September 2014 for the Macau gambling industry

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.

Macau gambling, October 2013

The Macau Gaming Inspection and Coordination Bureau (DICJ) recently released its tally of aggregate gambling winnings of the Chinese SAR’s casinos during the holiday month of October.  The results, in MOP millions, are as follows:

Monthly Gross Revenue from Games of Fortune in 2013 and 2012
Monthly Gross Revenue Accumulated Gross Revenue
2013 2012 Variance 2013 2012 Variance
Jan 26,864 25,040 +7.3% 26,864 25,040 +7.3%
Feb 27,084 24,286 +11.5% 53,948 49,325 +9.4%
Mar 31,336 24,989 +25.4% 85,284 74,314 +14.8%
Apr 28,305 25,003 +13.2% 113,589 99,317 +14.4%
May 29,589 26,078 +13.5% 143,178 125,395 +14.2%
Jun 28,269 23,334 +21.1% 171,447 148,729 +15.3%
Jul 29,485 24,579 +20.0% 200,932 173,308 +15.9%
Aug 30,737 26,136 +17.6% 231,670 199,444 +16.2%
Sept 28,963 23,866 +21.4% 260,632 223,310 +16.7%
Oct 36,477 27,700 +31.7% 297,109 251,011 +18.4%

Source: Macau DICJ.

 

The monthly “win” is an all-time record for Macau, and, in my view, stunningly good.

Two factors appear to be at work:

–the expansion of casino capacity and the parallel development of non-gambling entertainment (at the insistence of the Macau government) in the Cotai region is broadening the appeal of Macau as a tourist destination and drawing in a younger, “merely” affluent crowd in large numbers, and

–the upturn in the Chinese economy is prompting the return of increasing numbers of the enormously wealthy VIP baccarat players who have until now formed the backbone of Macau’s casino industry.

 

What I find interesting is that the Hong Kong-traded Macau casino stocks have been selling off on this good news.  This is partly, I think, because the stocks have been extremely good performers over the first three quarters of the year, as it became clearer that the Chinese economy was beginning to rebound.  The fact that more speculative and less skillful operators in the Macau market have been leading the pack had already been suggesting that the recent run was getting a bit long in the tooth.  In addition, however, I think the pullback we are seeing also is in line with an emerging mood of caution I see building in stock markets around the world.

I don’t think anything is wrong, either with Macau gambling or with the strongest operators.  A while ago, I trimmed my casino holdings a bit, based solely on position size.  Others may be doing the same, only timing their move a bit better than I did.  I expect that as Macau continues to exhibit strong growth in gambling win over the coming months, the stocks will take up their outperforming ways again, with Galaxy Entertainment, Sands China and possibly Wynn Macau in the vanguard.

Macau casinos, August 2013

Over the Labor Day weekend, the Macau Gaming Inspection and coordination Bureau (DICJ) released its monthly report on the aggregate amount won by the casinos in the SAR during the month.  Here are the figures:

* 1 HKD = 1.03MOP (Unit:MOP million )
Monthly Gross Revenue Accumulated Gross Revenue
2013 2012 Variance 2013 2012 Variance
Jan 26,864 25,040 +7.3% 26,864 25,040 +7.3%
Feb 27,084 24,286 +11.5% 53,948 49,325 +9.4%
Mar 31,336 24,989 +25.4% 85,284 74,314 +14.8%
Apr 28,305 25,003 +13.2% 113,589 99,317 +14.4%
May 29,589 26,078 +13.5% 143,178 125,395 +14.2%
Jun 28,269 23,334 +21.1% 171,447 148,729 +15.3%
Jul 29,485 24,579 +20.0% 200,932 173,308 +15.9%
Aug 30,737 26,136 +17.6% 231,670 199,444 +16.2%

Source: Macau DICJ

The figures are obviously good.  the MOP 30.7 billion achieved in August surpasses all but the win from last March, a holiday month.  They’re 4% better than the results for July.  They’re also up 17.6% year on year.  August of last year may have been negatively affected both by weather and by high rollers beginning to pull in their horns as the anti- conspicuous consumption attitude of the new Communist Party leadership began to make itself known.

What’s most interesting–and encouraging–are company comments that VIP gamblers are beginning to return in higher numbers to Macau as they feel more comfortable about what the Party’s anti-corruption stance and dislike of lavish displays of wealth actually means for them.  Apparently, gambling, in itself, isn’t a bad thing.  In addition, the tide of merely affluent gamblers–who might gamble US$10,000 on a visit, rather than US$1 million–is continuing to rise strongly.

The real shortage element at present is casino and hotel capacity to receive customers.  The biggest beneficiaries of market growth are those who are opening new space in Cotai.  To my mind, this means Galaxy Entertainment and Sands China (I own shares of  Galaxy and of Sands China’s parent, Las Vegas Sands.  (Both Fidelity and Schwab maintain Americans aren’t permitted to buy Sands China in Hong Kong and refuse to transact in the name.   I’ve asked LVS several times for an explanation–their investor relations people are clueless, however.  I find that disturbing for a big company, but not to the degree that I want to sell LVS.)

One’s instinct in any attractive market is to look for laggards–companies that may not be the best-positioned, but which are significantly cheaper than the leaders.  Buy them, wait for a run and trade into the leaders, the strategy goes.  In theory this sounds good.  And Hong Kongers have no trouble executing it among the Macau gambling stocks.  As for me, some of the laggards are controlled by people I don’t trust.  So I’d rather stick with the names I have (I also own Wynn Macau and WYNN).