Category Archives: Lodging

LVS’s 3Q11: very strong, across the board

October 28, 2011 By in Asian economic development, Casinos, China, earnings conference calls, Entertainment, Hong Kong, Industry Analysis, Lodging, Recent Market Action, Stock ideas Tags: , , , , , , , , , , , , , , Leave a comment

the report

After the close of New York trading on October 27th, LVS reported 3Q11 results.  Revenue was a record $2.41 billion, up 26% year on year.  Property EBITDA (earnings before interest, taxes and depreciation and amortization) was up 43.2% to $924.1 million.  EPS were $.55, a 61.8% boost over earnings in 3Q10.  The Wall Street consensus eps estimate was $.52.

LVS shares are up by about 4% in aftermarket trading as I’m writing this.

the details

In what follows, it’s important to remember that what a casino company reports as gambling revenue is not the total amount of money bet, but rather the portion of the money bet that it retains or “wins.”  Over a long period of time, the casino’s winning percentage is relatively steady.  In any given quarter, however, it can move away substantially from the long-run average.  In analyzing quarterly results, we should note any short-term deviations and at least mentally adjust for them.

Singapore

Year on year comparisons for the Marina Bay Sands aren’t that helpful, because the casino/resort complex is so new. I’m using quarter on quarter comparisons, instead.

Gambling activity continues to grow rapidly.  EBITDA, which was $413.9 million for 3Q11 vs. $405.4 million in 2Q11 doesn’t show this clearly, though.  That’s because the high roller winning percentage at Marina Bay was 2.99% in 2Q11 and 2.69% in 3Q11 (LVS thinks the normal range for quarterly win in the VIP segment, by far the casino’s largest, should be 2.8%-3.0%).  The q-on-q decline in winning percentage clipped about $35 million from 3Q EBITDA.  The real quarter on quarter growth rate is 10%+, not the 2%+ the accounts show.

VIPs bet an eye-popping $16.7 billion at Marina Bay during 3Q11.  This compares with $12.2 billion in 2Q11 and $10.2 billion in 3Q10–both breathtaking numbers in their own right.

Macau

Same story here.  EBITDA in 3Q11 was $388.3 million, down $3.3 million compared with 2Q11–at a time when market growth, quarter on quarter, was about 10%.  Adjusting Sands China’s winning percentage up to 2Q11 level adds $40 million to the EBITDA line.  This suggests that Sands China held its own in a growing market, despite not adding any casino space this year.

Sands China’s newest, 13.7 million square foot casino in Cotai is slated to open in five months.

US
I’m going to ignore Bethlehem, PA because it’s so small (EBITDA of $25.2 million in the quarter).

EBITDA in Las Vegas was $94.3 million for the seasonally weak 3Q, up slightly from $92.9 million in 2Q11 but up sharply from $58.3 million in 3Q10.   About $10 million of the increase on a year over year basis is due to higher royalty income from Macau and Singapore.  Most of the rest is a halving in the level of giveaways from the $40 million or so LVS needed last year to get customers to come to its Las Vegas properties.

 

In short, LVS is holding its own in the US and is making money hand over fist in Macau and Singapore.

valuation remains compelling, in my view

(Remember, I own LVS, WYNN and 1128 (if it weren’t for a software glitch Fidelity can’t find/fix, I’d own 1928, too)).

Look first at WYNN, which I consider to have the strongest gambling company management.  Its interest in 1128 is worth about $11.5 billion at today’s market price.  Therefore, the market is valuing the US interests of WYNN at about $5.5 billion.

Next, MGM, the weakest of the big firms.  Its interest in MGM China is worth $3 billion, implying its other interests, including its entanglement with Pansy Ho, are worth $2.7 billion.

What about LVS?  The market in Hong Kong values its interest in 1928 at $17 billion.  Arguably, Marina Bay should be valued at a premium to Sands China.  But capitalizing its earnings on the same basis as 1928 yields a value for the 100%-owned Singapore subsidiary of $25 billion.  This would mean the market values the rest of LVS–Las Vegas and Pennsylvania–at minus $9 billion.  LVS shares would have to be almost 30% higher just to get the needle out of the minus column.

is there a reason for the apparent undervaluation?

