Category Archives: Casinos

gambling stock arbitrage

December 17, 2013 By in Asian economic development, Casinos, Entertainment, Hong Kong, Industry Analysis, Japanese development, Macau, Securities regulation, Stock ideas Tags: , , , , , Leave a comment

on a winning streak

Macau gambling stocks have been on a tear recently.

During the past three months, the S&P 500 is up by 4.5%, the Hang Seng down by 1.8%

Over the same time span, Galaxy Entertainment (HK: 0027) is up by 24.4%; MGM China (2282) is up by 30.3%; Sands China (1928) has gained 32.8%; and the current star of Hong Kong (although a severe laggard until the current run), Wynn Macau (1128) is up by 40%.

The three months have seen advances by the US parents of the Macau gambling stocks, as well, but of a lesser magnitude.  MGM is up by 12.5%. LVS by 21.5% and WYNN by 21.9%.  MPEL, an unusual situation, is ahead by 25%.

arbitrage situation?

This performance differential has created an unusual valuation situation:

—WYNN, for the first time I can remember, is trading at a slight discount to the value of its interest in Wynn Macau, meaning the company’s US holdings–the brand name, royalty/management fees from 1128, and the Las Vegas operations–are being valued on Wall Street at right around zero.

—LVS is a less clear case, since its valuable Singapore gambling subsidiary is 100%-owned, and therefore not publicly traded.  Still, LVS’s interest in 1928 represents about 3/4 of the parent’s market cap.  Even if we valued Marina Sands at 40% of the worth of Sands China, a figure I think is too low, the total of the two subsidiaries represents about 115% of LVS’s worth on Wall Street.

—MGM, in my view still by far the weakest of the Las Vegas Big Three, doesn’t get my hands racing to fill out a “buy” ticket.  But MGM does look far less risky than it has seemed to me in the past.  That’s because the value of its holding in MGM China now represents over 70% of the parent’s market cap.

why the strength in Hong Kong?

…and why should 1128 be leading the pack?  After all, Wynn Macau is presently capacity constrained, and its new casino complex won’t open until 2015.

I think the ongoing rebound in the Macau gambling market is part of the reason the stocks are strong.  Wynn Macau has been getting attention because it has been a severe laggard among the Macau casino companies in Hong Kong trading over the past year.  But I think there’s another important reason as well:

To my mind, the Hong Kong market has already understood the enormous potential size of the mainland gambling market in a way it failed to do initially.  I think it also has come to appreciate the earning power of the Las Vegas gambling model, which it woefully underestimated at first.  Now, the mind of the market, realizing that Macau has a superior product, is turning to the possibility that the Macau gambling companies can duplicate their success in other areas.  The catalyst for this is the introduction of a bill in the Japanese Diet to legalize casino gambling in that country.

What I think we’re seeing now is an anticipatory reaction to the possibility that one or more of the Macau gambling companies will get a Japanese casino license.

buy the parent or the subsidiary?

This is an age-old question–the pure play or the place where the brains of the operation have their own money.

The standard answer is that the safer place is with the parent, but the greater initial sizzle is with the subsidiary.

this situation is a little different

1.  It isn’t clear that everyone in Macau has the money or the inclination to apply for a license in Japan.

2.  It’s not a lock that everyone who applies will pass the local “suitability” tests.

3.  It isn’t clear what part of some of the various companies would hold a Japanese license.  A lot probably depends on the tax regime, but my initial thoughts are:

–for Galaxy Entertainment (0027) there’s no issue

–for WYNN, I presume a license would be held in 1128

–in the case of MGM, having a license inside 2282 means holders of the parent only have a half interest

–for LVS, it’s harder to say, since the company already has two completely unconnected Asian subsidiaries.  It could easily establish a third, meaning that Sands China holders would be left out in the cold.

