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buying Sands China (1928:HK): why, trouble, and recent developments (ll)

December 5, 2010 By in Casinos, Current Market Thoughts, Entertainment, Hong Kong, Industry Analysis, Securities regulation, Trading Tags: , , , , , , , , , Leave a comment

As I mentioned in my last post, I think Fidelity has the best international operation for individuals in the US to buy foreign stocks. The commissions are very reasonable. The traders are generally knowledgeable. And the Fidelity software allows you to trade in real time in foreign markets—meaning at midnight Eastern time for Asia or 5am for Europe.

I also have a tendency to trade in relatively less-known names and have rarely had difficulties. When I moved my main foreign account to Fidelity, the firm wouldn’t accept my holding in 2432:JP, the Japanese social networking firm DeNa (pronounced D-N-A). The transfer people mixed this security up with the Dena Bank in India. I haven’t really kept up with developments in India, but at the time foreigners could only hold Indian securities if they were institutional investors who had registered with, and were approved by, the Indian government.  So it couldn’t be in a non-registered account.  It took quite a while to straighten that one out!

An (eminently skippable) aside on Schwab

I tried for a while to use Schwab for international trading, but had a very bad experience with them. I (stupidly) placed an order to buy a Hong Kong stock without checking on the commission I would pay. Instead of the $100-$200 I had expected, the bill came to around $2,000, or 4%-5% of the principal amount of the trade. Yikes! (To boot, the stock was one of the worst picks I’ve ever made.)

When I got no satisfaction from the Schwab trading department over the phone, I decided to test the “talk to Chuck” exhortation I’d seen in advertisements. I wrote a letter addressed to the personal attention of Mr. Schwab, detailing my complaint.

To be brutally honest, I had no case. I had left myself open to a $2,000 charge by not determining the commission rate in advance. On the other hand, this is not a great way to treat a customer.  The most straightforward interpretation of the bill was that Schwab didn’t particularly want my business, or at least this business.

Anyway, I got a call from a woman who said she’d look into the matter and get back to me. A month later, having heard nothing from her I wrote a second letter to Mr. Schwab, enclosing a copy of the first. I got a second call, from a different person. He said, somewhat indiscreetly :

–when we hung up, my first caller had marked my file “closed” and not done anything,

–he would explain to me how the commission and fees were calculated.  But he couldn’t get the numbers, commission + fees, to get as high as $2,000 (he said he’d get back, but it’s been over three years, so I don’t expect he will)

–people misunderstand what “talk to Chuck” means. It doesn’t mean anyone actually gets to communicate with Mr. Schwab himself–as taking the commercials literally would lead you to believe. Instead, it means that all Schwab employees are so imbued with the principles of their founder that talking with any of them is just like talking to Chuck himself. Given I deduced my two conversations with “Chuck,” that an axiom of the Schwab credo appeared to be to ignore my complaints, if not everyone else’s.  So I took most of my money away.

Back to Fidelity.

At about 10pm one recent night, I turned on my computer, logged onto the Fidelity site and placed an order to buy shares of 1928:hk. Whoops. Error message. The stock trades in lots of 400 and I had inadvertently entered an odd lot order.

Easy to fix. I added 200 shares to the order and hit enter again. (Incidentally, Fidelity allows you to settle the trade either in the local currency or US$ and lets you buy currency on the spot, if you need to.  Pretty neat.)

Error message again. This time Fidelity said this order had to be placed with a broker, because it had a Reg-SHO issue.

Strange. Reg-SHO has to do with short-selling and the uptick rule, so it didn’t apply to my trade.

I called the 800 number contained in the message.

Whoops. Fidelity’s international department is only open between 8:30 am and 4:30 pm, New York time.

I called again the next morning. The trader I talked with said I didn’t have a Reg-SHO problem. I had a Reg-S problem.

Hmm. My understanding of Reg-S is this.  It allows a company  incorporated in the US to issue new securities to foreigners without having to file a registration statement with the SEC. Such shares are electronically marked (in the old days, there’d be a warning written on the physical share certificate), and can’t be sold to Americans.  Well, 1928 is incorporated in the Cayman Islands (typical for Hong Kong stocks).  Its home market is Hong Kong.

