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Two recent Macau gambling developments

March 8, 2011 By in Asian economic development, Casinos, China, Entertainment, Hong Kong, Industry Analysis, Securities regulation Tags: , , , , , , , , , , , , , Leave a comment

Pansy Ho has resigned from the board of MGM Macau

Macau Business reported on February 28th that Pansy Ho stepped down at the end of last year from the board of directors of the casino company, MGM Macau, that she and MGM Resorts International jointly control.  MB’s source is a Wall Street Journal article that says the Macau casino regulator confirmed the move.

Why do this?

As I posted on February 1st, Stanley Ho appears to have transferred his controlling interest in the largest casino operation by revenue in Macau, Sociedade de Jogos de Macau (SJM  HK:0880), to a number of relatives, including his daughter, Pansy Ho.  I say “appears” because Mr. Ho has since denied doing so more than once, and–depending on the day–is suing to have the interest returned to him.

The transfer forced Pansy Ho to make a choice, since Macau law bars anyone from having operating control over more than one casino concession.  Although Ms. Ho herself hasn’t said, as far as I’m aware, why she left the MGM Macau board, the move suggests she is going to try to recast herself as a passive investor in MGM Macau.  That way she may be able to keep her ownership interest in the venture (maybe as a safety net) while she actively engages in an intra-family struggle for operating control of the much larger SJM.

The association between MGM and Pansy Ho is a controversial one.  The joint venture was the price MGM had to pay to get a seat at the lucrative Macau table.  The Nevada casino regulators decided, after extensive hearings, that Ms. Ho was a suitable business partner for a casino operating in that state.  But the New Jersey Casino Control Commission, considered the gold standard for regulatory compliance, decided otherwise last year.  It ruled that Ms. Ho was more or less an extension of her father, Stanley, whose ties to Chinese organized crime made him (and, therefore, her) “unsuitable” to hold a casino license in New Jersey.

The NJCCC gave MGM two options:  sever ties with Ms. Ho, or sell its casino interests in the Garden State and leave.  MGM chose the latter course, even though declaring oneself a forced seller isn’t a move calculated to get a good price for your assets.

To my mind, and based on the New Jersey finding, the association with Ms. Ho tarnishes MGM’s otherwise good reputation.  Certainly, in my opinion, there will be some American investors who won’t hold the stock because of this.  It may well be harder to get seasoned international casino professionals to work for MGM Macau, as well.

In Hong Kong and Macau, on the other hand, the Ho name isn’t a minus.  It may, in fact, be a plus.  Last summer, both LVS and WYNN voiced their opinion during earnings conference calls that they thought an unnamed competitor was preparing for an IPO.  Since all the other competitors are listed, I presumed the company referred to was MGM Macau.  If so, the departure of Ms. Ho is probably a negative.  And if she had any influence in getting high roller business to come to MGM Macau, one has to ask where she will steer these customers now. My answer:  to SJM.

In the long run, MGM may have a chance to buy Pansy Ho out.  It may be that if she gains control of SJM, the Macau government will require that she divest the interest.  That would be a good thing for MGM, in my view.  But I don’t think that’s likely until the Ho succession is settled.  And that may take a long time.  In the meanwhile, it seems to me MGM Macau has the worst of all possible worlds.

February reached an all-time high in revenue for the Macau gaming market

The previous record, 18.883 billion patacas (one pataca is roughly equal in value to one HK$), came last December.  February got off to a slow start, but that was more than offset by an extremely successfully New Year holiday period.  Overall, the month showed a 40% year on year gain.  The market shows no signs of a slowdown in growth, despite ongoing efforts by Beijing to cool off the mainland economy and an almost 60% expansion of revenue last year.

The following table comes from the Macau Gaming Inspection and Coordination Bureau:

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

why is Las Vegas Sands eyeing Spain?

