a new casino for Connecticut, good or bad?

Shortly after I retired as a portfolio manager, I went to work part-time at the Rutgers business school in Newark.  No, it wasn’t to teach investing or portfolio management–accreditation rules effectively rule this out for anyone without a PhD in (the alternate reality of) academic finance.  Instead, it was in a practical management consulting class run by adjuncts with real-world experience and advising mostly small businesses.  (We were all fired several years later and the program–the only profitable area in a school dripping red ink–dissolved.   …but that’s another story).

Anyway, one of the projects I mentored involved a casual dining restaurant.  A student had a connection with a very successful pizza restaurant whose approach might serve as a model for our client.  The pizza owner said he had superior results.  How so?  …he had cloth tablecloths and fresh flowers on each table; the food was good;  he spoke with every customer himself to make sure everyone knew they were welcome.  In fact, he drew customers from as far as 15 miles away.

How far was the closest competing pizza restaurant?   …30 miles.

Put a different way, in this state customers hungry for pizza went to the closest restaurant, despite what this owner thought was his special charm!

It’s the same with a lot of other things, including local casinos.

In the case of Connecticut, the two existing operators are coming under threat by the decision of Massachusetts to legalize gambling in that state.  In particular, it’s allowing MGM to open a casino just on the northern border of Connecticut in Springfield, MA.

Hartford has just responded by authorizing a new casino in East Windsor just on the Connecticut side of the border from Springfield, to be jointly run by the two incumbent operators.

This is an interesting case.  Let’s take a (simple) look:

My pizza rule says customers go to the closest casino.   If that’s correct, the new Massachusetts casino will reduce the existing Connecticut casinos’ revenue by a substantial amount.  Hartford estimates that amount at a quarter of the current business, about $1.6 billion.   If they want to keep the remaining 75%, however, it seems unlikely to me that the casino operators will be able to reduce their costs by much.  So their profits could easily be cut in half.

And when the proposed East Windsor casino opens?

Figure that East Windsor will take back from Springfield half of the revenue initially lost.   That’s $200 million a year.  From the state’s point of view, any revenue gain means higher tax collections–in this case, about another $35 million a year.  So it’s understandable why East Windsor has gotten a legislative seal of approval.  It’s not clear, however, that the casino operators are going to be better off–because they’re taking on the expense of a third location in order to protect 12% of their current revenue.

 

We’ve also seen this movie before in the northeast US, with the effect on Atlantic City of gambling legalization in Pennsylvania, and on Pennsylvania of legalization in Ohio and Maryland.  One additional complication in this instance is that both of the incumbent operators are Native American tribes, for whom maintaining/expanding employment may be more important than profits.  A second is that the new CT casino will be run by two in-state rivals.  That should be interesting to see.

 

 

 

 

 

 

Macau and ATM machines

During its days as a Portuguese colony, Macau was reputed to be a key center used by the mainland underworld to launder its ill-gotten gains.  The main laundromat, as it were, was allegedly the  collection of casinos run under a monopoly granted to the Ho family.

After the return of Macau to Chinese rule, the government moved quickly to break the monopoly and to guide the casino industry toward the Las Vegas model through technology transfer by granting casino licenses mainly to prominent US Las gambling operators with a Disney-esque approach to business.

A second political problem threatening the legitimacy of the Chinese Communist Party began to arise during the last decade as fabulously wealthy political insiders began to flaunt their riches through elaborate, ostentatious gambling jaunts to Macau.  A crackdown ensued, which also served the long-term interests of Macau by strongly redirecting the emphasis of the Macau gambling industry away from high-roller VIPs toward middle class and upper middle class patrons.  This, by the way, follows the development of the gambling market in the US.

During US trading hours yesterday, media reports from Hong Kong surfaced suggesting Beijing was beginning to crack down on middle class gamblers as well as VIPs.  The stories said the daily limit that mainland residents vacationing in Macau are allowed to withdraw from their (renminbi-denominated) bank accounts through a local ATM would be cut in half from–MOP 10,000 ($1300) to MOP 5,000, effective tomorrow.

Given Beijing’s plans for Macau’s economic development, this report made little sense–although, realistically speaking, who knows what Beijing’s day-to-day thoughts are.

The US-traded Macau names immediately dropped by around a tenth in a flattish market.  In today’s Hong Kong trading, Macau gambling stocks fell by 7% or so (expressing about half the negative sentiment in NY)–with the strongest (relative) performance by Ho-controlled SJM.

After the close of Hong Kong trading, mainland authorities “clarified” the initial report, saying that, yes, the per transaction limit on ATM withdrawals by mainlanders in Macau was being cut in half, but that the total daily limit would remain unchanged.  No reason why the clarification took 12 hours to be made.

In early US trading today, Macau-related stocks have made up about a third of their losses from yesterday.

As a holder of Wynn Resorts, Wynn Macau and Galaxy Entertainment, I’m going to sit on my hands.  If I held nothing, I’d be inclined to buy a bit.  My preference would be for the Hong Kong names, however, for two reasons:  the US market is being driven now by dreams of a domestic industrial revival, so foreign casinos aren’t at the top of institutions’ wish lists; and investors who dumped out their Macau holdings in a panic yesterday will be loathe to buy them back at a higher price, at least for a while.

