Tag Archives: emerging markets

September 2014 for the Macau gambling industry

October 7, 2014 By in Asian economic development, Casinos, China, Entertainment, Industry Analysis, Macau Tags: , , , , , , Leave a comment

Yesterday in Macau, the SAR’s Gambling Coordination and Information Bureau (DICJ) released its monthly report of aggregate casino win (the amount gamblers lost in the casinos) for September.

The results were ugly.  The gambling industry as a whole took in MOP 25.6 billion (US$3.2 billion).  That’s an eye-popping amount  …but it’s 11.7% less than the SAR’s take during the same month last year.  September is also the fourth consecutive month of negative year-on-year comparisons.  To top the negative story off, the comparisons are getting progressively weaker.

The reason for the falloffs the in gambling in the SAR is an intensifying anti-corruption crackdown by Beijing, which has had Chinese high-roller gamblers trying to keep low profiles.  Some are doing their gambling in the Philippines, Singapore or Las Vegas; many are just staying home.

Despite this bad news, Macau casino stocks traded in Hong Kong rose by about 5% on the news.  Why?

–Analysts in Hong Kong have recently been falling all over themselves trying to be bearish, with the (typical) result that the actual numbers were better than the consensus had been predicting.

–The stocks are cheap.  They’re 40% – 50% below their peaks, with most now yielding more than 5%.

–The Macau gambling market is transitioning, thanks to the development of Cotai, away from being a destination only for the ultra-wealthy to a venue for the middle class.  Yes, the former gamble make much bigger wagers, but a casino may keep only 1.5% of the amount bet.  For the mass affluent, on the other hand, that percentage may be 15% – 20%.  In addition, middle class gamblers will also shop, eat out and go to shows.

–Comparisons should begin to improve next year.  New capacity catering to middle class gamblers will open; at some point, the renewed anticorruption campaign will have been going on for a year.  Assuming government efforts don’t intensify again, the yoy high-roller comparisons should stop deteriorating.  That would allow the middle class growth to begin to shine through in earnings.

I have no idea whether this is the absolute bottom for the Macau casino stocks or not.  But they look cheap to me.  I continue to think the long-term winners are the American-run casinos, especially Wynn Macau and Sands China.  I’ve been nibbling at both.  (An aside:  For a long while, I couldn’t buy Sands China through either Fidelity or Schwab.  Both had mistakenly classified the stock as a Reg S issue, which couldn’t be sold to Americans. At least with Fidelity, though, the problem has been fixed.)  The biggest loser will likely be the former monopoly operator, SJM.

recalling Tiananmen Square

October 3, 2014 By in Asian economic development, China, emerging markets, Hong Kong, Tiananmen Square Tags: , , , , , , , 1 Comment

I was fast asleep at home in the US in early June 1989 when a Hong Kong broker woke me up to tell me troops had opened fire on the crowds that had been occupying Tiananmen Square in Beijing.  That should let you know that I observed what was going on fback then from afar–as well as through the lens of a stock market investor.

Although I think there’s always the possibility of a mistaken escalation of the student demonstrations now under way in Hong Kong into Tiananmen-like violence, I see a number of important differences between the two situations.  Among them:

–Tiananmen Square took place in the heart of China’s capital, not in a politically marginal SAR

–1989 was a time of considerable political/economic unrest in China, with the economy unable to create jobs and, in consequence, hundreds of thousands of unemployed workers roaming around the countryside looking for work.  This was very scary for Communist Party leaders.

–during the months it took the Tiananmen situation to come to a head, many of the students who had originally occupied the square left, and were replaced by older unemployed workers, whose motives were less political and more economic.

–local units of the Peoples Liberation Army (PLA) were ordered to use violence on demonstrators to remove them from the square.  They refused–and were replaced by units from distant areas that had few cultural and ethnic ties with the demonstrators

–the careers of the soldiers–especially the commanders–who obeyed the orders to fire on the crowd were ruined

–world outrage at Tiananmen resulted in significant diplomatic and economic sanctions against China.  Private companies reallocated their capital away from China; highly skilled foreign workers, a key source of potential technology transfer, rethought their plans as well.

 

In sum:  I think media suggestions that the current student pro-democracy demonstrations in Hong Kong are the new Tiananmen are way off base.

I can see potential worries, though.  Clearly, Tiananmen taught the authorities not to use violence against demonstrators.  However, teenage student leaders may genuinely not realize where they live–that, just as there’s no crying in baseball, there’s no democracy in China.  It may also be that opponents of the current administration in Beijing would regard a political incident in Hong Kong as a way of derailing its anti-corruption campaign.  So there is a non-zero chance of a tragic accident.