February 24, 2011 By in Casinos, emerging markets, Entertainment, Industry Analysis, Recent Market Action, Securities regulation, Stock ideas Tags: , , , , , , , Leave a comment

the news on Spain…

I was very surprised when I read a newspaper article last week trumpeting LVS’s negotiations with the Spanish government to open a $13 billion-$20 billion casino resort project in that country.  After all, it wasn’t so long ago (late 2008) that LVS was:

–cutting back on expansion (the steel skeleton of the aborted Palazzo expansion still graces the Las Vegas Strip),

–cautioning that the company could be in violation of its debt covenants, and

–the Adelson family was injecting $1 billion of its own money into the company to help reduce its leverage.

…comes from Singapore

The report seems to have been based on a briefing by LVS of reporters in Singapore, although the company has issued no press release I can find, nor has it filed a statement of its plans, which may include casinos in Madrid and/or Barcelona, with the SEC.  LVS is apparently far enough along with that project to be meeting with contractors in Spain in a couple of weeks.

a rosy present

Of course, the situation for LVS is a lot better today than it was back then.  Las Vegas has turned cash flow positive (although it’s still losing money).  More important,  Macau generated ebitda (earnings before interest taxes depreciation and amortization) of $341 million in the fourth quarter.  And the recently opened Marina Bay Sands in Singapore produced ebitda of $306 million during the same period, even though the resort complex isn’t quite finished.  Business in both Asian regions is growing, with LVS thinking the Marina Bay might generate ebitda of $2 billion in 2011. (I’m pencilling in $1.5 billion for Macau.)

Spain makes some sense

In addition, the Spain idea may not be as far-fetched as it sounds at first.  How so?

Making the very crude (but probably still accurate enough) assumption that depreciation and amortization (an addition to cash flow) and interest expense (an outflow of money) cancel each other out, Macau + Singapore could together generate $3.5 billion in cash, before taxes, this year.  Presumably 2012 would be stronger, at the very least because the Marina Sands will have been completed. But business there is also continuing to grow so rapidly that LVS is worried about running out of hotel rooms.

We’ll have a much better sense of LVS’s financial obligations and its debt repayment schedule when the 2010 10-K comes out, but my numbers are at least directionally correct.  They illustrate three emerging characteristics of LVS:

–the company is generating a ton of cash

–most of that is outside the US

–LVS’s mountain of debt doesn’t look so bad anymore.

What does LVS do with its cash?

Well, we know what LVS doesn’t do.  It doesn’t repatriate any more of this money to the US than it has to, since the funds sent stateside become subject to federal income tax at up to a 35% rate.  Burning the money in the street instead would at least allow you to roast hot dogs.

To my mind, it also doesn’t keep a lot of spare cash in the bank in Singapore.  Why not?  Although Singapore’s economic development model is based on Japan, its legal and political systems grew their roots during Singapore’s time as a British colony.  For the British, no monopoly–like LVS and Genting have in the casino business in Singapore–lasts forever.  And the faster a monopolist makes money, the sooner the rules that are allowing windfall profits change.  No, I’m not worried that the decade or so LVS and Genting have as exclusive casino developers will be altered.  My question is about taxes.  I think having bank balances in the billions in Singapore just invites the government to raise the gaming levy.

Interestingly, apparently in response to a question from the audience in Singapore, LVS management also said it has no intention of taking the Marina Bay Sands public, citing the illiquidity of the Singapore and Hong Kong stock markets (arguably true in Singapore’s case, but not relevant, in my opinion).  I draw three conclusions from this answer:

1) LVS doesn’t need the money,

2) LVS would like to keep 100% of the Singapore cash flow potential, which could be mind-bogglingly high, for itself,

3) Marina Sands could easily be the vehicle LVS uses to establish and fund Spanish operations, since there are no potentially pesky minority shareholders to object.  Also, Sands China will likely have its hands full with further expansion in China.

it’s how they roll

Once you get past the headline shock and realize the LVS has the looming problem of how to reinvest its Asian cash flows, Spain doesn’t look so crazy after all.  An aggressive move, yes.  But that’s just how LVS rolls.

