Macau casinos

I haven’t written about the Macau casinos for some time, mostly because I haven’t had anything useful to say.  The fact that I’ve called this group horribly wrongly over the past year or so hasn’t encouraged me to make predictions, either.

I’ve traded around in the group (and, in the case of Wynn Macau and Sands China, their US parents, as well) but have kept my overall position size by and large intact.  Shows what I know.

It has seemed to me, wrongly, that all of the bad news about the casinos in Macau has been in the public domain for some time.  The anti-corruption campaign being waged by Beijing–that has made high rollers wary of exhibiting their wealth at the gaming tables–has been going on since 2013.  Restrictions on visitation rights from the mainland to Macau put in place last year have done the rest of the damage.

Both of these factors have been well-known for a long time.  Therefore, it has seemed to me, much/most of the potential damage had to already be factored into the prices of the stocks.

Wrong! The Macau casino stocks have been sold down again and again when the SAR’s gaming authority has announced each month the (highly predictable) year on year gambling revenue decline.  Figuring we were at the bottom six months ago as far as the stocks are concerned, as I did, has clearly been the wrong position to take.

As I’m writing this on Wednesday night, however, the stocks I pay particular attention to–Wynn Macau, Sands China and Galaxy Entertainment–are each up by more than 10%.

Why is this?

It’s because the mainland has rescinded the travel restrictions it inaugurated in 2014.  As far as visiting is concerned, we’re back to the older, more favorable rules.  This plus has been already reflected in US trading over the past two days, but only in overnight trading tonight in Hong Kong.

Are we at the bottom now?

For someone like me, who already has a significant position, this question has no action-related relevance.  And, as I’ve mentioned above, I’ve been wrong about these stocks for a considerable time.  Still, it’s hard to ignore a 10%-15% increase in stock prices.  Also, the second half of 2014 was the period when the Macau gambling market began a serious swoon. Therefore, year on year comparisons for the overall market should soon begin to improve.  We don’t need current results to get any better.  More than anything, the improving comparisons will be coming from deterioration in the base year, 2014.

So. yes, I think this is the bottom.

I also think that the upturn in the gambling market won’t be a rising tide that lifts all boats, was it has been in the past.  I think Wynn Macau, and to a lesser extent, Galaxy Entertainment, have the most to gain.

 

Macau casinos, February 25, 2015

Macau casino stocks in Hong Kong took a drubbing overnight, continuing weakness shown by US parents in Wall Street trading yesterday.  The US stocks are down again as I’m writing this.

Why?

Analysts had been estimating (guessing/hoping is probably a more accurate description) that the amount lost by gamblers during the current Lunar New Year month would come in at slightly more than half what they left at the tables during the comparable period last year.  With the month nearly gone, data so far indicate that the actuals will come in at somewhat less than half the 2014 take.  Hence the selloff.

If there’s a positive story for the Macau casinos–and I think there is a strong one–it has little to do with whether this month is good or not.

Current weakness is the result of  a campaign by Beijing that’s now deep in its second year.  The idea is to restore faith in the Communist Party by discouraging flashy over-the-top consumption by the politically well-connected.  It’s also aimed at quashing corrupt local government get-rich-quick schemes involving crazy real estate developments and unneeded, heavily polluting basic industry projects.  This two-pronged attack, which has had a negative effect on high-roller gambling in Macau, has lasted much longer than anyone, myself included, had predicted.  The February-to-date casino results seem to indicate that Beijing has not yet taken its foot off the regulatory accelerator.

The positive case has three parts:

–the development of the Cotai Strip along Las Vegas lines is creating a new, more lucrative, less volatile gambling market in Macau.  It’s for middle-class Chinese visitors who want a gambling vacation that also includes resort dining and entertainment.  This business has been expanding very rapidly.  It now accounts for about three-quarters of the SAR’s gambling profits.  Non-gambling attractions in Macau are still in their profit childhood.  In pre-recession Las Vegas, however, resort profit equaled that of the casinos.  So there’s plenty of room for expansion

–at some point–who know when–the current anti-corruption campaign will abate and high-roller business in Macau will begin to stabilize and then gradually expand again.  Beijing’s crackdown began in 2013 but only started to cause serious high-roller attrition in Macau in late spring last year.  So positive year-on-year earnings comparisons are unlikely before autumn.

–the stocks are reasonably priced–cheap, if you believe the first two points.

