Tag Archives: China

Macau casinos, August 2013

September 5, 2013 By in Asian economic development, Casinos, China, Entertainment, Hong Kong, Industry Analysis, Macau Tags: , , , , , , , , , , , , Leave a comment

Over the Labor Day weekend, the Macau Gaming Inspection and coordination Bureau (DICJ) released its monthly report on the aggregate amount won by the casinos in the SAR during the month.  Here are the figures:

* 1 HKD = 1.03MOP (Unit:MOP million )
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%

Source: Macau DICJ

The figures are obviously good.  the MOP 30.7 billion achieved in August surpasses all but the win from last March, a holiday month.  They’re 4% better than the results for July.  They’re also up 17.6% year on year.  August of last year may have been negatively affected both by weather and by high rollers beginning to pull in their horns as the anti- conspicuous consumption attitude of the new Communist Party leadership began to make itself known.

What’s most interesting–and encouraging–are company comments that VIP gamblers are beginning to return in higher numbers to Macau as they feel more comfortable about what the Party’s anti-corruption stance and dislike of lavish displays of wealth actually means for them.  Apparently, gambling, in itself, isn’t a bad thing.  In addition, the tide of merely affluent gamblers–who might gamble US$10,000 on a visit, rather than US$1 million–is continuing to rise strongly.

The real shortage element at present is casino and hotel capacity to receive customers.  The biggest beneficiaries of market growth are those who are opening new space in Cotai.  To my mind, this means Galaxy Entertainment and Sands China (I own shares of  Galaxy and of Sands China’s parent, Las Vegas Sands.  (Both Fidelity and Schwab maintain Americans aren’t permitted to buy Sands China in Hong Kong and refuse to transact in the name.   I’ve asked LVS several times for an explanation–their investor relations people are clueless, however.  I find that disturbing for a big company, but not to the degree that I want to sell LVS.)

One’s instinct in any attractive market is to look for laggards–companies that may not be the best-positioned, but which are significantly cheaper than the leaders.  Buy them, wait for a run and trade into the leaders, the strategy goes.  In theory this sounds good.  And Hong Kongers have no trouble executing it among the Macau gambling stocks.  As for me, some of the laggards are controlled by people I don’t trust.  So I’d rather stick with the names I have (I also own Wynn Macau and WYNN).

June 2013 Macau gambling statistics–no sign of slowdown

July 10, 2013 By in Asian economic development, Casinos, China, economics, Entertainment, Hong Kong, Industry Analysis, Recent Market Action Tags: , , , , , , , , Leave a comment

Last week the Macau Gaming Inspection and Coordination Bureau (DICJ) posted on its website the total that casinos in the SAR won from gamblers during June 2013.  The figures, in millions of Macau patacas, are:

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%

Source: Macau DICJ

Of course, we have to be careful not to read too much into one month.  The situation is also complicated because the gambling market in the SAR is new enough that it’s difficult to know what the seasonal patterns in visitation may be–that is, whether June is usually a big month for gamblers or a weak one.  That factor is being covered up by the overall mad rush by increasing numbers of Chinese citizens to the baccarat tables.

In addition, we should note that the apparent acceleration in year-on-year revenue comparisons that we see in June is due to the effects of last year’s economic slowdown in the 2012 numbers–in advance of the November leadership change in the Communist Party–rather than a surge in revenue last month.

Still, the past four months have been the biggest in the Macau gaming market’s history.  June appears every bit as strong as the months that preceded it.  Reports I’ve read suggest that so far July is stronger than June.

This is good news.

That hasn’t helped the Macau gambling stocks, which have sold off in sympathy with the Shanghai Composite over the past six weeks or so.  Chinese stocks are falling on fears about the credit crunch I described yesterday.

The most attractive Macau gambling stocks right now, in my view, are Galaxy Entertainment and Sands China (I own Galaxy and LVS, Sands China’s US parent).  But I’m not in any rush to add to either position until I see more data on how the credit situation will unfold.  (There’s also the issue of a potential crackdown by Beijing on money laundering in Macau.  But I think this is a problem with the pre-SAR casinos and will have little effect on the companies invited into the market by the current Macau government.  In any event, in my view, stricter regulation would be another long-term plus for Macau’s development into an Asian Las Vegas.)

the developing Chinese credit squeeze

July 9, 2013 By in Asian economic development, China, Current Market Thoughts, economics, Hong Kong, Japanese development, Recent Market Action, Strategy Tags: , , , , , , Leave a comment

a new broom

The new administration in Beijing has begun to crack down on a series of abuses in the domestic Chinese financial system that pose a long-term threat to the stability of the economy.