The Fidelity trader politely said there was more to Reg-S than I understood, exactly what being open to question. But neither of us really knew for sure. He said he’d check with his third-party data source to see if the Reg-S warning was correct or not.

When I called back the following morning, another trader told me S&P and FT had both confirmed that 1128 is a Reg-S security.  Therefore, the company couldn’t accept the trade.

a “mature” reaction

For all their talk of rational fundamental analysis, most Wall Street people, myself included, are deeply superstitious. I think it comes from operating in an environment where so many factors are out of your control.

At any rate, at this point I realized that, for me, the trade was cursed and I shouldn’t do it.

Now, there is an unsponsored ADR for 1928. So you can buy it on the pink sheets. The bid-asked spread, which can often be as much as 10% on smaller stocks, was within a couple of percent the day I looked. But the ADR is, to my eye, very illiquid, meaning it might be tough to sell if you needed to.

Just out of curiosity, I phoned and emailed the LVS investor relations department to see if they could explain what was going on with 1928 and Reg-S. They had no idea what I was talking about.

What did I end up doing?

A secondary consideration in my thinking about 1928 was that the stock had sold off about 15% from its recent high. It had made up about half its losses while I was trying in vain to buy it, making it a bit less interesting. 1128 had also fallen by about the same amount and hadn’t rebounded. So I bought a little bit of that.  That didn’t help me with my too-many-eggs-in-one-basket problem  But I figured it would give me time to look at the 1928 ADR more carefully, to decide if I could put up with the liquidity risk.

My gut feeling, however, is what I said earlier—the trade is cursed and I’ll only lose money if I buy Sands China. You’ll be able to tell if I override my better judgment and buy the ADR. You’ll see the Hong Kong shares crater soon after.

Actually, as you may be able to tell, I wrote this on Wednesday December 1st.  Sands China was suspended from trading on December 2nd in Hong Kong, pending dissemination of information.  The news was that the firm’s application for approval to build on two sites in Cotai had been rejected by the government.  On Friday, the stock opened down about 5% but recovered throughout the day.

More on this development in my next post.

buying Sands China (1928:HK): why I wanted to, troubles I had, recent developments (l)

December 3, 2010 By in Casinos, emerging markets, Entertainment, Hong Kong, Industry Analysis Tags: , , , , , , , Leave a comment

I’m going to cover this topic in three posts. Today I’m going to talk about why I wanted to buy Sands China. Tomorrow I’ll write about the troubles  I encountered in doing so—and what I ended up doing.  The final post will deal with the Macau government’s rejection of a Sands China expansion proposal.

the Macau (or Macao, as LVS spells it) gaming market

I’ve written about this market extensively elsewhere. You can find more details here and here. The executive summary:

Macau is a Special Administrative Region of China, like Hong Kong. That’s because, like Hong Kong, it was controlled by a foreign power—in this case, Portugal—and reverted top Chinese rule about the same time Hong Kong did.

Macau has been a gambling center for longer (since 1986) than I’ve been involved as an investor in Hong Kong. And because Macau is part of China, it has privileged access to gamblers from the mainland, a large, fast-growing market that has only partially been tapped.

The SAR government invited WYNN, and later LVS, into the market to bring it upscale and, in my opinion, to act as a counterweight to entrenched competitors reputed to be controlled by organized crime.

In other words, the Macau government wants WYNN and LVS to be successful.

the growth of China Continue reading →

Singapore the biggest factor in LVS’ 3Q10 earnings blowout

October 28, 2010 By in Casinos, China, emerging markets, Entertainment, Hong Kong, Industry Analysis, Japanese development Tags: , , , , , , , , , Leave a comment

the report

LVS reported 3Q10 earnings after the close yesterday.  Adjusted EBITDA was $645.2 million vs. $272.3 million in the year-ago quarter.  Revenue was $1.91 billion vs. $1.14 billion.  Diluted eps was $.34 vs. $.03 for the September quarter 2009 and a consensus estimate of $.27.

