Tag Archives: China

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.

Las Vegas Sands (LVS) and Sands China (HK: 1928): 3Q13 earnings

October 18, 2013 By in Casinos, China, earnings conference calls, Entertainment, Hong Kong, Industry Analysis, Macau, Stock ideas Tags: , , , , , , Leave a comment

the results

After the New York close yesterday, LVS announced 3Q13 results for itself and for its subsidiaries, Macau-based 1928 and wholly owned Marina Sands of Singapore.

Revenues for LVS came in at $3.57 billion, up 31.7% year on year.  EBITDA (earnings before interest, taxes, depreciation and amortization)  advanced by 45.5% yoy to $1.28 billion.  EPS was $.82, a 78.3% yoy increase.  That figure exceeded the Wall Street consensus by $.05.

During the quarter, LVS repurchased 4.6 million shares of its stock, at an average price of $65.18.  It says it will buy back a minimum of $75 million in stock a month from now on.

LVS also raised its quarterly dividend from $.35/share to $.50, giving a forward yield of 2.8%.

 

1928 rose by almost 10% in overnight trading in Hong Kong (in a market where other Macau casino stocks were up by 4%-5% or so).  LVS has barely budged in this morning’s pre-market trading.

 

the highlights

Macau

LVS is a convention hotel operator.  Its strength is catering to customers who have, say, $10,000 to gamble during a stay rather than VIPs with $1 million or more.  Its huge investment in hotel/casino capacity in the Cotai section of Macau on the conviction that if Sands built it, customers would come, is beginning to pay off royally now.

EBITDA for 1928 came in at $785.3 million for the quarter, up 61.7% yoy.

Singapore

Marina Bay’s EBITDA was $373.6 million, up 43.3% yoy.  However, the amount bet by VIP gamblers was only up by 16.9%.  The largest portion of the EBITDA increase comes from the casino “win” (the amount gamblers lose, which is what casinos count as revenue) bouncing back from an abnormally low 1.79% of the amount bet during 3Q12 to a more normal 2.85%.

US

Down a bit, yoy.  EBITDA in Las Vegas was $87.1 million (vs. $98.2 million during 3Q12).  Bethlehem, Pa brought in $29.6 million (vs. $32.1 million).

my take

At this point, over 90% of LVS’s EBITDA comes from Asia.  That percentage will continue to climb.

Marina Bay is an enigma to me.  …a good enigma, but a puzzle nonetheless.  It isn’t that long ago that Marina Bay and Macau were neck-and-neck in generation of cash for LVS.  But while Singapore has been relatively stagnant, LVS’s Macau EBITDA have doubled.  Has Marina Bay already topped out at $1.5 billion in annual EBITDA?  I find it hard to think this is the case, but I can’t see any evidence to the contrary from the financials.

Macau is booming   …and the market is rapidly developing a large resort/convention segment, which is LVS’s management specialty.

valuation

At today’s Hong Kong closing quote, LVS’s interest in Sands China is worth $49 billion.

If we make the (conservative, in my view) assumption that Marina Bay will generate about $1.5 billion in annual cash flow and that we’re willing to pay 10x for that, then the Singapore subsidiary is worth $15 billion.

The same calculation for the US operations (let’s put a cash flow multiple of 8 on it) would value it at about $4 billion.

Total value = $68 billion.  That compares with a total market cap for LVS at yesterday’s close of $58.5 billion.

If these back of the envelope figures are close to correct, LVS is trading at about a 15% discount to the sum of its parts.  Further upside could come from continuing flowering of the Macau operations, which I think is highly likely, and/or a return to growth for Marina Bay.  (I own the stock and am happy to remain a holder.  At some point, I’ll have to trim the position simply because of size, but see no present reason to do any other selling.)

 

 

China calls for a “de-Americanized” world

October 15, 2013 By in China, currency effects, economics, reserve currency, Strategy Tags: , , , , , , , , Leave a comment

China editorializes

Over the weekend, Xinhua, the official Chinese news agency, wrote an editorial, sparked by Beijing’s worry about possible US debt default, but also addressing its general concerns about the military, political and economic dominance of the US in the world.

