October Macau gambling results

Just at midnight, New York time, the Macau Gaming Coordination and Inspection Bureau (DICJ) posted its report of aggregate casino win for the SAR during October.  The win, that is, the amount gamblers lost in the SAR, was MOP 28.0 billion (US$3.5 billion).  That’s up by 9.8% month-on-month, but down 23.2% year-on-year.

The result had been widely anticipated–and heavily publicized by the companies themselves, the government of the SAR and Hong Kong-based securities analysts.  Consensus estimates of the decline seem to me to have centered around -21% yoy.

The Hong Kong casino stocks were up a couple of percent in midday trading today when the DICJ report appeared.  Despite the wide publicity, the stocks immediately lost all their morning gains.  They drifted lower throughout the afternoon, ending down by around 3% for the day.

How could  stocks drop 5% on news that had arguably so fully anticipated?

I don’t think it’s that win was down 23% instead of 21%.  Both are equally weak.  More likely, in my view, is that short-term traders used the DICJ report to take profits after the stocks’ 15% gains in recent weeks.  It’s also possible that the market hadn’t grasped the current Macau casino situation as fully as I had thought.  It could be, as well, that the discounting mechanism for stocks nowadays in Hong Kong works more like the bond market in the US (reacting to strongly to current news as it hits the media) than the stock market.  (I doubt this last, but it has been a while since I devoted a serious chunk of my time to studying the Hong Kong market.)

my take

I’m not in a huge rush to buy, partly because I already have a pretty full weighting, both through the Hong Kong stocks and through WYNN and LVS.

My working hypothesis is that cyclical lows–10%+ below today’s close–have already been made.

Could the stocks drop another 5% from here–i.e., get halfway back to the lows of September?   …maybe, especially since the market upturn I anticipate will likely be in the spring or summer of 2015.  But it would take at least that much to get me interested again.  For now, I’m content to watch.

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 developments, December 2013–a longer view

The Macau Gaming Inspection and Coordination Bureau published its monthly “Gross Revenue from Games of Fortune” report (I love the names) a couple of days ago.  Here it is:

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%
Nov 30,179 24,882 +21.3% 327,288 275,893 +18.6%

Source: Macau DICJ.   Figures in millions of MOP.

Another very healthy month, in what has been for the Hong Kong consensus a surprisingly good year.  My only caution would be against extrapolating from the current year-on-year comparisons.  Yes, current figures are likely to trend upward in 2014 (by 1o%+).  But May through November of 2012 was an unusually weak period for Macau, as a result of overall global economic softness + uncertainty surrounding the once-in-a-decade change in Communist Party leadership on the mainland.  Comparisons will get much tougher, starting with December.

a pat on the back for Macau

In just over a decade the SAR has created a booming Las Vegas-style gambling market from pretty much nothing.  While doing so, it has also severely weakened the relative power and influence of the previous gaming monopolist, the Ho family, with its purported connections to the Chinese underworld.  By carefully controlling capacity additions and by banning cutthroat price competition, the industry has enjoyed almost uninterrupted prosperity.  So too the SAR>

where to from here?

This question has two aspects to it:

1.  how does the Macau gambling market evolve?  and

2.  how do the Macau gambling companies evolve?

My thoughts:

1.  The next several years are pretty much set.

New capacity is being added; new transportation links are being forced that will make Macau accessible to increasingly large portions of the mainland.  All-but-professional super rich VIP baccarat players are being supplemented by middle class tourists.  This latter development is in its infancy.

Three years down the road, Macau gambling revenue will be at least a third higher than now.  Spending on hotels/restaurants/shows/shopping?    …make up a number.  Double what it is now?

What then?  My guess is that if becoming the Las Vegas of 2000 was Macau’s aspiration, it’s fervent desire today is not to become the Las Vegas of 2013, a city mired in overcapacity.  I think the SAR will take its foot off the gaming pedal and (mixing my metaphors) begin to steer the economy in a non-gaming tourist direction.

I’m not saying the party is over–far from it–but maybe we’re eating the main course now.

2.  Casinos are gigantic cash flow generation machines.  Left to their own devices, they’d just plow that money back in to new capacity in Macau.  But so far they haven’t been allowed to give in to these impulses, nor will the future be any different, in my view.  What do they do with the money they’re going to be awash in.

Some of it will go to permitted new expansion in Macau. Some will go to repay debt–although with borrowing costs close to zero, no one is going to be in a great rush to pre-pay borrowings.

Some may end up in real estate development nearby (Hengqin, anyone?).  But real estate alone doesn’t make use of the casino operator’s special skills.

Dividends?   …probably so, but especially if the companies with US parents can do so in a tax-efficient way.

However, I think the next serious turn of the wheel will see at least some Macau players using their companies’ cash flow to build casinos elsewhere.  This could be a very interesting investment development, with Macau casino firms turning into multinational Asian gambling conglomerates.  Galaxy Entertainment, for example is already talking about this openly, with Japan as its first target.

This may well also be what Wynn ends up doing.  The Las Vegas Sands case is more complicated, since that firm has two Asian subsidiaries, one in Macau and one in Singapore.