A friend who’s a regular reader of PSI asked about ongoing litigation involving LVS, based on a Wall Street Journal article a week or so ago.  I’ll write about this on Sunday.

The litigation may well be a serious issue.  I don’t know.  On the other hand, the stock price already seems to me to be discounting a very unfavorable outcome.

Also, arguably LVS’s leading position in two major Asian markets and its tourist/convention emphasis make it attractive to other countries interested in creating a tourism/gaming industry.  Both WYNN and LVS are seeing synergy effects in Las Vegas from their Asian exposure;  LVS is seeing this in Singapore.  One might therefore expect LVS to be trading at a premium to its competitors, not a steep discount.


WYNN/Wynn Macau (HK:1128)’s new Cotai casino gets government okay: implications

September 15, 2011 By in Casinos, China, Current Market Thoughts, emerging markets, Entertainment, Hong Kong, Industry Analysis, Lodging, Stock ideas Tags: , , , , , , , Leave a comment

the WYNN Cotai project

Last Monday in Hong Kong, Wynn Macau announced that it had received a 25-year concession from the government of the SAR to develop a new casino in Cotai.  The concession consists of 51 acres of land.  1128 will pay a land premium of US$193.4 million and annual rent of US$771,738.

The planned casino, which WYNN has been talking about for the past six months, will likely cost US$3.0-$3.5 billion and will probably debut in 2014 (the concession requires the casino to be in operation within five years).  Given that 1128 already has about US$ 1 billion in cash on the balance sheet and will probably earn another US$2 billion from its existing Macau casino operations before the new venue opens, financing the project will not be a problem.

market implications

I think there are four:

1.  Macau, which I think has done an excellent job of developing the casino industry in the SAR, has been very careful in recent years grant new casino concessions slowly enough that supply doesn’t outpace demand.  The WYNN concession indicates that it believes strong demand from the mainland will continue for at least the next several years.

2.  There had been speculation in Hong Kong that Beijing was upset at the relatively greater success of US casino groups in Macau vs. the incumbent Ho family.  The WYNN concession shows me that this isn’t the case.  All along I’ve believed that the SAR has actually been eager to have US casino operators (why else give an initial concession to WYNN?), for two reasons:  to get the convention/resort expertise of Las Vegas, and to break the power of the triads in the market.

3.  The Hong Kong stock market has apparently begun to worry about what happens to the casino industry in Macau after the concessions granted to current operators end in 2022.  I think these worries are silly–as if Macau would set onerous new terms that would compel operators either to leave or to run their casinos to extract capital rather than expand.  That would turn the SAR from the Las Vegas of China into its Atlantic City–an outcome that would be disastrous both for the casino operators and for Macau.

For those who think that pieces of paper are more important than common sense in these matters, the WYNN Cotai concession agreement requires the company to remain in Macau and run a casino for the next twenty-five years.

4.  There have also been market worries that, because current concessions end in about ten years, western banks won’t finance casino expansion.  For the incumbent operators, this is not a big issue.  For one thing, casinos are so cash generative that a company like 1128 won’t need financing.  For another, mainland Chinese banks are likely the preferred lenders to the casinos.

thoughts on WYNN and 1128

Both WYNN and Wynn Macau have been spectacular performers, year to date.  I don’t think anything is “wrong” with either stock.

WYNN hasn’t participated in the market rebound of the past few days, mostly, I think, because it resisted the preceding downdraft.  1128 is suffering from (misplaced, in my opinion) jitters in the Hong Kong market about the possible rapid deceleration of growth of the Macau gambling market.

For the moment, the US market is, understandably, concentrating on stocks that have been severely beaten down in the market’s fall.  I expect investor interest will return to WYNN soon enough (although I have written October $170 calls on a small part of my holding).

1128, which I also hold, is a more difficult situation to assess.  To US eyes, it’s a fabulous stock.  It’s trading on well under 20x forward earnings, with easily 25-30% earnings growth is prospect–much more if the Macau gambling market remains as strong as I think it will. And there’s the capacity expansion in a couple of years, as well.  Yet Hong Kong investors, who will make or break the market in the stock, appear unwilling so far to differentiate 1128 from its much weaker competition.  And they’re clearly worried about a possible downturn in Macau gambling.  More patience may be required here.