The Macau casino stocks are now what I would call a value idea–meaning that we have a good sense of what will happen but are pretty much at sea about when.  High dividend yields argue that we’re gin paid to wait.

One technical note:  the stocks hit relative low points about a month ago and have come back to those lows over the past few days.  It would be a sign that they may be finally bottoming if they can stay above the month-ago lows as the weak February results are officially announced.   Technicians would regard a breakdown below these lows would be a good thing in the US, but bad news in Hong Kong.

overnight rally in Macau casino stocks

In trading today, the Hong Kong stock market was up by around 1.3%.  But the Macau casino stocks traded there all rose by 5% or more.  One exception–the former monopoly casino operation, SJM (I’m not a fan), which rose by “only” 2.5%.

The near-term situation for the Macau casinos isn’t good.  Francis Tam, the SAR’s finance minister, has recently said that October will be a particularly weak month for casino win and that he doesn’t expect recovery until the second half of next year.

The reasons for the slump are also clear:  the mainland crackdown on corruption in general and conspicuous consumption in particular; protests in Hong; and, for October, the difficulty in matching the mammoth month (second-best in history) the casinos had this time a year ago.

Why the rally?

Two reasons, I think:

–the Macau casino stocks have been beaten down this year, are relatively cheap, and enjoy considerable support from their above-average dividend yields.  The group, ex SJM, had been up by 10% or so from its lows in late September – early October, even before today.

–the third-quarter earnings report from Wynn Resorts (WYNN), which contains information about its subsidiary Wynn Macau (HK: 1128), shows that the situation isn’t quite as bad as the consensus had been expecting.

what the WYNN report brings home

WYNN is a high-roller specialist.  In theory, then, 1128 should be hurt the most of all the casinos in Macau by the current slow contraction of the VIP gambler business.  Nevertheless, the Wynn Macau EBITDA (earnings before interest, taxes, depreciation and amortization–more or less, its cash generation) was basically flat with 3Q13!

Two reasons for this favorable outcome:

–the replacement of high rollers in Macau by the mass affluent (read:middle class, upper middle class) gamblers, who are much more profitable

–gamblers gravitating toward the better casino operators.  When the market was very hot a year ago, gamblers had trouble just locating a place to stay, so they ended up wherever they could find a bed and a seat at the table.  Now they have choices–and the market is sorting itself out into relative winners and losers.  In my view, this benefits the operators with Las Vegas experience.

what to do

For some time, I’ve been writing that I’ve been nibbling at Wynn Macau and Sands China–I already own a lot of Galaxy.  October win figures will likely be poor.  I’d use any weakness to add to those three.

 

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.

2Q14 results for Wynn Resorts (WYNN) and Wynn Macau (HK: 1128)

it’s been same old, same old for the big casino operators…

I haven’t written about WYNN and its subsidiary Wynn Macau (1128) for a while.  That’s mostly because I perceive the company to be in a holding pattern.  It has two casino operations:  Las Vegas and Macau, the latter through 72%-owned Wynn Resorts.

–In Las Vegas, all the major casino resort operators, WYNN included, upped their operating leverage by opening big new casino and hotel capacity in 2007-08, just as the recession was unfolding.  Demand dropped through the floor.    Profits disappeared faster.  Results since have been consistently weak as the casinos wait for demand to pick up and/or for weaker entries to close up shop.

–In the Macau market, which is now many times the size of Las Vegas, 1128 has been capacity constrained for some time.  Its next expansion, the Wynn Palace, isn’t slated to open until early 2016.

…until now

Las Vegas

For WYNN, the near-term story is Las Vegas.  And the change is for the better.  Room revenues in 2Q14 were up by 7.3% year-on-year in the quarter.  Average room rates rose to $283, up from $268 in 2Q13.  Occupancy increased from 88.4% from 86.9%.  To my mind, the room rate rise is a particularly important indicator of increasing demand.

In addition, the amount bet at WYNN’s Las Vegas tables was up by almost 15%, year-on-year.  The company’s win percentage was an unusually high 27.4%. vs.  the company’s expected range of 21% – 24%.  In all likelihood, the “extra” win from this quarter will be offset by sub-par “luck” in coming periods.  But, again, the more interesting number is the sharp jump in table games betting.

Slot machines were flat.

Management said on the earnings conference call that the 2Q strength was continuing into 3Q.

Macau

In Macau, the individual pluses and minuses for 1128 may be a little different, but the near-term profit profile–flattish–remains the same.