Macau gambling developments, December 2013–a longer view

December 6, 2013 By in Asian economic development, Casinos, Current Market Thoughts, Entertainment, Industry Analysis, Macau, Stock ideas Tags: , , , , , , , , Leave a comment

The Macau Gaming Inspection and Coordination Bureau published its monthly “Gross Revenue from Games of Fortune” report (I love the names) a couple of days ago.  Here it is:

Monthly Gross Revenue from Games of Fortune in 2013 and 2012
Monthly Gross Revenue Accumulated Gross Revenue
2013 2012 Variance 2013 2012 Variance
Jan 26,864 25,040 +7.3% 26,864 25,040 +7.3%
Feb 27,084 24,286 +11.5% 53,948 49,325 +9.4%
Mar 31,336 24,989 +25.4% 85,284 74,314 +14.8%
Apr 28,305 25,003 +13.2% 113,589 99,317 +14.4%
May 29,589 26,078 +13.5% 143,178 125,395 +14.2%
Jun 28,269 23,334 +21.1% 171,447 148,729 +15.3%
Jul 29,485 24,579 +20.0% 200,932 173,308 +15.9%
Aug 30,737 26,136 +17.6% 231,670 199,444 +16.2%
Sept 28,963 23,866 +21.4% 260,632 223,310 +16.7%
Oct 36,477 27,700 +31.7% 297,109 251,011 +18.4%
Nov 30,179 24,882 +21.3% 327,288 275,893 +18.6%

Source: Macau DICJ.   Figures in millions of MOP.

Another very healthy month, in what has been for the Hong Kong consensus a surprisingly good year.  My only caution would be against extrapolating from the current year-on-year comparisons.  Yes, current figures are likely to trend upward in 2014 (by 1o%+).  But May through November of 2012 was an unusually weak period for Macau, as a result of overall global economic softness + uncertainty surrounding the once-in-a-decade change in Communist Party leadership on the mainland.  Comparisons will get much tougher, starting with December.

a pat on the back for Macau

In just over a decade the SAR has created a booming Las Vegas-style gambling market from pretty much nothing.  While doing so, it has also severely weakened the relative power and influence of the previous gaming monopolist, the Ho family, with its purported connections to the Chinese underworld.  By carefully controlling capacity additions and by banning cutthroat price competition, the industry has enjoyed almost uninterrupted prosperity.  So too the SAR>

where to from here?

This question has two aspects to it:

1.  how does the Macau gambling market evolve?  and

2.  how do the Macau gambling companies evolve?

My thoughts:

1.  The next several years are pretty much set.

New capacity is being added; new transportation links are being forced that will make Macau accessible to increasingly large portions of the mainland.  All-but-professional super rich VIP baccarat players are being supplemented by middle class tourists.  This latter development is in its infancy.

Three years down the road, Macau gambling revenue will be at least a third higher than now.  Spending on hotels/restaurants/shows/shopping?    …make up a number.  Double what it is now?

What then?  My guess is that if becoming the Las Vegas of 2000 was Macau’s aspiration, it’s fervent desire today is not to become the Las Vegas of 2013, a city mired in overcapacity.  I think the SAR will take its foot off the gaming pedal and (mixing my metaphors) begin to steer the economy in a non-gaming tourist direction.

I’m not saying the party is over–far from it–but maybe we’re eating the main course now.

2.  Casinos are gigantic cash flow generation machines.  Left to their own devices, they’d just plow that money back in to new capacity in Macau.  But so far they haven’t been allowed to give in to these impulses, nor will the future be any different, in my view.  What do they do with the money they’re going to be awash in.

Some of it will go to permitted new expansion in Macau. Some will go to repay debt–although with borrowing costs close to zero, no one is going to be in a great rush to pre-pay borrowings.

Some may end up in real estate development nearby (Hengqin, anyone?).  But real estate alone doesn’t make use of the casino operator’s special skills.

Dividends?   …probably so, but especially if the companies with US parents can do so in a tax-efficient way.

However, I think the next serious turn of the wheel will see at least some Macau players using their companies’ cash flow to build casinos elsewhere.  This could be a very interesting investment development, with Macau casino firms turning into multinational Asian gambling conglomerates.  Galaxy Entertainment, for example is already talking about this openly, with Japan as its first target.

This may well also be what Wynn ends up doing.  The Las Vegas Sands case is more complicated, since that firm has two Asian subsidiaries, one in Macau and one in Singapore.