Macau’s August 2011 gambling results: another record

September 2, 2011 By in Casinos, China, Entertainment, Hong Kong, Industry Analysis, Lodging, Stock ideas, Strategy Tags: , , , , , , , , , , , , , Leave a comment

August gaming results for Macau

Prior to the opening of Friday trading in Hong Kong, the Macau Gaming Inspection and Coordination Bureau released its monthly report for August on the gambling “win” of the casinos in the SAR.   Here are the fig

* 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%
May 24,306 17,075 +42.4% 103,334 72,211 +43.1%
Jun 20,792 13,642 +52.4% 124,126 85,853 +44.6%
Jul 24,212 16,310 +48.4% 148,337 102,163 +45.2%
Aug 24,769 15,773 +57.0% 173,106 117,935 +46.8%

Source: Macau Gaming Inspection and Coordination Bureau

Interestingly, despite this unexpected good news all the major Hong Kong-listed casino companies, except China Sands, went down by more than the market (the Hang Seng was off by 1.8% overnight).

The prevailing sentiment in Hong Kong seems to be that the Macau gaming market’s gains will never be any better than this and that a slowdown to 20% growth rate or less is imminent.  The reaction to today’s GICB announcement just confirms the same market reaction–selling–that a recent Deutsche Bank research report expressing the same sentiments provoked.

If extensive press reporting of the researcher’s reasoning–a falloff in Chinese buying of German luxury cars presages a general reduction in spending–are correct, her conclusion is a little loony.  So the DB report probably isn’t the reason for the selling.  But it apparently did voice worries that investors have had, perhaps on general principles, perhaps simply because the stocks have been such spectacular performers over the past year or two.

It is true that 2011 will be a tough act for Macau to follow.  My own feeling, however, is that the SAR has at least a couple of more years of substantially above normal growth before it settles down to an expansion rate more in line with that of China’s nominal GDP.  I think “settle down” would mean 10%-12% annual revenue growth for the market and a 15%-18% annual gain in aggregate profit.

Investment interest would then presumably turn to sorting out relative winners from relative losers. That may be happening now.  My pick for top of the winners’ column is Wynn Macau (1128); my sense is that Hong Kong’s is SJM (0880).

Ultimately, relative earnings growth will determine who’s right and who’s wrong.  For now, it seems to me that the selling of the past week or so among the Macau casino stocks already pretty well discounts the imminent maturity of the industry.  In Wynn Macau’s case, I think the price suggests Hong Kong views it as an average performer–no worse, but certainly no better.

old soldiers fade away; what about old hotels?–how overcapacity shrinks

August 25, 2011 By in Casinos, economics, Entertainment, Industry Analysis, Lodging, Private equity Tags: , , , , , , , , Leave a comment

supply/demand imbalances…

In many cases, imbalances between supply and demand resolve themselves relatively quickly.

–Fresh produce goes bad.

–Clothing wears out, or is lost or damaged–or fashions shift–constantly creating new demand.

–Workers retrain and change careers.

–Technological change makes production equipment, as well as their output, obsolete.

…are difficult with long-lived assets like real estate

But what happens with real estate?

…where structures can be very expensive, are typically funded with borrowed money, may take years to build, generally can’t be relocated and can last for fifty years or more.  They’re also relatively low tech.

In this post, fresh from my visit to Las Vegas, I’m going to write about what happens with hotels/motels, a special case of this real estate question.

motels

These are easier to analyze than hotels, since they cost less and can be built faster.  Often, they’re designed in modular fashion so they can add extra wings of rooms at relatively low expense, if needed.  They also tend, in the US at least, to draw most of their customers from people who have business within a few miles of the motel.

Therefore, new capacity comes in lower increments and is visible to potential new entrants faster than with hotels.  So overcapacity tends to be less severe.

cost pressure points

There are two big costs for a motel operator that I don’t think are readily apparent–the price of affiliation with a national chain, and the need for periodic refurbishment of rooms.  These expenses end up being the big factors in eliminating existing capacity.

Chain affiliation, which may cost 5% or more of revenues, brings two benefits:  a brand image and access to a reservation system to direct potential guests to the motel.

