller gambling niche.  This required the least infrastructure.  It tapped an already existing clientele that was able to sidestep the considerable administrative hassle involved at that time in leaving the mainland.  The government intention was always to create a large mass-market gambling result in the SAR, however.

–The high roller business isn’t as easy as it might seem.  Clients are typically highly skilled gamblers, who lose, at high stakes baccarat  (the dominant game in Macau), around 3% of the money they bet.  However, they require perks while they’re gambling.  The intermediaries who steer them to a given casino (sometimes the high rollers themselves) also collect commissions for doing so.  The commissions can amount to half the pre-amenities take by the casino.

At one point, a potentially ruinous bidding war broke out in Macau, as less successful entrants sought to “buy” high roller business by conceding virtually all their profits to junket operators who brought the VIPs.  The government stepped in, though, and set limits on commission payments, saying its goal was to ensure that all the casinos remained profitable.

–During the past year or so, Macau reached the tipping point where there were enough hotel rooms, restaurants and entertainment to foster a mass market tourist business.  There were also much better transportation links (even better ones to come) and a much more relaxed attitude by Beijing toward travel to Macau.

The important thing to note is that mass market gambling operates by different rules.  It’s much more a “normal” resort hotel business.  Negotiation with the client is at a minimum.  Very little personal attention is required.  Gamblers bet less–but they’re generally not very skilled, so they can lose 20% – 30% of the money they wager.  Therefore, allocating casino space to them can still be very lucrative–especially so for operators who don’t have a knack for running high roller operations.

Put in different terms, you no longer need to be Steve Wynn to succeed in Macau.  The market is expanding to include Sheldon Adelson’s wheelhouse, as well.

Two investment consequences:

–most casinos are increasing their allocation of floor space to mass market gamblers because, for them at least, it’s much more profitable to do so.  So they’re making more money.

–the reduction in the number of casinos using price as their main tool to attract VIPs means that downward pressure on the profits for Wynn Macau-like operations is abating, as well.

Everyone becomes more profitable!

PS:  When I wrote this post I hadn’t yet looked at the website of the Macau casino authority.  The DICJ reports that monthly revenue from the SAR’s casinos was up only 7% year-on-year in January.  I think the true run rate is well more than double that figure.  The main reason for the weak reported outcome, I think, is the timing of the Lunar New Year.  As the New York market works this out, both WYNN and LVS, which were each down by over five percent in early trading, have rallied close to breakeven.

Las Vegas Sands (LVS): a revealing 4Q13 earnings report

February 4, 2014 By in Casinos, earnings conference calls, Entertainment, Hong Kong, Macau, Stock ideas Tags: , , , , , Leave a comment

the results

Last week LVS reported 4Q and full-year 2013 results.

The quarter was another very good one.  Revenue (remember, this basically means the amount won from gambling customers) was up 18.8%.  EBITDA (earnings before interest, taxes, depreciation and amortization), smoothed to eliminate the effects of good/bad luck, were up by 25.8%.   Macau was up 55.8%–meaning it was the whole growth story.  EPS, on the same adjusted basis, were up by 35.9% at $.87.

For the full year, the company made $2.90 a share in earnings, and paid out $2.00 a share in dividends.

a tale of three countries

I think for an investor it’s more imformative to look at full-year results than just 4Q13.  It’s easier to see the overall economic underpinnings of LVS this way.

LVS had adjusted EBITDA of $4.767 billion last year.  That breaks out as follows:

1.  the US = flattish, at less than 10% of the total

The US had EBITDA of $475 million in 2013.  That’s up by $30 million, or 6.7% the year prior.  Of the total, about 30% comes from royalties paid to the parent by Asian gaming operations ( to be honest, I’ve never followed up on this detail like I would if I were still working).  The rest is split about 3/4 for Las Vegas and 1/4 for Pennsylvania.

Las Vegas is still suffering from the massive overcapacity created by the major casino operators MGM, LVS and WYNN just as the economy was cresting in 2007.  In addition, revenue-hungry states are continuing to create new gambling capacity within their own borders, the latest being Massachusetts.

So flattish is my best guess for the next few years.

2.  Singapore = flattish at just about 30% of the total

The Marina Bay Sands had hold-adjusted EBITDA of $1.385 billion in 2013, up from $1,366 billion in 2012.

For the first time–or maybe the first time I’m aware of–LVS has stated (more or less) clearly its assessment of its Singapore operations.  The evaluation?  …the operation is mature.  It has been government policy in Singapore from the beginning to discourage local citizens from frequenting either of the casino operations in the island state.  So growth there is out.  Its high background check standards–again, no surprise–mean many VIP junket operators are barred from doing business there.  So any high roller growth will come slowly and be the result of hard work.

So Marina Bay has turned into a $1.5 billion yearly annuity.  Not the outcome one might have hoped for a few years ago from LVS’s huge investment, but not a bad result either.

Note:  Marina Bay has also had an unusually long streak of bad luck, during which the amount actually lost by high rollers has consistently fallen shy of what historical experience would lead one to expect.  (translation:  the actual results have been below the hold-adjusted amount).

3.  Macau = 60%+ of the total–and rising

Macau’s EBITDA in 2013 was $2.907 billion, up 45.6% from the prior year.

Yes, the year-on-year comparison is flattered by relative weakness in Macau during the leadership transition in Beijing two years ago.  So Sands China won’t be up by 50% again in 2014.

More important, mass market gambling–which is the sweet spot for LVS–is just beginning to emerge in Macau (more about this tomorrow).  LVS has the experience and the hotel/casino capacity to take advantage of this new trend.  In what will likely be a 15% growth year in revenue for the Macau market in the aggregate, I think Sands China has a reasonable shot at being up by 20% in–and by a considerably higher percentage in EBITDA.

the stock?

First, I should mention that until recently I’ve been selling bits and pieces of my casino stock holdings (WYNN, LVS, Galaxy) because of position size.  Because of this, I don’t feel any urgent desire to add more.

If I owned none?  I’d be torn between Galaxy and LVS (assuming, as I do, that LVS has created conditions where US citizens can’t buy Sands China–company representatives I’ve spoken with appear to be clueless).  

At 20x forward earnings and a dividend yield of 2.7%, LVS strikes me as appropriately valued today–not cheap, but not that expensive if my view on Macau proves correct.  Personally, I’d be waiting to see how the correction we’re in develops, for the chance of buying the stock, say, 10% cheaper than now.