Atlantic City casino gambling

For a couple of years I was an adjunct at Rutgers business school.  I worked on a course where teams of MBA students provided management consulting services for actual companies.  For one project, one of my teams interviewed a pizza parlor owner about the key characteristics of his restaurant that attracted business.  He said:  good food, extensive menu, fast service, friendly staff, tablecloths on the tables.  These enabled him to get customers from as far as 7-8 miles away from his store.

How close was the nearest competitor?   …15 miles away.

All of the attributes he named may have been important to get any customers to his restaurant, but it’s hard not to think that distance is key to defining his market area.  That’s true of any generic bricks-and-mortar business.

…which brings us to Atlantic City.

That beach resort has had its annual gambling revenue cut in half since competing casinos began to open in neighboring Pennsylvania in late 2006.  Additions in Maryland and Delaware haven’t helped, either.  The issue is the same as with pizza. Absent some incredible attraction (think:  Las Vegas), the average gambler will typically choose the closest casino to patronize.

The response of government in New Jersey to the competitive threat has been quite odd, in my view.  It hasn’t been to build up the city as a resort destination or to improve transportation access.  The main thing I’ve seen has been the attempt several years ago to help yet another casino, the Revel, to open, adding new slot machines and table games to a market already awash in overcapacity.

Potential good news is that, after the closing of four casinos (Atlantic Club, Revel, Showboat and Trump Plaza) in 2014, the market appears to have stabilized.  Even online gambling is perking up, having brought in $16+ million in April (although this is still a far cry from the $80 million average monthly take the state had been touting when online was legalized).

The other side of the coin is that Trenton is again “helping” Atlantic City by opening the door to building two new casinos in northern New Jersey.  Local voters will vote on proposals later this year.  Maybe the idea is to stabilize the state’s gambling tax revenue at any cost.  But nothing seems to me more likely to snuff out a nascent recovery in AC than this.


the heavy half: internet gambling and Native American casinos

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.


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.





how mature is the Macau gambling market today?

A Hurricane Sandy note:  Still no internet at home–no sign of Comcast, either.  I’ve been using my phone as a mobile hot spot, but today Verizon failed as well.  Hence the late post.


We have some indirect evidence from the recent actions of the Macau government, which has been especially careful to pace growth of casino operations in the SAR in order to avoid overcapacity.  The authorities have approved a total of five big new casino development plans for the Cotai area, with completion scheduled over the next three-five years.  That’s on top of projects already under way.  But although I think trust in the good sense of the government is justified by its behavior over the past decade, that’s a particularly slim reed to depend on in making an investment.

…not so much

a.  visitation

Luckily, there’s a substantial amount of tourist data compiled by the Macau Statistics and Census Service available to us.  The information below summarizing the casino penetration of various Chinese provinces is MSCS data that I’ve taken from the 3Q12 Las Vegas Sands quarterly earnings report.  I’ve reorganized the presentation a bit.

Over the 12 months ending September 30th,  11 million visitors came to the SAR from other parts of China.  Let’s assume they all came to gamble.

Guangdong:  Of that number, 8.1 million, or 74% came from neighboring Guangdong province.  Guangdong has a population of 104 million, so the number of visitors (I don’t think it matters that many people will have come more than once) equals 8% of the population.  The number of visitors from Guangdong grew over the past year, but by only 4%.

the rest:  Macau also draws from other provinces in eastern China, whose population totals 262 million, or 2.5x that of Guangdong. The number of visitors from those provinces last year amounted to 1.1% of their populations.  The visits break out as follows:

Hunan, 66 million people, 596,000 visits, 27% year on year growth

Zhejiang, 54 million people, 608,000 visits, 11% yoy growth

Fujian, 37 million people, 877,000 visits, 4% growth

Chongqing, 29 million people, 201,000 visits, 36% yoy growth

Shanghai, 23 million people, 422,000 visits, 11% yoy growth

Beijing, 20 million people, 426,000 visits, 14% yoy growth

Tianjin, 13 million people, 130,000 visits, 47% yoy growth.

The province that jumps out at me is Fujian, just to the northeast of Guangdong.  It seems to be showing the same flattening out of visitor growth seen with Guangdong, but at a visitation level  = 3% of the population vs. 8% in Guangdong.

If we think that the non-Guangdong provinces listed above will reach maturity at the Fujian level of 3%, then those provinces will yield another 5 million or so visitors over the next few years before growth flattens out.  That would imply close to 50% growth in visitors for the Macau gambling market before the industry would need to look to the other 2/3 of China for growth.

