Tag Archives: Las Vegas Sands

Wynn Resorts’ 3Q12: Macau (HK:1128) flat, Las Vegas picking up, big dividend

October 26, 2012 By in Casinos, earnings conference calls, Entertainment, Industry Analysis, Stock ideas Tags: , , , , , , Leave a comment

the 3Q12 earnings report

WYNN reported earnings for 3Q12 after the market close on October 24th.

Revenues came in at $1.2985 billion, flat with $1.2983 billion collected during 3Q11.  Net income was $149.2 million, 12.5% higher than the $132.6 million posted in the comparable period last year.  Due to a sharp reduction in share count from 125.9 million to 100.9 million, eps showed a much sharper 41% increase, at $1.48 vs $1.05. (The shrinkage in outstanding shares is due to the forced cancellation of 24.5 million shares formerly owned by Aruze USA.)

Results exceeded the Wall Street analysts’ consensus eps estimate of $1.34.

WYNN also announced a special dividend of $7.50 a share to accompany the regular 4Q payout of $.50.  In addition, in its conference call the company said it would increase the regular dividend to $1/share, starting in 1Q13.

details

Property EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) for the quarter was $402.6 million, vs $381.1 million in 3Q11.  That breaks out into $292.2 million achieved in Macau and $110.4 million in Las Vegas.

Macau

If we subtract out from Macau results the portion owned by the investing public (including me) rather than Wynn Resorts, Macau accounts for about 2/3 of WYNN’s profits.  Over the past few years, Macau has also accounted for virtually all the earnings growth WYNN has achieved.

Wynn Macau earnings are now flattish, however, for several reasons:

–an economy-related slowdown in Chinese VIP gambling

–the opening of new casinos by competitors.  If nothing else, the novelty factor draws business to the newest venues, at least for a while

–Wynn Macau is at, or near, the capacity limits of its current physical plant.

Yes, the Macau government has given 1128 permission to build a new casino in Cotai, but that’s not scheduled to open until Chinese New Year in 2016.

In the meantime, we should expect no better than growth in line with the market for the Wynn properties in Macau.  But they will continue to generate huge free cash flow for shareholders and large management fees for the parent.

Las Vegas

EBITDA in Las Vegas is up by $25.2 million, or almost 30%, vs. 3Q11.

Most of the increase comes in casino operations.  About half the casino gain is from a return of the house “win” percentage to normal from last year’s unlucky lows.  The rest is genuine improvement in the amount of money wagered in the Wynn/Encore complex.  That’s a really good sign.

the dividend

As I mentioned yesterday, WYNN is in the unusual position of generating very high free cash flows, while having no current investment projects that need them.  WYNN is certainly not going to expand in Las Vegas, which is still plagued with substantial overcapacity.  The new Cotai project won’t need a lot of money soon, and it’s going to be financed mostly with debt, in any event.  Also, in today’s ultra-low interest rate environment, it makes little sense to repay cheap borrowings (arguably, one should be adding to debt, not subtracting).

So WYNN is electing to distribute much of its excess cash to shareholders.  1128 will likely soon follow suit.

buy or sell?

I hold both WYNN and 1128.   …LVS, too.  I think LVS is the cheapest of the three, and the only one I’d buy at today’s prices.

But I’m happy to hold the other two.  The Macau gambling market will likely be considerably better next year than this, although lack of capacity will be somewhat of a drag on 1128.  Las Vegas, where WYNN has considerably more operating leverage, will continue to make progress, I think.  And, as the cliché goes, with considerable dividend income I’m being paid to wait for earnings to accelerate.

what makes casino stocks interesting investments

October 25, 2012 By in Casinos, Dividends, Entertainment, Industry Analysis, Recent Market Action, Stock ideas Tags: , , , , , , , , , , Leave a comment

I started covering casino stocks as a securities analyst around 1980.  At that time, Atlantic City was still the hot, fast-growing market that investors focused on, although the bloom there was already coming off the rose.  Las Vegas was a backwater.  Neither Singaporean nor Australian casinos existed (legal ones, anyway).  Macau, then a Portuguese colony, was a Ho-family monopoly.

In those days, casino operators basically gave away food, hotel rooms and entertainment.  Non-gaming operations were cost centers, existing solely to induce customers to visit the gaming floors.  That situation has changed dramatically over the years.  In pre-Great Recession Las Vegas, which is the gold standard for today’s global gaming industry, non-gambling operations had risen to equal importance–and profitability–with the gaming floors.

It’s not so much that I find the gambling activities themselves so interesting.  As a professional portfolio manager, they used to remind me a lot of work–but with substantially diminished chances of making money.

