Macau casinos

Talk about an unloved group.

Casinos with Macau exposure have been pummeled over the past six months.  Late summer has been an especially bad period.   Wynn Macau (HK: 1128) has lost a third of its value over the past half year;  its parent, Wynn Resorts (WYNN) has lost a quarter of its market cap.  The only issue to escape relatively unscathed is MGM, a former near-death experience that has apparently turned the corner.

The reason?

…an anti-corruption campaign by the government in Beijing has had high roller baccarat players from the mainland trying to keep a lower profile.  As a result, the overall casino win, the total amount lost by patrons of the SAR’s casinos, has been showing small year-on-year declines for the past three months.  There’s no reason to believe this trend won’t continue for a while yet.  There’s more, but this is the basic story.

I also think, although I have no evidence for this, that institutional investors have generally decided that they want to participate in the upcoming Alibaba IPO but that they don’t want to increase their aggregate exposure to China-related stocks.  So they’re jettisoning a growth story gone cold for one with more obvious signs of life.

Overnight (i.e., this morning in Hong Kong) I bought a small amount of Wynn Macau.

I have no idea if this is the near-term bottom for the Macau gambling market or for 1128.  But the stock is trading at 15x earnings and yielding 5%+.  I think the long-term story for Macau–that it is turning itself into a (much larger) clone of the Las Vegas Strip, that is, a resort destination for the Chinese middle class–is still intact.  I think it’s still early days for tourism in the SAR.  I also expect the current slowdown will increase the competitive distance between the firms I view as the ultimate market winners, Wynn, Sands China, and Galaxy vs. the former monopoly casino operator, SJM Holdings.  SJM still has the largest market share, but is handicapped by its connection to the Ho family.

 

For the moment I’m going to wait, watch and collect the dividend.  If 1128 declines further, however, I’ll probably buy more.

This isn’t an idea for the very risk-averse, since the Macau gambling market ultimately depends on the good will of Beijing, whose mood is difficult to assess.  The extent and duration of the current crackdown on lavish consumption has so far taken even veteran China hands by surprise.  Still, a 5% yield makes up for a lot of warts.  And using a discount broker like Fidelity makes getting in an out easy and inexpensive.

 

 

 

 

Macau casinos, after their stock market decline

a weak few months

Macau casinos, and their foreign parents, have been bludgeoned in the stock market over the past couple of months.  Several reasons:

–general worry about stocks that had gone up a lot

–the Ukraine situation, which has unnerved European investors

–fear that the the current anti-corruption/anti-excessive consumption drive by Beijing will hurt the VIP business which has been the heart of Macau casino profits, and

–the possible proliferation of casino openings elsewhere in China, or in other Asian countries like the Philippines or Japan.

what, me worry?

Every portfolio investor acts on small amounts of imperfect information.  That’s why we don’t put all our eggs in one basket (Bernard Baruch to the contrary).   From where I sit, a lot of the negative things now being said about Macau seem to be (mistaken) attempts to explain the stock price drops.   I don’t think they have much factual basis.  Of course, even the best stock market investor is wrong 40%+ of the time.

For what it’s worth, here’s my take:

–So far there’s no hard evidence so far that Beijing’s anti-corruption campaign is having any negative effect on the VIP gambling business in Macau.

–More important, the Macau gambling market is no longer being driven solely by VIPs.  The new sweet spot is the mass affluent, a market segment that’s now the source of most of the SAR’s growth.  How so?  VIPs bet huge amounts, but they’re semi-professional gamblers.  They lose on average about 3% of the amount they bet; the casino rebates half of that, either to the high roller himself or to the middlemen who has brought him there.  So margins are razor-thin.  The mass affluent, on the other hand, are seeking entertainment.  At table games, they make much smaller bets, but they lose about a quarter of what they wager–and they don’t care that much.   A mass affluent pataca bet is worth 15x-20x in casino operating profit what a high roller pataca is.  Hordes of them are now descending on Macau.  (There’s also a shift among winners and losers within the market, but that’s another story.)

The mass affluent also want non-gambling entertainment.  In the salad days of Las Vegas, shows, concerts, restaurants…brought in just as much profit as the casino operations.  In Macau, this business is still in its infancy.  But I see no reason why Macau in the end will be any different.

–Transportation links are still being built to allow more far-flung areas of China to reach Macau, meaning market saturation is still years off.

–It makes no sense to me to believe both (1) that Beijing’s crackdown is aimed squarely at casinos and (2) that the government will give permission for more casinos to open in other areas of China.  But this is what some bears are saying.

–Macau has critical mass and lots of amenities.  Chinese is the dominant language.  Kidnapping high rollers isn’t an issue.  Japanese casinos, whatever they may eventually look like, are years away.  Singapore has already been up and running for a considerable while–and Chinese junket operators aren’t welcome there anyway.  Some VIPs will certainly try out the Philippines or other venues.  I just don’t see this as a big deal.

 

Yes, I trimmed my Macau exposure significantly last year–because my position size was much too large.   At this point, I’m a potential buyer, not a seller.

 

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.