What I’m doing:  I’ve found myself buying odds and ends on the Hong Kong stock market over the past few days, since the Hang Seng is down almost 10% from its pre-demonstration high.  I may nibble a bit more.  Ultimately, though, while I believe the current situation is very un-Tiananmen-like, I’m not going to bet the farm on my (limited) ability to analyze political events.  So I’m going to make up a shopping list, but wait for clear signs that the situation is being defused before doing much more.

 

 

Chinese economic growth: the big picture

September 23, 2014 By in Asian economic development, China, economics, emerging markets Tags: , , , Leave a comment

the problem Deng faced

In the late 1970s, Beijing came to realize that central planning would no longer work (assuming it ever did).  The economy had become too big and too complex.  So China had to adopt at least some Western free market principles.

The country had two main, related, economic objectives:

–to expand quickly enough to maintain employment and absorb the large numbers of young people looking for a job for the first time, and

–to reduce the importance/power of highly inefficient money-losing state-owned enterprises, which during the early Deng days represented over three-quarters of the country’s GDP.

China had to accomplish these goals without a modern central bank able to temper economic cycles, and without a lot of control over the day-to-day actions of the regional governments being ordered to create economic growth.

 

The result was an overall Chinese economy that grew very rapidly, using the time-honored developing country strategy of favoring export-oriented manufacturing.  Because Beijing lacked better controls, the economy tended to lurch between periods of speculative excess and of near-recession.

The SOEs were never supposed to fail–that would have created the kind of high unemployment that led to Tiananmen Square.  Rather, they were either to modernize or slowly fade away and be replaced by private enterprise.  Foreign investors quickly realized that the SOEs were an excellent economic policy timing tool.  When the SOEs were prospering, policy tightening by Beijing could not be far behind.  When they were approaching death’s door, Beijing would ride to the rescue.

what’s changed

Not any more, however.

China has reached the point where additional low-wage, sub-scale, highly polluting export-oriented materials or manufacturing operations provide absolutely no economic or political benefit.  So Beijing is not going to provide stimulus that would rescue some of the existing capacity and spawn more.  Waiting for stimulus to happen is a mistake.  Equating no stimulus with economic doom is one as well.

I find it encouraging not only that Beijing is trying to transition toward becoming a domestic demand-oriented economy, but also that it appears to feel comfortable that it can do so without negative political repercussions.  Yes, growth may be slower, but it will be more solidly based.

The investment conclusion I come to is to look for mid-sized domestic-oriented Chinese companies whose stocks have been punished during the current period of global investor disenchantment.

 

Detroit’s city-owned art and alternative investments

July 11, 2014 By in Current Market Thoughts, hedge funds, Investment firms, Private equity Tags: , , , , , , Leave a comment

Late last year, Detroit revealed the results of an estimate by auction house Christies of the value of the city’s art held by the Detroit Institute of Art.  The figure was a range of $464 million – $867 million.  Let’s take the mid-point and call it $650 million.

Yesterday, I saw in the Wall Street Journal a new estimate by Artvest Partners and commissioned by the city that comes in with a range of $2.8 billion – $4.6 billion.  The mid-point here is $3.7 billion.

But wait!   …there’s more.  According to Artvest, if Detroit actually wanted to sell the artwork, it’s only worth $850 million – $1.8 billion.  Mid-point:  $1.3 billion.

OK, which is it—$650 million, $1.3 billion or $3.7 billion?

There is one subtlety.

–The $650 million is the (if you’re not selling) value of the art that the city has bought with its own tax money.  It does not include work donated to the DIA, where there may be strings attached that don’t allow the works to be sold.  (An aside:  there may be a further twist here.  The DIA has presumably either provided donors with appraisals of their gifts’ value, or validated appraisals donors have provided.  In either case, donors will have used these figures, which may be–shall we say, “optimistic”–to claim income tax deductions.  a potential mess that I have no desire to comment further on.)

–The Artvest figures, on the other hand, count everything as salable.

What caught my eye in the WSJ article is the gigantic difference between what the appraiser says the art collection is worth–$3.7 billion–and what it would fetch at auction–about a third of that amount.

What struck me is that this is a lot like the way, in my experience, that the market for illiquid “alternative” assets works.  So the Detroit case gives a rare glimpse into the inner workings of alternative asset valuation.