The stock rose about 11% in aftermarket trading.  WYNN went up in sympathy by 3.7% and MGM by 2%.  There was a significant positive reaction in Hong Kong as well, with 1928 up by about 9%, although 1128 barely budged.

the details

The EBITDA for the quarter breaks down by location as follows (all figures are in US$):

Macau     $307 million vs. $237.7 million in the September period of 2009

Singapore     $241.6 million vs not open

US     $74.4 million vs. $42.8 million.

the conference call

To my mind, the really stunning information came in the conference call.  Chairman Sheldon Adelson began by saying he had been wrong at the company’s annual meeting to say EBITDA for LVS could be $3 billion in 2011.  According to Mr. Sheldon, business in October is running “substantially in excess” of that figure.

In Singapore, where all the elements of the resort complex are not yet in place, October revenues have been running at $8.4 million per day, at a 50% EBITDA margin.  This works out to EBITDA of $130 million for this month alone.  True, October is a holiday month.  But LVS also said that business momentum has been steadily building, with each month in the September quarter better than the previous one.

In Macau, October will also turn out to be a record month.

Las Vegas is slowly improving.  Demand from groups is very strong but massive overcapacity in the city will keep hotel room rates from rising.  Bethlehem, PA will benefit from the introduction of table games and from the hotel LVS is building there.

impressions

I don’t know LVS well enough to have an investment opinion, although it does appear the company has decisively turned the corner.  The biggest investment issue is that at the June 10-Q, LVS had about $9.5 billion in liabilities on the balance sheet, even after netting out $3.5 billion in cash on hand.  LVS thinks that when it gets permission to sell apartments at its Four Seasons complex in Macau, they could go for up to $1.4 billion.  Mr. Adelson also believes that LVS will be able to sell its retail space in Singapore for enough to repay all its construction-related debt there.  These sales have the potential to transform LVS’s capital structure.  On the other hand, LVS now appears to be lobbying aggressively to expand into Japan and Korea.

Singapore has an open-ended feel to it.  It’s possible LVS is only scratching the surface of potential demand.

In Macau, Mr. Adelson thinks all the competitors, except for LVS and WYNN, are starting to revert to the traditional way of doing gambling business.  That is to say, they are beginning to in effect rent their casino space to junket operators for a small fee.  Thereby, they avoid the problems of extension and collection of credit.  On the other hand, they lose contact with the high roller customers.  Presumably they become less desirable venues and end up being considerably less profitable than WYNN and LVS.

LVS has “mixed feelings” about Las Vegas.  Overcapacity won’t go away soon.  Even if smaller operators go into bankruptcy, the hotels and casinos will be acquired by entrepreneurs who will reopen them.  Bethlehem has the problem of competition from nearby states that are sponsoring casino gambling as a way to address budget woes.

We’ll get more information on Las Vegas and Macau when WYNN reports next Tuesday.

 

 

stock prices can “talk”

October 12, 2010 By in How often to measure, Portfolio management, Stock ideas, Trading Tags: , , , , , , , , , , , Leave a comment

not for everyone

I look at the prices of the stocks I hold every day.  Sometimes, but not always, I’ll look several times intra-day.  The advent of smartphones has made this possible for everyone to do, both for US and foreign stocks.  This is so, almost no matter where you are.

It takes a substantial amount of self-control and emotional discipline to do this productively.  I’ve seen almost every professional investor I’ve worked with, including myself, at one time or another mesmerized–and paralyzed into inaction–by staring at random fluctuations of stocks marching across the screen that’s virtually always on your desk.  The only short-term cure is to turn the machine off.  Otherwise, it’s kind of like watching a trashy TV show.  You know it’s a waste of time but you’re sucked in.

With TV, this compulsion to watch may come when you have other, unpleasant, stuff to do.  For investors, it’s typically when plans have gone awry and you’re hoping against hope that a miracle will happen and you’ll see the situation reversing itself on your computer.  It never works.

Still, there’s sometimes information to be gleaned from stock prices.  Sometimes, the movements are unusual in that they’re not random.  The only way you can tell is by checking them regularly.

how I learned

My first international portfolio job, managing holdings in smaller (that is, non-Japan) Pacific Basin markets, was also my first time working in non-US markets.  Every morning my boss would call me into her office.  She always had a report showing prices and volumes for all the major stocks–whether we held them or not–in all the areas I was responsible for.

She would name a stock.  I had to tell her the stock price change, in dollars and cents and in percentage terms, the trading volume and who the major brokers were who were active in the stock–both on the buy and sell side.  I also had to say how the trading in this stock compared with the trading in similar stocks in the same industry.