Although guests don’t think about it much, hotels and motels suffer a lot of wear and tear, both in the rooms themselves and in common areas.  So they require a considerable amount of spending on maintenance.  In addition, to keep the rooms new looking in a way that justifies a higher rate, rooms have to be refurbished periodically–say every five years.

The two expense items are interconnected, since maintaining a specified standard of appearance will also be a condition for retaining affiliation with a chain.

When profits are under pressure, in my experience the first area to suffer cutbacks will be maintenance/room refurbishment.  Once these expenditures begin being postponed, it becomes progressively more difficult to catch up, since returning to the former standard is increasingly more expensive.  At the same time, less favorable online user reviews translate into less repeat business.  This compounds the financial problem.

At some point, a motel may fall below the standards necessary to maintain its affiliation with, say, the Marriott chain.  It may, however, still qualify to be a Best Western or Comfort Inn affiliate.   So it “solves” its maintenance/refurbishment problem by switching affiliations.  The motel effectively removes capacity from a higher-price market segment and introduces new capacity to another, lower-price one.

For a given motel, this journey to less expensive market segments may have several steps.  At some point, the building may be sold for alternate use as, for example, a nursing home.  If so, the capacity disappears entirely.

hotels

The same principles apply.  Three differences, however:

–hotels need to achieve a certain amount of occupancy–generally thought of as 30%–regardless of profits, so the building will feel “alive” and safe

–hotels are much larger in scale

–there are no alternate uses.

In Las Vegas, scene of immense overcapacity currently, two additional patterns are evident:

–older and new, but not as conveniently located, properties had been competing on lower price.  Given the new hotels’ need to generate occupancy to create a favorable ambiance, that advantage is diminished.  WYNN, for instance, had been planning to charge $300+/night for its new rooms.  But average room rates are currently around $200, with mid-week rates considerably below that.

–in the case of WYNN, LVS and to a lesser extent MGM,  management fees from Asian operations to the US are supplementing US cash flows, thereby enhancing the location advantage the three have.

signs of strain

You can already see signs of strain–and of capacity leaving the premium segment of the market.  The Wall Street Journal reported yesterday, for example, that Hilton is planning to end its affiliation with the Las Vegas hotel owned by private equity investor Colony Capital.

And MGM is also hoping to be able to blow up its as yet unopened Harmon hotel on the Las Vegas Strip.

walking around in Las Vegas last week

August 24, 2011 By in Casinos, Entertainment, Industry Analysis, Lodging, Property/housing, Retail Tags: , , , , , , , , , , Leave a comment

My wife and I went to San Francisco to see the Giants play two weeks ago.  Then we drove down the coast to Los Angeles to visit relatives.  And we stopped in Las Vegas for a day on the way home, just to see how the city looked compared with our last trip early in the year.

Over the years, I’ve learned that you have to be careful in drawing any firm conclusions about the hustle and bustle you see.  As I’ve already mentioned a long while ago in this blog, I once was in Caesars in Atlantic City at a time when the casino was packed to the gills.   (By the way, I’m not a big casino gambler myself.  I find it too much like work.  But the stocks are simple to analyze and usually generate huge amounts of cash flow.)

I called the company the next day and found out that their profits in Atlantic City were weaker than usual, not stronger.  A main set of doors had broken and no one could get in or out easily.  Few people were actually gambling; most were just stuck, and preventing fresh money from getting in.

Nevertheless, for what it’s worth:

–the city seemed to have far more foreign visitors than in January

–WYNN had a lot more casino patrons

–the Fashion Mall across the street was bustling

–the Bellagio seemed quieter; the visibly worn carpeting in retail areas hasn’t been replaced

–CityCenter appeared a lot quieter than in January

–I didn’t detect much difference with LVS

–every retail complex I saw had at least one vacancy, even WYNN;  CityCenter, understandably had the most empty space.

 

One of the odder aspects of my trip was the controversy that flared up last week over the yet-to-be-completed Harmon hotel in the CityCenter.  MGM is proposing to blow the structure up. (VegasInc has a comprehensive account).  It says the building is a potential hazard in an earthquake, because of construction defects.  Contractor Perini Building Co., which says MGM owes it $200 million+ for its work on the building, asserts any problems are design defects caused by MGM.   Just another day in the desert.