Instead, what attracted me to casino stocks as an investor–and still does– is that:

–casinos are very cash generative once they’re up and running, and

–they’re relatively simple to analyze.

Under most circumstances, growth in gambling revenue is a direct function of two variables.  They are:  the increase in nominal GDP of the area where target customers live; and any increase in casino floor space.  So gains in gambling earnings are highly predictable.   Resort profits aren’t as easy to project, but they’re not much more difficult, either.

One caveat:  like many commercial property-based businesses, expansion of Las Vegas-style casinos only comes in $1 billion-plus increments.  So the gaming industry can be subject to periodic bouts of overcapacity, when, after a run of profitable years, everybody in a certain area decides to make a major expansion at the same time.  Think of the current situation in Las Vegas–although that’s by far the worst overcapacity I’ve ever seen.

Funnily enough, it’s precisely the disastrous last-decade expansion in Las Vegas and the current slowdown of gambling in Macau, where the Big Three of American casinos (Wynn, Sands and MGM) all have operations, that make WYNN and LVS attractive.  (As regular readers will be aware, I’m not a fan of MGM.)

Why?  The companies are generating tons of cash and they have no place to plow it back in to new casinos.

In the case of LVS, this means it’s repaying borrowings much faster than I think the consensus realizes.  As for WYNN, the company has just announced a special dividend of $7 a share.  It’s increasing the regular quarterly payout as well, from $.50 to $1.  This means the shares have a prospective yield of  3.4%.

More on WYNN tomorrow.

 

Macau casino gaming, September 2012

October 16, 2012 By in Asian economic development, Casinos, China, Current Market Thoughts, economics, Entertainment, Hong Kong, Industry Analysis, Stock ideas Tags: , , , , , , , , 1 Comment

September gambling results

Earlier this month, the Macau government’s Gaming Inspection and Coordination Bureau released its monthly report of gaming “win” for the SAR’s casino industry.  The figures are as follows:

* 1 HKD = 1.03MOP (Unit:MOP million )
Monthly Gross Revenue from Games of Fortune in 2012 and 2011
Monthly Gross Revenue Accumulated Gross Revenue
2012 2011 Variance 2012 2011 Variance
Jan 25,040 18,571 +34.8% 25,040 18,571 +34.8%
Feb 24,286 19,863 +22.3% 49,325 38,434 +28.3%
Mar 24,989 20,087 +24.4% 74,314 58,521 +27.0%
Apr 25,003 20,507 +21.9% 99,317 79,028 +25.7%
May 26,078 24,306 +7.3% 125,395 103,334 +21.3%
Jun 23,334 20,792 +12.2% 148,729 124,126 +19.8%
Jul 24,579 24,212 +1.5% 173,308 148,337 +16.8%
Aug 26,136 24,769 +5.5% 199,444 173,106 +15.2%
Sept 23,866 21,244 +12.3% 223,310 194,350 +14.9%

Source: Macau DICJ

Initially the Hong Kong stock market took the September figure of 23.9 billion patacas (US$3.1 billion) as disappointing.  For reasons best known to themselves, the consensus of Hong Kong gambling industry analysts had been that revenue should be up by 17% (I have no idea why they were so bullish).  As a result, on the day of the report the stocks all sold off.  But they rallied back the next day, as the market began to look at the accelerating pattern the year to year comparisons appear to be establishing over the past three months.

October as a key

October, which contains Golden Week–normally the period of the highest demand for gaming during the year–will be important to monitor.

October 2011 gaming win was 26.9 billion patacas, a 26% month on month increase over normally weak September.  I would take a gain of 15%+ for October this year as a signal that the market has already hit bottom and is on the mend.

an important time

In my view, the Macau gaming market is at a crucial juncture, one that participants in capital-intensive industries dread.  Casino capacity has expanded to the point where it, at least temporarily, outstrips demand.  How so?  A number of big new casino projects, started several years ago, have been coming on-line just as economic slowdown in China is putting a crimp on high rollers’ desire to gamble.

I think the casino operators and the Macau government have been reacting to the situation in an unusually sensible way.  New casino approvals have dried up.  Operators have been stretching out the timetables for already initiated projects–Sands China, for example, has already paid a penalty to the government so it can postpone by a year the opening of its latest Cotai expansion.  At the same time, casino companies have used the current period of extraordinarily low interest rates to lock in their project financing on favorable terms.

It seems to me, therefore, that intra-industry dynamics are not the big worry they would be in, say, the cement or paper or high-rise building construction.  The most important steps to stimulate global economic recovery are already being taken.  So holders of Macau casino stocks (like me) are simply waiting for evidence that will show the timing of the market’s rebound.