This grilling went on for 15-30 minutes, every day for several months.  I stopped having to do this, I think, when I started to give my boss significant information that she didn’t already have.  Although I wouldn’t have described the process as pleasant, my boss forced me over a period of time to try to distinguish between random and information-laden price/volume data and to think about and improve my analytic/intuitive capabilities in this area.  Otherwise, I might still be in that room!

an (obvious) example

A number of years ago, I owned a Canadian energy royalty trust.  The stocks were primarily owned by Americans attracted by high income.  I bought after they collapsed when Canada announced the payouts were going to become subject to Canadian income tax.  The stock I bought had a 14% dividend yield that was slated to be gradually reduced to 8% as the new income tax was phased in.

One afternoon, very close to 4pm, someone placed a million share order, at the market, in the stock.  The US$20 million that the order represented amounted to about half a day’s volume and was maybe 100x the size of the typical order.  The broker who got the order seemed to do the minimum legally required to find stock away from his in-house market maker and then filled the order, pushing the stock price up about 5% in the process.

This trade screamed that something unusual was going on.  Maybe you should  think twice before saying someone with $20 million to spend on a single stock is a total idiot, but this trade was done in a way that would humiliate any professional trader.  So either the buyer was an idiot by entering a huge order with no price sensitivity, or he knew something that the market wasn’t yet aware of.  The “something” also had to be such that even waiting until the next day was an unacceptable risk.

A few weeks later, the stock was bid for by a Middle Eastern sovereign wealth fund at a 25% premium.

why I’m writing about this today

As regular readers of this blog will know, I like the casino industry–because it’s simple to analyze–and I own both WYNN and 1128 (Wynn Macau).  Overnight, 1128 was up 8.7% to HK$15.98, after hitting an intra-day high of HK$16.40.  The stock just doesn’t normally move more than a few percent in a day.

Sands China (1928) and Galaxy Entertainment (0027) were both up 4.6%.  The Hang Seng, in contrast, was up 1.2% and its China Enterprises index was up 1.5%.

These are all unusual price movements, although 1128 jumps out as extraordinary, especially since all three stocks have been star performers in the Hong Kong market this year and are all trading at relatively high PE ratios.

What’s going on?  My guess is that information is leaking out that the Golden Week holiday has gone surprisingly well for the Macau casinos–and especially so for the American-run ones.

What am I doing as a result?  I’m hanging on to my entire 1128 position longer than I would otherwise.  In my analysis of the Wynn-related companies posted earlier this year, I had used a sum-of-the-parts method to look at WYNN.  I started with the idea that HK$15 (20x what I estimated 2010 eps would be) was a fair price for 1128.  Although I may not have written it, I’ve been thinking that HK$18 (same multiple, eps up 20%) is a reasonable first target for Wynn Macau for 2011.

Ordinarily, I’d be selling a portion of the 1128 I hold, maybe with a limit order of HK$16.50, hoping to buy it back later on at a lower price.  I think I’m going to wait and see, instead.

Addendum:  WYNN gained 8.5% in New York trading on Monday in a flat overall market.  If we figure that 1128 represents at current levels about 70% of the market value of WYNN, the move up in 1128 is the equivalent of a 6% rise in WYNN.  The “extra” 2.5% is the interesting part of the parent’s performance.

The Macau gambling market: September 2010 results

October 7, 2010 By in Asian economic development, Casinos, China, Current Market Thoughts, Entertainment, Hong Kong, Industry Analysis, Stock ideas, Uncategorized Tags: , , , , , , , , Leave a comment

The Gaming Inspection, and Coordination Bureau of Macau, the casino regulator in the SAR, posts total market casino win statistics monthly on its website.

The 2010 figures, year to date, along with comparisons with the comparable periods of 2009, 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 – – – – – –
Nov – – – – – –
Dec – – – – – –

Source:  Gaming Coordination and Inspection Bureau, Macau SAR

The pataca is worth about US$0.125.  So the market win in September is about US$1.9 billion.