I think this is a very positive development for China, and one that’s crucial to the central government’s efforts to channel resources toward domestic consumer-oriented industries and away from low value-added export-oriented manufacturing.

I don’t know the details of Beijing’s plans the way I might if the domestic market were open to foreign private investors like you and me–and, for the same reason, I’m not particularly interested in finding out.  But I think it’s safe to say that sectors like real estate and finance won’t be happy places over the next six months or so, nor will highly leveraged, labor-intensive export-oriented manufacturing.

where it’s sweeping

As I see it, there are three avenues to the government’s attack on out-of-control credit growth.  Much of this follows very familiar patterns:

1.  non-bank financials.  Regulators tell banks to stop speculative lending, usually in real estate.  The banks counter by forming non-bank subsidiaries–out of the regulators’ purview–and continue imprudent lending.  Political “contributions”  to powerful legislators keep the regulators at bay.

The “Keating Five” in the US during the savings and loan crisis are a good example of the last.  The Five, all Senators–including former astronaut John Glenn and Vietnam war hero John McCain, become famous for intimidating regulators into not acting on a massive financial fraud perpetrated by Charles Keating, who preyed on lower-income workers and the elderly at the Lincoln S&L in California.

2.  loans to “zombie” companies.  During the 1990s, Tokyo forced Japanese banks to continue to lend to highly inefficient, loss-making companies–apparently in order to avoid layoffs.  One consequence was that these “zombies” destroyed the businesses of healthy, well-run firms that were not receiving continuing large infusions of cash.

The Chinese analogue is state-owned enterprises in mature industries.  Also think:  almost any state-controlled business in the EU or the auto industry in the US.

3.  lending to state and local government projects.  This is a particularly Chinese problem.  Mayors and governors are officials in the Communist Party, as are the heads of local banks.  The former get promoted by keeping the local workforce employed and GDP growing.  An easy way to do this is to sponsor (dubious) construction projects and armtwist bankers into providing the finance.  As the adage goes, “The mountains are high and the emperor is far away.”

my thoughts

Long-term, the crackdown is a very positive development.

The extent of crazy lending, and attendant political corruption, is invariably much larger than anyone realizes.

This may be a years-long project for Beijing, in which it applies pressure to uneconomic lending until GDP begins to wilt and then backs off for a short while.  That’s how the central government has been reducing the size of the state-owned sector since the days of Deng.

Although I don’t expect any significant negative effects for world economies or stock markets, this is another (big, I think) piece of bad news for suppliers (like natural resources and basic materials companies) to construction and low-end manufacturing companies in China.

We’re already seeing spillover into Hong Kong of downward pressure on Chinese stocks.  At some point, this will create a big buying opportunity.  Maybe not right now, though.

Bain Luxury Goods Spring update (II) : structural changes in the luxury market

June 21, 2013 By in Asian economic development, Bain luxury goods study, China, economics, Hong Kong, Industry Analysis, Japanese development, Luxury goods, Retail, Stock ideas Tags: , , , , , , , , , , Leave a comment

structural changes

Yesterday I wrote about Bain’s analysis of prospects for global luxury goods sales in 2013.  Today, I’m going to take a look at what the consulting company perceives as possible structural changes in the worldwide luxury goods market.

There are two big ones:

Asian tourists remaining closer to home

Japan:  Twenty years + of economic stagnation had finally begun to take a toll on the seemingly insatiable Japanese demand for European luxury goods a few years ago.  Recent sharp devaluation of the yen has depressed this appetite further.  Skeptics (like me) of the ultimate success of Abenomics must believe that this is a permanent change.  Given that, pre-devaluation, the price of luxury goods in Japan has typically been much higher than elsewhere, the negative effect of lower Japanese spending on the profits of luxury goods manufacturers will probably be disproportionately high.