Macau gambling, October 2013

November 8, 2013 By in Asian economic development, Casinos, China, economics, Entertainment, Hong Kong, Industry Analysis, Macau, Stock ideas Tags: , , , , , , , , , , , Leave a comment

The Macau Gaming Inspection and Coordination Bureau (DICJ) recently released its tally of aggregate gambling winnings of the Chinese SAR’s casinos during the holiday month of October.  The results, in MOP millions, are as follows:

Monthly Gross Revenue from Games of Fortune in 2013 and 2012
Monthly Gross Revenue Accumulated Gross Revenue
2013 2012 Variance 2013 2012 Variance
Jan 26,864 25,040 +7.3% 26,864 25,040 +7.3%
Feb 27,084 24,286 +11.5% 53,948 49,325 +9.4%
Mar 31,336 24,989 +25.4% 85,284 74,314 +14.8%
Apr 28,305 25,003 +13.2% 113,589 99,317 +14.4%
May 29,589 26,078 +13.5% 143,178 125,395 +14.2%
Jun 28,269 23,334 +21.1% 171,447 148,729 +15.3%
Jul 29,485 24,579 +20.0% 200,932 173,308 +15.9%
Aug 30,737 26,136 +17.6% 231,670 199,444 +16.2%
Sept 28,963 23,866 +21.4% 260,632 223,310 +16.7%
Oct 36,477 27,700 +31.7% 297,109 251,011 +18.4%

Source: Macau DICJ.

 

The monthly “win” is an all-time record for Macau, and, in my view, stunningly good.

Two factors appear to be at work:

–the expansion of casino capacity and the parallel development of non-gambling entertainment (at the insistence of the Macau government) in the Cotai region is broadening the appeal of Macau as a tourist destination and drawing in a younger, “merely” affluent crowd in large numbers, and

–the upturn in the Chinese economy is prompting the return of increasing numbers of the enormously wealthy VIP baccarat players who have until now formed the backbone of Macau’s casino industry.

 

What I find interesting is that the Hong Kong-traded Macau casino stocks have been selling off on this good news.  This is partly, I think, because the stocks have been extremely good performers over the first three quarters of the year, as it became clearer that the Chinese economy was beginning to rebound.  The fact that more speculative and less skillful operators in the Macau market have been leading the pack had already been suggesting that the recent run was getting a bit long in the tooth.  In addition, however, I think the pullback we are seeing also is in line with an emerging mood of caution I see building in stock markets around the world.

I don’t think anything is wrong, either with Macau gambling or with the strongest operators.  A while ago, I trimmed my casino holdings a bit, based solely on position size.  Others may be doing the same, only timing their move a bit better than I did.  I expect that as Macau continues to exhibit strong growth in gambling win over the coming months, the stocks will take up their outperforming ways again, with Galaxy Entertainment, Sands China and possibly Wynn Macau in the vanguard.

3Q13 earnings for Wynn Resorts (WYNN)

October 25, 2013 By in Casinos, earnings conference calls, Entertainment, Stock ideas Tags: , , , , , , , Leave a comment

3Q13

After the close yesterday, WYNN reported its 3Q13 earnings results.  Revenue came in at $1.39 billion, up 7% year on year.  Macau was up by 9.6% and Las Vegas by 1.1%.  The company posted EPS of $1.84, much higher than the Wall Street consensus of $1.65, and considerably ahead of the $1.48 WYNN tallied in the comparable period of 2012.

details

In my view, the basic WYNN story remains unchanged for now:

–The company is capacity constrained in the booming Macau market and will remain so until its new casino in the Chinese SAR, the Wynn Palace, opens in early 2016.  In the meantime, it is refurbishing and fine-tuning its existing capacity to boost profits and maintain competitiveness with new casinos currently being opened in Macau.  But it probably won’t keep pace with overall growth in that market.

–Las Vegas is flattish, which is good performance in a city suffering from the combined effects of slow economic recovery in the US, massive overcapacity created at the market peak and the continuing expansion of regional casinos in hard-strapped states looking for new sources of revenue.

The current situation is probably best summarized by the stock’s market capitalization, almost 95% of which represents the value of WYNN’s Asian subsidiary, Wynn Macau.  Some anticipation of the Wynn Palace’s opening must already be included in the latter’s price, since Las Vegas still accounts for a quarter of WYNN’s total EBITDA.

Massachusetts

Perhaps the most interesting thing about the company’s earnings conference call was Steve Wynn’s apparent distress at the shabby way in which he feels his company is being treated by Massachusetts as it applies for a casino operating license there.  The bone of contention seems to be the state regulator’s suspicion of anyone doing business in Macau.