As in the Detroit case, there’s one value that investors hear about in reports from the management company, and based on which the manager charges his fees.  That, of course, is the $3.7 billion.

The other value is what investors would get if the alternative asset pool were to be liquidated today.  It’s what mutual fund investors would call net asset value, or NAV.  That’s the equivalent of the $1.3 billion.

Yes, part of the reason the actual sales value in the Detroit case is so far below the (I don’t know what to call it) “dream” value of the artwork is the possibility of donor litigation that would freeze assets for protracted periods.  On the other hand, any investor in emerging countries can face similar political difficulties.

Several factors do make the alternative investment case different from Detroit’s:

–in at least some alternative investment situations I’ve seen, the assets are so esoteric that there are few experts other than the asset managers themselves.  So the managers end up doing the asset value appraisals.  If so, I think they’ll tend to find it hard to arrive at a figure that’s not in the rarified air of Artvest’s $3.7 billion.

–the contracts between investors and managers often allow the latter to refuse redemption requests for an extended period, so actual NAV may be a moot point.

–if investors insist on liquidation, asset managers may be able to make a distribution in kind–meaning investors get their proportionate share of the actual assets, not cash.

Institutions will do almost anything to avoid this situation, since they’ll be forced to safeguard and value any assets they receive.  (Early in my career, when Guinness was an independent company, some one there had the crazy idea of paying a dividend in bottles of scotch instead of cash.  This would make portfolio managers like me responsible for valuing and storing the stuff, and presumably eventually selling it, on behalf of my clients.  What a disaster!)

–based on NAV, it’s not 2% of the assets per annum that moves from the investors’ pockets into the managers’.  It’s actually 6%!  Ouch.

As I’m confident you’ve worked out already, I’m not a fan of alternatives.  The risks are hard to get your arms around; information is scanty; and in my view most of the returns go to the managers.  Investors mostly get to dazzle their cocktail party friends with their daring; they lick their wounds in private.

My thoughts aside,for anyone wanting to get a peek under the covers of alternatives, watching the Detroit art case should provide an education.

 

 

 

 

 

the Macau gambling market contracted by 3.7% in June!

July 3, 2014 By in Asian economic development, Casinos, China, Entertainment, Hong Kong, Macau Tags: , , , , , , , , , Leave a comment

The recently released monthly report from Macau’s Gambling Information and Coordination Bureau (DICJ) showed that aggregate casino win (the amount gamblers lost in the casinos last month) amounted to MOP 27.2 billion, or about US$3.4 billion.  That’s a 3.7% year-on-year drop, the first red figure I can remember for the SAR, and the only one on the DICJ website, which contains comparisons going back to 2010.

Yes, the figures might have been slightly in the black if not for the World Cup keeping potential gamblers glued to their TV sets at home rather than being at the casino tables.  And it has been clear that the yoy comparisons would get progressively tougher as 2014 unfolded.  That’s because 2013 results got stronger as the VIP market returned to normal after the mainland Chinese Communist Party leadership transition.

There are two more important reasons for the flattening out of the Macau gambling market, however.  Both are temporary, I think.

–the continuing anti-corruption crackdown by Beijing, which has VIP gamblers adopting a lower profile, and

–lack of junket operator credit (junket operators typically borrow, at rates of 1%+ per month, funds that they advance to VIPs), in the wake of the apparent disappearance of a prominent organizer with US$1 billion – US$1.3 billion of his company’s funds.  This has understandably made lenders reluctant to back any junket operator as fully as before.

Interestingly, the Macau gambling stocks, which have been very weak performers since early this year, rallied on the DICJ report.

What to do?

My guess is that the VIP segment of the Macau market will be at best flat for the rest of the year. That will make it hard for the aggregate gambling market in the SAR to show significant advances.  However, the real story of Macau is below the surface.  It’s the rapid shift away from VIPs and toward the mass affluent that’s now going on.  The latter, which already account for the bulk of the SAR’s win, are also big spenders in the casinos’ food, entertainment and shopping venues (remember, non-gambling activities can account for half a casino’s income, and they’re just getting started in Macau).

The Hong Kong-traded casino stocks, which have been very weak performers since early in the year, seem to me to have already discounted the negative developments I’ve described above.

In my view, the worst hurt by the VIP slowdown will be the traditional casinos run by the Ho family.  The least affected will be Sands China, Wynn Macau and Galaxy Entertainment (I own Galaxy and the parents of the two others).

I’m not rushing to add to my exposure (although I think I may have missed the bottom in Wynn Macau a couple of weeks ago), but i have no desire to sell, either.