China:  Weakness of the renminbi vs. the euro is a mild negative.  More important, Bain points out that Chinese luxury buyers are beginning to turn away from Europe toward Macau, Hong Kong and Australia as vacation destinations.  On the surface, it shouldn’t make much  difference whether Chinese customers on holiday buy in France or Cotai.  However, the change in vacation travel venue may give a significant opportunity for budding Pacific-based luxury brands to take business away from European rivals.  I think this is already happening.

the Baby Boom passing the baton

Bain characterizes the luxury goods preferences of different age groups as follows:

Baby Boomers (55+)  want:

–a bricks and mortar store

–a one-to-one interaction with a salesperson who represents the brand ans who also knows them well

–high-priced scarce or one-of-a-kind items that they think confer status on them individually as people of unusual taste and means

–a formal buying ritual.

In contrast, Generation Y (20-35) and Generation Z (0-20)–i.e., the children of Baby Boomers–want:

–instant availability 24/7, whether through physical stores or online makes no difference

–to be defined by brand values, but to be able to influence those brand values as well

–unique or novel items, which are not necessarily the most expensive, but which are personalized and which identify them as members of a certain group

–to be entertained.

In a nutshell, this is the difference between buying statement jewelry in a private room and buying a handbag in an online flash sale.  The branding, selling and infrastructure skills differ greatly from the first transaction to the second.

This difference in outlook is increasingly important, because the Baby Boom is retiring and its children are emerging as a new generation of luxury buyers.  One might even argue–with how much validity I’m not sure–that the sudden drying up of demand for traditional high-end European luxury goods in Japan is mostly a function of an aging population and a shrinking workforce.  If so, we may begin to see the same phenomenon in Continental Europe before this decade is out.  Again if so, luxury goods companies that don’t refocus themselves to cater to the preferences of a younger generation of consumers will find themselves struggling to retain relevance.

Macau Gambling: May 2013 Market Results

June 5, 2013 By in Casinos, China, Entertainment, Hong Kong, Industry Analysis, Stock ideas Tags: , , , , , , , , , , , Leave a comment

The day before yesterday, the Macau Gaming Inspection and Coordination Bureau published the aggregate amount won from patrons by the casino industry in the SAR.  Results were as follows, in millions of MOP (Macanese patacas):

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%

Source: Macau Gaming Inspection and Coordination Bureau (DICJ)

At MOP 29,6 billion (US$3.7 billion), the monthly gaming win for May was the second-highest on record, exceeded only by the MOP 31.3 billion posted during the holiday season in March.  It was also a 13.5% year-on-year gain.  The strong–but not blowout–comparison came against the last healthy month of 2012. From June onward, a combination of economic slowdown and the desire not to attract much attention in advance of the change in leadership of the Chinese Communist Party caused a stagnation in market win until last December.

what to look for in market development

1.  Although what will likely turn out to be a 15% yoy growth rate for 2013 is nothing to sneeze at, it would no longer be the gold rush we’ve come to know and love in Macau.

Normally, I’d guess that maturity for Macau gaming will be 10% annual growth–because that would basically in line with my guess at China’s trend nominal GDP expansion rate.  But since China is attempting a macroeconomic transition away from low value-added manufacturing based on large wage increases rather than currency appreciation, I want to pencil in a higher number.  I’m just not sure what it should be.

2.  In addition, I don’t think Macau is mature quite yet.  Better transportation links will allow the SAR to reach progressively deeper into the mainland for customers.

3. Macau is unique in my experience, because it is dominated by high stakes baccarat played by extremely wealthy, highly skilled gamblers who don’t lose a large percentage of their bets and who have a large chunk of their losses rebated back to them as the price of their patronage.

In contrast, upper income, but not insanely wealthy, gamblers in Las Vegas have percentage losses on their bets of about 10x what the high rollers do.  So the broadening of the market to include more of the first group may bring profits to casinos that are very much higher than Hong Kong analysts now expect.

4.  Market momentum is moving toward Cotai.  That’s the newest area.  It’s also where the new capacity is opening. Galaxy Entertainment and Sands China are the prime beneficiaries.

5.  Former also-rans are now leading the pack.  Operators like Wynn Macau, who have been the most desirable destinations as well as efficient since opening in wringing every last avo (1/100 of  pataca) from their plant and equipment, will stagnate in gaming operations until they can open new capacity.

5.  Non-gambling offerings–restaurants, shows, retail–are in their infancy in Macau.  In pre-Great Recession Las Vegas, they brought in half the industry’s profits.  If Macau follows suit–and I don’t see why it shouldn’t–this could be an enormous positive surprise to Hong Kong investors.  Wynn Macau and Sands China will likely be the stars in this arena.