My quick reading of the situation suggests the vetting process is a little weird.  On the one hand, Massachusetts wants to outdo New Jersey as the strictest venue for casino operation in the US.  On the other, it is still considering MGM, which is barred from doing business in NJ.  And it seems to be intimating that applicants will get more favorable consideration if they give financial support to local tourist boards.   It will be interesting, though not crucial for WYNN, to see how the process turns out.  My sense is it will be a much bigger black eye for Mass than for WYNN if its application ends up being rejected.

my take

I’ve been holding both WYNN and HK: 1128 (Wynn Macau) for a long time.  I’ve recently sold my position in the latter, both on the idea that I can buy it back next year, when the new Palace is nearer to opening and because my overall casino holdings (I also own LVS and HK:0027 (Galaxy Entertainment)) had become too large).

WYNN and 1128 are the best casino operators in their markets, in my opinion.  Las Vegas may be boosted by a better climate for the convention/meeting business in Las Vegas next year.  But I don’t see market-beating earnings acceleration for 1128 for at least seven quarters.  Yes, the stock has been a blockbuster performer in Hong Kong recently, up by over a third during the past three months.  But that’s a short-term negative, in my opinion, not a positive.

the heavy half: internet gambling and Native American casinos

October 23, 2013 By in Casinos, Entertainment, Industry Analysis Tags: , , , 1 Comment

The article in the Wall Street Journal that I mentioned in yesterday’s post contains information about the business of an online gambling company in the EU and about a Native American casino in the northwest US.  It contains one piece of disturbing information.

The article leads with a “shocking” conclusion:  almost no one wins when they gamble.

…Duh!

Didn’t anyone look at a table of the odds on different casino games?  Everything favors the house. )The one exception is poker, where, ex the video game variety, the house merely collects a fee for organizing the game.)   To me, the more surprising information is that over 10% of gamblers–both online and in the Naive American casino–who wer net winners over an extended period of time.

The much more concerning statistic is that in the Native American casino, 2.8% of the patrons were big enough losers that they made up 50% of that casino’s profits.  The next 8% provided another 30% of the house take.

From a purely pragmatic p&l standpoint, this is a potentially dangerous concentration.  From a social/ethical point of view, my guess is that a good chunk of that 2.8% are problem gamblers who should be getting medical care and not be allowed to wager.

The pragmatist would begin to calculate how likely it is that legislative action would bar the casino doors to at least some of these golden-egg-laying geese.  The deeper question, however, is whether gambling is like cigarette smoking.  In the latter case, I think no self-respecting person can be a shareholder–and thereby lower the cost of capital of an ethically unsound business and share in the profits of promoting a fatal addiction.

I have several observations:

1.  Other than online poker, it;’s not clear that online gamblers and frequenters of physical casinos have anything in common.  It’s also not clear that although the games have the same names, that the odds for various online games are the same as those in physical casinos.

2.  A career of living and working with professional stock market gamblers makes me think that some people go to casinos expecting to lose and find that has a cathartic effect. (I’ve always felt casino gambling is too much like work to be fun.)

3.  I’m willing to think that the experience of the single Native American casino studied is similar to what happens in other local casinos around the US.  But I don’t think any of these has much in common with the resort casinos in Las Vegas–and certainly nothing to do with the US-run casinos in Macau or Singapore.

4.  The high roller  business (people who gamble $1 million+ in, say, a weekend casino jaunt) is very different from the low roller business examined in the WSJ article.  We have the clearest view of this in Macau, where companies disclose separately their profits from high rollers and from everyone else.  The everyone elses lose on average around 20¢ of every dollar they bet on baccarat.  High rollers lose 3¢–and have about half of that rebated back to they by the casinos as a condition of getting their patronage.

How is this possible?  High rollers know the rules, have lots of experience and want to win.  Low rollers don’t know the rules, like the atmosphere and want to be entertained.

5.  In the resort casino model practiced in Las Vegas and being implemented by WYNN and LVS in Macau, gambling produces half the firm’s profits.  Rooms, food, shopping and entertainment make up the rest.  So, in a purely pragmatic sense, even if all the large losers are  self-destructively in need of medical help and are barred from patronizing casinos, resort casinos would lose at most a quarter of their income.