 

 

 

walking around Las Vegas last week

January 17, 2011 By in Casinos, Current Market Thoughts, Entertainment, Industry Analysis Tags: , , , , , , , Leave a comment

I was in Las Vegas with my family last week for the first time in about a year.

The naked girders of a planned addition to LVS’s Palazzo are still rusting away as they were a year ago.  And the metal bones of a couple of other casino projects decorate lots across the street from the WYNN resort.

The Trump hotel has opened, with the C-A-S-I-N-O letters removed from the sign on the front that marks the (long) drive from the Strip to the hotel door.  The absence of lights in the rooms after dark indicate that either everyone is wearing night-vision goggles or there aren’t many tenants.

I went into the Cosmopolitan, which is very trendy and has a strange, narrow rectangular casino floor.  And I saw the CityCenter for the first time–hotels, condos, casino and mall.  Very impressive, pretty empty–and an odd-looking casino here, too.

For a while, it looked as if snow would prevent us from flying back to the east coast.  A quick check of travel websites showed plenty of $50 and under rooms around, including at the Mirage.

A number of retail stores have gone out of business but the survivors aren’t sporting the profusion of SALE! banners they were in early 2010. Lots more people in restaurants.  A bunch of new restaurants, as well.

my thoughts

There were many more people around the Strip and in the casinos than I saw a year ago, even though the time we were there was a non-convention week, just after the CES.

Of course, it’s dangerous to generalize from just walking around.  I remember once, when Caesar’s was a public company, going to Atlantic City and seeing the Caesar’s there packed to the gills.  I called the company the following day and commented that they must be happy with the business they were doing.  They weren’t!  A main door was broken in the shut position, so gamblers who had lost all the money they intended to couldn’t get out–and were blocking the way to the slot machines.

Having said that, I’m willing to believe that Las Vegas is on the mend.

My walk brought home, however, just how extensive the hotel overcapacity in Las Vegas is.  Occupancies and room rates will remain low for a long time, I think.  That’s important, since the casinos themselves only account for about half a company’s profits in the good times.  The rest is the hotel.

I also suspect that the two new casinos at Cosmopolitan and CityCenter will end up being more or less overflow capacity that will be filled only when others are packed.  If so, the casino overcapacity isn’t so bad.  The real issue for this part of the business is whether American entrepreneurs (the prime casino patrons) will feel like gambling again.  My impression is that they already are.

The upcoming round of quarterly earnings reports for Las Vegas companies will be interesting.  My guess is that the second-line hotel casinos will suffer the most.  WYNN (I own it) is, I think, the only front-line firm with the financial wherewithal to keep refurbishing its rooms to keep its hotels in tip-top shape.  I wonder if that will make any difference.

December 2010 Macau gambling results

January 5, 2011 By in Asian economic development, Casinos, China, earnings conference calls, Entertainment, Hong Kong, Industry Analysis, Stock ideas Tags: , , , , , , , , , , , , Leave a comment

The Macau Gaming Inspection and Coordination Bureau announced December monthly and full-year 2010 revenue for the SAR’s casino industry on Monday.  The numbers are as follows:

* 1 HKD = 1.03MOP (Unit:MOP million )
Monthly Gross Revenue from Games of Fortune in 2009 and 2010
Monthly Gross Revenue Accumulated Gross Revenue
2010 2009 Variance 2010 2009 Variance
Jan 13,937 8,575 62.5% 13,937 8,575 62.5%
Feb 13,445 7,912 69.9% 27,383 16,488 66.1%
Mar 13,569 9,531 42.4% 40,951 26,019 57.4%
Apr 14,186 8,340 70.1% 55,137 34,359 60.5%
May 17,075 8,799 94.1% 72,211 43,158 67.3%
Jun 13,642 8,269 65.0% 85,853 51,427 66.9%
Jul 16,310 9,570 70.4% 102,163 60,997 67.5%
Aug 15,773 11,268 40.0% 117,935 72,265 63.2%
Sept 15,302 10,943 39.8% 133,237 83,208 60.1%
Oct 18,869 12,600 49.8% 152,106 95,808 58.8%
Nov 17,354 12,215 42.1% 169,460 108,022 56.9%
Dec 18,883 11,347 66.4% 188,343 119,369 57.8% 
Source:  Macau Gaming Inspection and Coordination Bureau