My thought has been that a significant pickup in demand will be a 2013 phenomenon, not a 2012 one.  I’m not yet willing to act, but the pattern of recent yoy market win comparisons suggests to me I may be being too pessimistic.

LVS’s 2Q12–plusses and minuses

July 30, 2012 By in Casinos, China, earnings conference calls, emerging markets, Entertainment, Hong Kong, Industry Analysis, Stock ideas Tags: , , , , , , Leave a comment

the report

After the New York close last Wednesday, LVS reported its 2Q12 results.  Revenue came in at $2.6 billion, up 10.1% from what the company took in during the year-ago quarter.  EBITDA (earnings before interest, taxes, depreciation and amortization) came in at $844.7 million.  That’s $56.9 million, or 6.3%, less than during 2Q11.

EPS were $.44 for the quarter, vs. $.54 in the comparable three months of 2011.  The figures were also considerably below the brokerage house analysts’ consensus of $.60 a share.

Wall Street didn’t like this news. The stock dropped more than 5%, breaking through support levels that had held over the past year, before recovering somewhat.  This is despite the fact that LVS had already lost almost 40% of its market value during the past several months on worries that Chinese gamblers would pull in their horns as the mainland economy slows.  It also didn’t matter that the entire earnings “miss” was the result of random or non-recurring factors.

There was one piece of bad news, coming out of Singapore.  Nevertheless, I think the stock weakness was a knee-jerk reaction to the headline numbers, not a result of analysis of the facts.

details

US

EBITDA was down about $22 million year on year for the quarter, at $91.3 million.  Bethlehem, PA chipped in an extra $5.9 million (the first time I think I’ve ever mentioned this casino in a post).  Otherwise, the business was flattish.  The biggest single reason for the yoy decline was that table games players were much “luckier” than average in Las Vegas.  They lost 16.5¢ of every dollar bet during 2Q12 vs. 20¢ during 2Q11–and a normal loss rate of 21%-24%.

Macau

Revenues for Sands China (HK: 1928) came in at $1.48 billion during 2Q12, up 22.3% from the $1.21 billion in revenue posted during 2Q11.  EBITDA rose by $41.0 million, or 10.7%, yoy, to $429 million.

That came despite pre-opening expenses that were $25.3 million higher than a year ago, mostly due to the debut of the new Cotai Central casino during the quarter.  In addition, high-roller patrons of the Venetian Macao, who were unusually unlucky this time last year, turned the tables during 2Q12 and took home more than their long-term average amount.  Factoring these two influences out, I think EBITDA would have been up by 20% or so.

One more complication:  during the quarter Sands wrote off $100.8 million it had spent on site preparation at yet another potential Cotai casino location–one the government there has denied Sands permission to develop.  The combination of the writeoff, pre-opening expenses and bad luck pushed net income down by 40% yoy to $160.5 million.

Still another quibble (a minor one, in my view, but apparently more than that to the markets):  LVS opened a significant new casino in Cotai during 2Q12, but its market share for the quarter didn’t expand as much as its increase in gambling capacity.  If the situation stays that way, it’s a problem.  I think it’s way too soon to judge, however.

A final point:  some commentators have criticized LVS for continuing a pell-mell expansion in Macau despite the current slowdown.  Quite the contrary.  Earlier this month, LVS announced it had requested government permission to push back completion of its current Cotai project by three years.

Singapore

Revenue for the Marina Bay Sands was down 5.8% yoy, at $694.8 million. during 2Q12.  EBITDA was down by 18.5% at $330.4 million.  Two reasons:

–high-roller gambling was off by about 6% and those who played were unusually lucky.  About half of the revenue effect–but none of the back luck–was offset by mass market gains.

–the provision Marina Bay Sands made for questionable receivables–which means gamling credit advances to high rollers that may not be paid back–amounted to $39.9 million in 2Q12 vs. $11.4 million in 2Q11.

If there’s a worry in the 50+ pages of the LVS’s quarterly earnings release, this is it.  I’m not particularly concerned.  The provision boosts the company’s bad credit reserve in Singapore to about a quarter of the $822 million in receivables outstanding.  It comes from specific identification of gamblers who have not been paying their bills on time.  It presumably also coincides with withdrawal of credit from these individuals.  So the issue will likely gradually fade away.  It bears watching, though.

overall

LVS estimates that eps would have been $.08 higher if its luck had been in line with long-term experience.  Another $.08 would have been tacked on, save for the writeoff in Macau.  Arguably, then, Wall Street hit LVS earnings right on the nose.

finances

Yes, EBITDA is not growing like it was a year ago.  But it appears to be at least steady at close to a $3.5 billion annual rate.