Xinhua says:

” instead of honoring its duties as a responsible leading power, a self-serving Washington has abused its superpower status and introduced even more chaos into the world by shifting financial risks overseas, instigating regional tensions amid territorial disputes, and fighting unwarranted wars under the cover of outright lies”

Therefore, fundamental change is needed.  Along with renewed respect for international law and increasing reliance on the UN, 

“What may also be included as a key part of an effective reform is the introduction of a new international reserve currency that is to be created to replace the dominant U.S. dollar, so that the international community could permanently stay away from the spillover of the intensifying domestic political turmoil in the United States.”

my take

These sentiments aren’t exactly new.

Internally, the faction of the Chinese Communist Party that controls the investment of the country’s gigantic accumulated current account surpluses has got to be very worried that it will take the political fall for any loss on China’s Treasury bond holdings if the US defaults.  That’s what political infighting is all about.  And loss could come either through rising interest rates or a decline in the value of the dollar.  Important, then, to get the story out that the real villain is, as usual, the US.

At the same time, the editorial underlines the immense power that the US wields because the dollar is the world’s  de facto reserve currency.  For the US, it’s like owning the bank and being able to write/cash a check to yourself whenever you please.  You also get to defuse internal economic pressures by exporting them to the rest of the world through the currency.  

The US won’t lose this central role in world commerce any time soon.  However, an unintended consequence of the current Washington rhetoric of embracing default as a political tool–and the prospect of more of the same to come–may be a serious China-led effort to decouple from the dollar.  

Potentially very damaging to the US   …but a long time away.  

The imponderable here is the discounting mechanism in the financial markets.  Were large international banks and foreign government managers of their countries’ financial reserves to sense the possibility that a move away from the dollar might actually happen, their defensive measures (selling the dollar) could come very far in advance of the facts.  In other words, a move away from the dollar could snowball.

As investors, I think we have to be concerned that the role of the dollar as world reserve currency may not be as secure as the consensus thinks.  Personally, I’m a long way from acting on this possibility.  But it’s a lot higher up on my list of worries today than it was a month or two ago.

 

China and Japan weight in on the US debt ceiling debate

October 8, 2013 By in China, Current Market Thoughts, economics, Hong Kong, Japanese development, Recent Market Action, Strategy Tags: , , , , , , , , Leave a comment

China and Japan are our two largest foreign creditors.  Beijing holds $1.3 trillion in Treasury securities and Tokyo $1.1 trillion.  Together, they account for 21% of all public holdings of Treasuries, and 45% of foreign lending to the US government.  So what they say counts for a lot.  Of course, whether they choose to roll over their Treasury exposure as it matures counts for a lot more.

Needless to say, neither is thrilled by the current shenanigans in Washington   …but for different reasons.

Japan is worried that a US default would cause a decline in the US$ and a flight to safety in the ¥.  Japan has spent the last year engineering a sharp depreciation in its currency as part of a last-ditch effort to revive its moribund economy.  The last thing it wants to see is one of the three pillars (or “arrows”) of Abenomics, a weak yen, destroyed.  (On the other hand, there’s still no evidence that the third, and most crucial, arrow–reform of antiquated corporate business practices–will ever leave the quiver.)  What I find interesting about this attitude is that there’s no trace of the deference toward US interests shown by a prior generation of Japanese leaders–men who believed their loss of WWII obligated them to act this way.  No surprise here, except maybe to  politicians in Washington.

China is expressing concern that its very large investment in the US could lose value as a result of political stalemate in Washington.  In itself, this isn’t much of a surprise, either.  China has been working for several years to reduce its exposure to US government debt by spending its large surplus of dollars as fast as it can.  No matter what the outcome of the debt ceiling issue in Washington, Beijing will doubtless redouble its efforts to reduce its Treasury exposure.