If we thought that Fujian is outlier of some sort, and Guangdong is a better model, then the non-Guangdong provinces could yield up another 17-18 million visitors, almost tripling the current size before the casinos have to look for new gamblers in the 2/3 of China Macau doesn’t yet service.

As with most things, the truth of the matter is probably somewhere in the middle.

One other note about the visitor numbers.  To some degree, the number of gamblers who come to Macau is a function of the amount of casino space available for them to use.  Until the past six months, the market seems to me to have been capacity constrained.  If so, the visitation numbers and growth rates we’re using could be uncharacteristically low.

In addition, the 12 months ending in September represent the worst period of the current post-Great Recession slowdown–another reason to think that the current visitation numbers represent less than the growth the market will see in coming years.

b. spending

Market revenue growth is a function of both the number of gamblers and of the amounts that they bet.  Growth in visitors over the past year was just under 5%.  But the amount won by the casinos over the same period was up about 15%, implying the average visitor bet 10% more than in the prior year.

In my experience, this makes sense.  The average amount bet in a given market rises in line with nominal GDP.  There’s no reason this should change.

c. adding a + b

If the number of visitors rises by 5% per year on average and the amount spent goes up by 10%, then the Macau market will experience 15% annual revenue growth.  If so, five years from now the number of visitors will still represent much less than 3% penetration of the six non-Guangdong, non-Fujian markets listed above.  And gambling revenue in the SAR will have doubled in size.  I think that’s a bare minimum.

Wynn Resorts’ 3Q12: Macau (HK:1128) flat, Las Vegas picking up, big dividend

the 3Q12 earnings report

WYNN reported earnings for 3Q12 after the market close on October 24th.

Revenues came in at $1.2985 billion, flat with $1.298billion collected during 3Q11.  Net income was $149.2 million, 12.5% higher than the $132.6 million posted in the comparable period last year.  Due to a sharp reduction in share count from 125.9 million to 100.9 million, eps showed a much sharper 41% increase, at $1.48 vs $1.05. (The shrinkage in outstanding shares is due to the forced cancellation of 24.5 million shares formerly owned by Aruze USA.)

Results exceeded the Wall Street analysts’ consensus eps estimate of $1.34.

WYNN also announced a special dividend of $7.50 a share to accompany the regular 4Q payout of $.50.  In addition, in its conference call the company said it would increase the regular dividend to $1/share, starting in 1Q13.


Property EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) for the quarter was $402.6 million, vs $381.1 million in 3Q11.  That breaks out into $292.2 million achieved in Macau and $110.4 million in Las Vegas.


If we subtract out from Macau results the portion owned by the investing public (including me) rather than Wynn Resorts, Macau accounts for about 2/3 of WYNN’s profits.  Over the past few years, Macau has also accounted for virtually all the earnings growth WYNN has achieved.

Wynn Macau earnings are now flattish, however, for several reasons:

–an economy-related slowdown in Chinese VIP gambling

–the opening of new casinos by competitors.  If nothing else, the novelty factor draws business to the newest venues, at least for a while

–Wynn Macau is at, or near, the capacity limits of its current physical plant.

Yes, the Macau government has given 1128 permission to build a new casino in Cotai, but that’s not scheduled to open until Chinese New Year in 2016.

In the meantime, we should expect no better than growth in line with the market for the Wynn properties in Macau.  But they will continue to generate huge free cash flow for shareholders and large management fees for the parent.

Las Vegas

EBITDA in Las Vegas is up by $25.2 million, or almost 30%, vs. 3Q11.

Most of the increase comes in casino operations.  About half the casino gain is from a return of the house “win” percentage to normal from last year’s unlucky lows.  The rest is genuine improvement in the amount of money wagered in the Wynn/Encore complex.  That’s a really good sign.

the dividend

As I mentioned yesterday, WYNN is in the unusual position of generating very high free cash flows, while having no current investment projects that need them.  WYNN is certainly not going to expand in Las Vegas, which is still plagued with substantial overcapacity.  The new Cotai project won’t need a lot of money soon, and it’s going to be financed mostly with debt, in any event.  Also, in today’s ultra-low interest rate environment, it makes little sense to repay cheap borrowings (arguably, one should be adding to debt, not subtracting).

So WYNN is electing to distribute much of its excess cash to shareholders.  1128 will likely soon follow suit.

buy or sell?