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 evolution of Macau gambling

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.

Atlantic City gambling–withering on the vine

history

Casino gambling was legalized in Atlantic City in the 1970s.  The faded beach resort became an instant darling of US gamblers and of Wall Street (not two mutually exclusive sets)  …at least until the world worked out that there were no hotel rooms, the  weather got really cold in the winter, and the Garden State Parkway could only take so many cars before turning into a parking lot.  Only the first of these warts was easily fixable.

Steve Wynn was the first to smell the coffee, selling his Golden Nugget and returning to Las Vegas to begin building  today’s Las Vegas Strip.

Nevertheless, Atlantic City gaming revenues continued to grow, slowly, peaking in 2006 at $5.2 billion and declining steadily since.

today

The Star Ledger recently reported that last year Atlantic City was edged out by Pennsylvania (which legalized casino gambling in 2004) as the second-largest casino market in the US.  Both had yearly gambling revenues for 2012 of slightly more than $3 billion.

Atlantic City has clearly been damaged badly by Pennsylvania casinos.  But the Star Ledger notes that PA gambling revenues would have been higher had it not been for western the western part of the state encountering competition from a new casino in Cleveland.

the future 

Governor Christie may not have been happy when the Atlantic City mayor urged residents not to evacuate to higher ground in advance of Superstorm Sandy.  Nevertheless, that hasn’t stopped several recent developments aimed at making Atlantic City gambling more attractive (and therefore more tax-generative).

These may be a glimpse into the future for casinos in the US.  They are:

1.  The Borgata, the most successful Atlantic City casino, will begin to offer in-room video slot machine and poker gambling through TV.  The next step will apparently be allowing mobile gambling on the Borgata wi-fi network using smartphones and tablets for all casino guests while on casino property.

2.  Governor Christie, in vetoing an internet gambling bill passed by the legislature, said he would approve it if minor modifications are made.

3.  The New Jersey Casino Control Commission, the toughest regulator in the country, seems to be hinting that it could reconsider its ban of MGM International from casino operations in the state.  MGM lost its license to operate in New Jersey and was forced to divest its 50% interest in the Borgata (it’s in a trust) in 2010 because it would not sever its ties with Pansy Ho, whom the regulators determined was linked to organized crime in China.

implications

Governor Cuomo of New York appears to be very susceptible to the blandishments of the Lim family of Malaysia, which wants to build a Las Vegas-style casino somewhere (anywhere?) in NY.  Massachusetts is now considering proposals for building casinos as well.  So it seems like competition will intensify in coming years, not lessen.

Gambling revenue is a straightforward function of GDP.  Without strong GDP growth, the success of new gambling venues will depend almost completely on cannibalizing revenue from other locations.  We can see this clearly in Pennsylvania vs. New Jersey.

Innovation will be driven by the states losing market share.  Legalizing internet gambling seems to be the clear next step.  Weakening requirements to obtain a gambling license looks like another possibility.

Nearby destinations will likely be hit the hardest, but regional developments can’t be having a positive effect on Las Vegas visitation.

 

Macau gambling results: June 2011

The Macau Gambling Inspection and Coordination Bureau reported the June 2001 gambling win for the SAR’s casinos prior to the opening of New York trading on July 1st.

The numbers, in millions of patacas:

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%

Source:  Macau Gambling Inspection and Coordination Bureau

June was the first month in 2011 when market winnings exceeded those of the same period of 2010 by more than 50%.  The monthly take was the second-highest in the history of the SAR, exceeded only by May 2011–when results were aided by the Golden Week holiday.

The bullish GICB report seems to me to be behind the sharp rise on Friday in the price of the US parents of Macau gambling stocks–WYNN, LVS and MGM.

The case of the Hong Kong-traded subsidiaries, Wynn Macau (1128), Sands China (1928) and newly-listed  MGM China (2282), is a little more complicated.

1128 and 1928 have been correcting since early May, despite news of the extremely strong Golden Week results, as Hong Kong investors rotated toward locally-controlled, more mass market-oriented (and operationally weaker) casino operators. MGM China joined the other two almost the moment it IPOed.   The relative underperformance of the WYNN, MGM and LVS subsidiaries appears to have ended about a week ago, perhaps in anticipation of the June GICB report.

Trading in 1128, 1928 and 2282 over the next few days will be interesting to watch, the main question being the multiple that the market is willing to award to these shares.

In very simple terms, a 40%+ increase in yearly revenues will likely translate into a 60%+ increase in profits.  For, say ,1128. that would imply 2011 eps of HK$1.35-$1.40 (my guess is that the actuals will be higher, but then I own 1128, WYNN and LVS shares).  Wynn Macau peaked at 20x eps before falling by about 20%.  It seems to me that 20x isn’t particularly generous for the kind of growth this industry is exhibiting.  Will 1128 be able to exceed that multiple in the current rally?