The December figures represent an all-time high for revenues for the market.  They exceed the seasonal peak of October.  And they are much better than expected, especially so since the Chinese central bank is trying to cool down the mainland economy.

According to a local Macau magazine, Macau Business, a big beneficiary of the gaming surge has been Wynn Macau (1128), which it says has passed Sands China (1928) for second place in market share, with 17% of total market revenues. Presumably, the firm’s profits will benefit from substantial operating leverage.  Stanley Ho’s SJM (Sociedade de Jogos de Macau, 0880), the long-time incumbent, remains the market leader with a 30% share.

The magazine also maintains that MGM Macau has risen out of last place in the market, passing Galaxy Entertainment (0028) to do so.

This news appears to be the reason that the Hong Kong-listed market entrants have been strong this week, as well as their US-traded parents.

Two points to note:

–the quarter on quarter gain in market revenues from September to December is 16%.  For 1128, however, if it has gained one percent of market share for the quarter, its revenue stands to be up 24% quarter on quarter.  If it has gained two points, which I think is closer to being correct, the growth rate in revenues is 32%.  Even without factoring in operating leverage, which 1128 surely has, this means a blowout quarter.  If the Macau Business information is correct, the firm’s accountants will doubtless be hard at work devising ways to hold the earnings down–like increasing bad debt reserves.  But there’ll be no chance of 1128 not reporting a stunning number.

This is good for its parent, WYNN, as well–both because WYNN owns four-fifths of 1128 and it collects management fees based on 1128’s success.

–MGM is off my radar screen because of the company’s connection with the Ho family.  I did notice that both LVS and WYNN mentioned a not-yet-listed competitor (to my mind, clearly MGM Macau) that had begun to rent its casino space to junket operators in return for a very low fee.  Both LVS and WYNN speculated that this firm was trying to generate revenue growth in any way possible so that it could make an initial public offering.  And MGM has raised its market share from 7% to 11%, according to MB. There’s another possible explanation for MGM Macau’s behavior, though.  I only recently learned that, despite the fact that the government has not permitted casinos to add new tables for some time now, MGM has been unable to attract enough gamblers to use all the capacity it has permission for.  It may have feared that this unused capacity would be diverted to someone else if it weren’t put into operation.  Time will tell.


buying Sands China (1928:HK): why, troubles, developments…(lll)

December 6, 2010 By in Casinos, Current Market Thoughts, emerging markets, Entertainment, Hong Kong, Industry Analysis, securities markets, Securities regulation Tags: , , , , , , , , , , , , Leave a comment

background

The Macau has been very proactive–and very astute–in cultivating the gambling business in the SAR.  It has, for example:

–introduced sophisticated competitors like WYNN, to spur growth and innovation,

–regulated the pace of capacity expansion, to maintain a balance between supply and demand as well as to regulate the number of construction workers imported into the economy at any one time, and

–prevented destructive price competition initiated by weaker entrants, to maintain a minimum level of overall market profitability.

The main area of planned capacity expansion for the Macau casinos is Cotai, an area that, as I see it, is more or less landfill.  Development of new properties there has two steps:

–an informal one, which consists in preliminary government approval, followed by land remediation and preparation for new construction, and

–a formal one, the preparation of a detailed casino plan and receipt of final government approval.

the Sands China situation Continue reading →