To me, the most interesting aspect of the report is how quickly Wall Street picked up on it.  The figures were posted on the GCIB website at around 7am, New York time, on Monday.  Yet, the strong positive response to the figures in New York trading could be seen in the stock prices of the US firms with Macau interests–WYNN, LVS and MGM–from the opening bell.  US gaming analysts’ reports (I’ve only seen abstracts on the internet) commenting on the figures were apparently circulating among professional investors earlier than that.

the September figures

They’re really good.  That’s the bottom line.  Beyond that, the statistics aren’t completely straightforward.

Year over year comparisons are affected by the financial crisis, which severely reduced casino patronage in the first half of last year.  The market was still up for 2009, but only by about 10% vs. 2008.  If we look at the two-year growth rate for the market, as a way of offsetting some of the recession distortion, the advance comes in at a heady 30% annual rate.  That’s probably a better indicator of the market’s expansion than the 60%+ growth some first-half 2010 months showed.

In addition to the recession, government regulation has had an effect on the longer-term growth figures as well.  For one thing, it’s much easier today than it was a couple of years ago for a Chinese citizen to get a government ok to visit Macau.  For another, the SAR has stepped in over the past couple of years to slow down capacity expansion, capping the installation of new table games in Macau to an extra 10% in total.  And it intervened early in a potentially profit-devastating price war over VIP junkets, setting a ceiling on the incentive fees a casino could pay to organizers for steering clients their way.

The result of government policy, both the mainland and Macau, has generally been to slow revenue growth, meaning that above-average growth will continue for longer, but to ensure better profit performance.

where to from here?

One of the beauties of the casino business is that it’s relatively simple to analyze.  If we assume that the share of their income that gamblers wager in casinos is relatively fixed, then market revenue growth should be a function of expansion of nominal GDP and of growth in the number of gamblers.  In a mature market, the growth in gamblers is simply a function of the growth in the working population.

For Macao, the predominant source of gamblers is the mainland, at about 50%, followed by Hong Kong at around 25%.  Let’s say that nominal GDP will expand at around a 10% rate for the next few years in both places.  Put working population growth at 1%.  This would mean that in a mature state, Macau gaming revenues would rise by about 12% annually.

But the number of visitors to Macau is rising at close to a 20% annual rate, indicating that there are still gamblers, especially in China, who are potential Macau customers but who have yet to visit.  How long can this rapid annual increase in visitors go on?  That’s the big question for this market.

The short answer is there’s no way to tell.  We can try to extrapolate from experience in the US in Las Vegas.  The worry is that the size and structure of the US and Chinese economies is so different.  But here’s my guess:

Let’s say half the population of the US is affluent enough to afford to gamble in Las Vegas.  That would be 140 million people.  About 36 million, or about a quarter of the total, visited Las Vegas last year.  If we say that 10% of the population of China is affluent enough to gamble in Macau, that would be a potential market of about 130 million.  Of that number, about 10 million, or 7.7% of the total, are likely to visit Macau this year.

So, if mainland Chinese had the same propensity to gamble as Americans, then there are about another 20-25 million potential customers on the mainland yet to be tapped.

Even if that number is twice the real size, that would mean that mainland visitation to Macau could double from the current level, which could add 10% to the annual growth rate of casino revenues for the next seven or eight years.

signs capacity is getting tighter

We’ll know more when LVS, WYNN and MGM report September quarter earnings, but I’ve heard reports that hotel rooms are becoming harder to find between now and the end of the calendar year.  If true, that would be god for the non-casino side of the Macau businesses run by Americans.  The casinos might benefit as well, since an excess of patrons in a static capacity environment means table stakes may rise–leading by itself to a revenue boost.

lots of stock choices

So far, a quickly rising tide has supported all casino boats, year-to-date at least.  More than doubling, the Hong Kong-controlled companies have been the best performers.  Foreign-controlled firms have made about half those gains.

To me, the most basic questions are:

–do you want an American company trying to being Las Vegas-style gaming to Macau?  Americans think this is superior technology; Hong Kong investors, so far, see strangers who don’t know the market that well.  Hong Kong’s Disneyland probably didn’t help the Americans’ cause.

–do you want the baggage the Ho family brings with it?  Again, so far, this has been no problem for Hong Kong investors, although it has always been one for me.

My answers:  stick with either Wynn Macau or Sands China, or their US parents.