LVS now has $9.4 billion in debt outstanding (offset in part by $3.5 billion in cash), with borrowing costs of around 3%.  This implies annual net interest expense of a bit more than $350 million.  So pretax cash flow is in excess of $3 billion a year–meaning that the company could be completely debt-free in two years if it were to devote all its cash flow to repaying borrowings.  Quite a change from late 2008.

To my mind, it makes little sense to repay more than minimum requirements of very low-cost debt.  In fact, at 3% the company should be borrowing more.  LVS will have capital expenditures for the coming year of $1 billion.  It will also pay out $825 million in dividends.  But the point still remains that LVS is highly cash-generative.

valuation

LVS has a market capitalization of $30 billion.  Its interest in Sands China has a market value of about $18 billion.  If we award the same EBITDA multiple to 100%-owned Marina Bay Sands as Sands China receives in the Hong Kong market, the former has an asset value to LVS of $18 billion as well.  This leaves the US operations of LVS–Las Vegas, PA and royalty/management fees from Asia–with a value of minus $6 billion.

Of course, I have been making essentially the same argument for some time and that hasn’t stopped the stock price of LVS from plunging.  What’s happened is that the Hong Kong market is now pricing 1928 at $23 a share vs $32 in April.  However, the stock is now trading at about 12x cash flow and yielding 5%.  And that’s with cash flow at, or close to, what I think is a business cycle low.

That’s way too cheap. (Remember, I own LVS.  I’d own 1928, too, but I don’t want to buy on the pink sheets and a glitch in Fidelity’s software prevents Americans from buying the stock in Hong Kong).

2Q12 for Wynn Resorts (WYNN) and Wynn Macau (HK:1128)

July 23, 2012 By in Casinos, China, earnings conference calls, Entertainment, Lodging, Stock ideas Tags: , , , , , , , , Leave a comment

the results

After the New York close on July 17th, WYNN reported its financial results for 2Q12.  Revenue for WYNN, which includes 100% of the revenue of Wynn Macau, was $1.253 billion vs. $1.374 billion in the comparable period of 2011.  Earnings were $139.0 million vs. $200.8 million in last year’s 2Q (before subtracting a $107.5 million charge for the present value of a planned charitable contribution by Wynn Macau to the university there).

EPS were $1.38 in 2Q12, compared with $1.60 in 2Q11.  The reason the eps comparison looks better than the net profit comparison is that the forced sale of Aruze USA’s 24.5 million shares in WYNN to the company reduced the number of shares outstanding to by about 25% 101.0 million.

The immediate reaction of the market to the results was relief that the numbers weren’t weaker than they were.  Of course, on the other hand, it’s not that long ago that WYNN was closing in on the $140 mark, as Wynn Macau received permission to build a new casino in Cotai.

details

Las Vegas

Business is up around 5% year on year, both in the gambling and non-gambling parts of WYNN’s operations.

The hotel/entertainment/shopping gain is straightforward.  It’s not so easy to see the improvement on the gambling side, however.  The industry accounting convention is not to measure revenue by the amount that gamblers bet–which was up around 5% yoy for Wynn in 2Q12–but rather by the share of that amount that the casino wins from them.

For slot machine play, which consists of huge numbers of small transactions, the odds almost always even out during a given quarter.  It’s not the same for table games, particularly for the high-roller segment of the market that WYNN specializes in.  The typical table game “win” percentage for Wynn is about 23%.  But in the June quarter of 2012 that figure was a mere 15%.  And the comparison is against 2Q11, when the win percentage was a whopping 27.6%.  The negative win comparison for high stakes baccarat was even worse.

I don’t think this is anything to worry about.  It’s just a fact of life.  Over the coming quarters, the win percentage will doubtless return to normal–and results will look more favorable than they do now.  The bottom line, however, is that the trend for WYNN’s Las Vegas operations is up.

Macau

Wynn Macau’s results are flattish.  That’s mostly because, for the moment, that market has run out of steam.

Two reasons:

–slowdown in the Chinese economy has translated into a flattening out in business for Macau casinos from mainland gamblers, and

–at the same time, casino floor space in Macau has expanded significantly as operators begin to develop Cotai.

The result is increasing, price-driven competition for junket operators to steer customers to a given casino.  Either customers are offered larger credit lines, or junket operators are offered higher commissions.  Wynn Macau’s position is strong enough that it isn’t compelled to participate.  However, until the economic environment in China improves, Wynn Macau will be doing well simply to maintain the current level of operating profit.

my take

WYNN is the strongest operator in an industry that I think has attractive investment characteristics.  On the other hand, I think LVS is the cheaper stock. And, although I have no desire to sell either WYNN or LVS (I have switched a little money from the former to the latter, however), I think all the Macau-related stocks will mark time until the Chinese market begins to pick up again–probably in early next year.