I hold both WYNN and 1128.   …LVS, too.  I think LVS is the cheapest of the three, and the only one I’d buy at today’s prices.

But I’m happy to hold the other two.  The Macau gambling market will likely be considerably better next year than this, although lack of capacity will be somewhat of a drag on 1128.  Las Vegas, where WYNN has considerably more operating leverage, will continue to make progress, I think.  And, as the cliché goes, with considerable dividend income I’m being paid to wait for earnings to accelerate.

what makes casino stocks interesting investments

I started covering casino stocks as a securities analyst around 1980.  At that time, Atlantic City was still the hot, fast-growing market that investors focused on, although the bloom there was already coming off the rose.  Las Vegas was a backwater.  Neither Singaporean nor Australian casinos existed (legal ones, anyway).  Macau, then a Portuguese colony, was a Ho-family monopoly.

In those days, casino operators basically gave away food, hotel rooms and entertainment.  Non-gaming operations were cost centers, existing solely to induce customers to visit the gaming floors.  That situation has changed dramatically over the years.  In pre-Great Recession Las Vegas, which is the gold standard for today’s global gaming industry, non-gambling operations had risen to equal importance–and profitability–with the gaming floors.

It’s not so much that I find the gambling activities themselves so interesting.  As a professional portfolio manager, they used to remind me a lot of work–but with substantially diminished chances of making money.

Instead, what attracted me to casino stocks as an investor–and still does– is that:

–casinos are very cash generative once they’re up and running, and

–they’re relatively simple to analyze.

Under most circumstances, growth in gambling revenue is a direct function of two variables.  They are:  the increase in nominal GDP of the area where target customers live; and any increase in casino floor space.  So gains in gambling earnings are highly predictable.   Resort profits aren’t as easy to project, but they’re not much more difficult, either.

One caveat:  like many commercial property-based businesses, expansion of Las Vegas-style casinos only comes in $1 billion-plus increments.  So the gaming industry can be subject to periodic bouts of overcapacity, when, after a run of profitable years, everybody in a certain area decides to make a major expansion at the same time.  Think of the current situation in Las Vegas–although that’s by far the worst overcapacity I’ve ever seen.

Funnily enough, it’s precisely the disastrous last-decade expansion in Las Vegas and the current slowdown of gambling in Macau, where the Big Three of American casinos (Wynn, Sands and MGM) all have operations, that make WYNN and LVS attractive.  (As regular readers will be aware, I’m not a fan of MGM.)

Why?  The companies are generating tons of cash and they have no place to plow it back in to new casinos.

In the case of LVS, this means it’s repaying borrowings much faster than I think the consensus realizes.  As for WYNN, the company has just announced a special dividend of $7 a share.  It’s increasing the regular quarterly payout as well, from $.50 to $1.  This means the shares have a prospective yield of  3.4%.

More on WYNN tomorrow.


Macau gambling market results: another record high in May 2011

The Macau Gaming Inspection and Coordination Bureau reported on June 2the monthly win for the SAR’s casinos during May 2011..  As the table below shows, thanks both to a successful Golden Week and to the opening of new venues, the take was a record $24.3 billion patacas, almost 20% ahead of the previous record posted just the month before, in April.

Monthly Gross Revenue from Games of Fortune in 2011 and 2010     MOP millions
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%
 Source:  Macau Gaming Inspection and Coordination Bureau

The biggest winner during the month  appears to have been Galaxy Entertainment, which opened a giant new casino, the Galaxy Macau in Cotai, around mid-May.  The largest market share loser seems to have been Wynn Macau.

Reaction by Hong Kong investors to the May record  has, so far, been muted.  Several reasons why:

–There have already been a series of months of 40%+ year on year gains in casino win recently; the fourth no longer carries the same positive surprise value that the first did.

–MGM is meeting with investors as part of its IPO process, and other publicly traded Macau casino companies have been presenting at investor conferences.  So the news of a strong Golden Week and the expansion of the market due to the Galaxy Macau has already been disseminated.

–I think we’re reaching, at around 20x current year results, the limits of the price-earnings multiple expansion that the Hong Kong market is willing to permit for Macau casino stocks.  Unless/until the market changes its mind, it seems to me that no stock will trade at more than 20x, no matter what current profit growth may be.  If so, the stocks will either tread water, or move simply in line with the market, until investors begin to discount 2012 prospects.

Wynn Resorts’ 4Q10: spectacular results from Wynn Macau

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


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.