The way it has framed its concern, however, should be sending chills down the spines of any US entity with direct investments in China.  Beijing points out that China has large investments under the stewardship of the US–predominantly Treasuries.  Conversely, the US has large investments under the stewardship of China–in the form of manufacturing, distribution and retail ventures that US corporations have established there.  The two governments have reciprocal obligations toward each other.  The US must be a responsible steward of China’s investments; China, in turn, must be a responsible steward of foreign direct investment from the US.

The implication is that US failure in its obligation releases China from its duty.

If I’m understanding China correctly, the negative consequences for US companies with China businesses of the current goings on in Washington may be far greater than I think Wall Street realizes.

If so, very bad for the US.  From a practical standpoint, probably better to get China exposure through the Hang Seng than the S&P.

defaulting on the government debt: what it would mean

October 4, 2013 By in Balance of Payments, bond market, currency effects, Current Market Thoughts, Recent Market Action, reserve currency, securities markets Tags: , , , , , , , , , Leave a comment

debt ceiling crunch time

According to the Washington Post, the letter Treasury Secretary Jack Lew recently sent to Congress said that in mid-October, the Treasury will reach the legislatively imposed upper bound on borrowing to pay for goods and services that Congress has ordered up.   That’s a problem, because Washington’s spending so far this year has exceeded its income by about $100 billion a month–and that’s even after the sequester kicked in.

D-Day is October 17th.

The Treasury figures it will have $30 billion on hand on that date.  Bills coming due can reach as high as $60 billion in a single day.  The current layoff of large numbers of Federal employees through the Tea Party-created shutdown might “save” $5 billion a month, but that doesn’t move the needle much.

what if Congress doesn’t act?

If Congress doesn’t raise the debt ceiling, two related problems arise:

–someone has to decide who gets paid and who doesn’t.  The biggest chunks of spending are Social Security, Medicare/Medicaid, the military and interest on the Federal debt (which alone averages about $33 billion a month), and

–inevitably there’ll come a day when the till is empty and the Treasury either misses an interest payment or, more likely though a rollover timing issue, a principal repayment on Treasury securities.  That’s a default.

what default would mean

Secretary Lew is saying that a government debt default could/would create an economic crisis bigger than the bank failures of 2008.

Yes, I think the inevitable default that would come from not raising the debt ceiling would be a major shoot-yourself-in-the-foot moment for the country.  Worse than 2008, though?

…unless we’re talking about possible very long-term consequences, I think this is possible but not probable.  On second thought, minimizing the damage would require Congress to realize what an idiotic thing it had done and “cure” (as the technical term goes) the default immediately.  The more reluctance by Washington to do so, the closer to the Lew scenario we get.

Default would have several important negative consequences:

slower economic growth

–by not paying on time, the US would establish itself as an unreliable borrower.  Lenders, both foreign and domestic, would therefore demand a higher interest rate for the use of their money.  How much higher?  That depends a lot on Congress, but basically no one knows.

–given Washington’s dysfunction, the only effective tool of macroeconomic policy the country has is the Fed.  To at least some degree, the Fed would lose its ability to influence rates if investors begin to regard Treasuries as risky securities.  That’s not good.

weaker currency

–the move among emerging countries to replace the dollar as world currency with, say, the renminbi, would kick into higher gear.  This would risk the US losing the perks of being the world’s banker–lower interest rates, ease of borrowing.

–in extreme circumstances, global buyers and sellers might lose enough confidence in the dollar that they’d refuse to accept it in trade.  This might freeze global commerce in the same way that was so devastating to the world in late 2008-early 2009, when firms wouldn’t take bank letters of credit.  That could be really ugly.

 

There is, of course, the issue that adding $1 trillion+ a year to the Federal debt isn’t a sustainable plan for financing the Federal government.  And business-as-usual Washington has no tolerance for addressing the holy trinity of budget-busters–the military, Social Security and Medicare/Medicaid.  Still, puling the house down around everyone’s ears isn’t a great solution, either.