Overall market growth in Macau has slowed as an economic lull in China and Beijing’s anti-corruption campaign have tempered VIP’s  enthusiasm for high-stakes gambling.  This has been offset by a sharp jump in visits by the mass affluent, who–unlike their high-roller counterparts–are more concerned with being entertained than at winning a lot at baccarat.  They also want to eat, shop and go to shows.  So from the casinos’ point of view, they’re great customers.

While it waits for the new capacity the Wynn Palace will bring, 1128 is refurbishing its existing hotel and casino spaces.  It’s also raising salaries considerably, both to reinforce its reputation for superior service and to retain staff.  While these actions may make profits a bit weaker than they would be otherwise, it makes sense to use the current lull to set the stage for stronger growth in a year or two.

my take

WYNN has a market cap of $22 billion.  Its stake in 1128 is worth $16 billion, meaning that Wall Street is valuing the Wynn name, Las Vegas operations, royalties from Macau and the potential of future casino development in, say, Japan, at $6 billion.  That’s roughly 25x earnings.

WYNN shares yield 2.3%, 1128 about double that.

Last year, I sold the 1128 I had held since just after the IPO, partly because my casino holdings had become too large a part of my portfolio, partly in anticipation of the current fallow time.  I’m beginning to think about buying it back.  But I’d prefer to do so in the mid- to high-HK$20s.  Rightly or wrongly, I think I have time before the market begins to discount the opening of the Wynn Palace–with a presumed strong profit upsurge–in 2016.

I bought a lot of the WYNN I hold during the market collapse in early 2009.  I may be influenced by the tax I’d pay if I sold (I hope not, because this is virtually always a bad way to think), but I’m content to collect the dividend while I wait for Las Vegas to recover and the Wynn Palace to open.  To me it sounds as if the first may already be happening, which would be good news for WYNN shares.

What would I do if I owned nothing in this sector?

The least risky thing to do would be to buy a small amount of either WYNN or LVS and try to add on weakness.  LVS has the better near-term profit profile; WYNN has the better management, in my view.  Their valuations are similar, although their business models are a bit different.  LVS runs convention hotels; WYNN focuses on the high-roller niche.  (I own both.)

The most attractive firm I see at the moment is Galaxy Entertainment.  It’s a Macau-only operator and trades either in Hong Kong, or on the pink sheets–so it’s riskier than the other two.

 

 

 

 

 

 

 

 

Macau gambling, May 2014

The day before yesterday, the Macau Gaming Inspection and Coordination Bureau (DICJ) posted the total monthly gambling “win” (the amount lost by gamblers) for the SAR’s casinos during May.  The results were below analysts’ expectations, causing a selloff in the US gambling stocks with Macau presence, and a minor negative ripple in the Hong Kong-traded Macau casino stocks themselves.

The year-to-date DICJ results are:

Monthly Gross Revenue from Games of Fortune in 2014 and 2013
Monthly Gross Revenue Accumulated Gross Revenue
2014 2013 Variance 2014 2013 Variance
Jan 28,739 26,864 +7.0% 28,739 26,864 +7.0%
Feb 38,007 27,084 +40.3% 66,746 53,948 +23.7%
Mar 35,453 31,336 +13.1% 102,199 85,284 +19.8%
Apr 31,318 28,305 +10.6% 133,517 113,589 +17.5%
May 32,354 29,589 +9.3% 165,871 143,178 +15.8%

Source: Macau Gaming Inspection and Coordination Bureau

What’s going on?

First of all, and least important, the market had been expecting a 10%+ year-on-year gain in aggregate casino win, based on weekly reports of business results provided by the casinos.  The falloff during the last few days of the month is most likely a random variation in the casino luck factor, one that will eventually be reversed.

More generally, the so-so rate of yoy gain in win is the result of two opposing factors.  On the one hand, increases is betting by mainland high-rollers, the almost exclusive focus of the Macau market over the past decade, have slowed to a crawl.  On the other, affluent mass-market gambling is rising sharply.  Mass market gamblers bet smaller amounts, but lose a much higher percentage of the amount bet than VIPs (who are more or less professional gamblers).  Mass market patrons want entertainment, not necessarily gambling profits, so they don’t watch what they’re doing so closely.  They also spend a lot more on things like restaurants, shows and shopping.  We’ll know more about non-gambling when June financial reports are released by the casinos, but non-gambling profits have been rising sharply from a small base.  It’s important to remember that in the salad days of Las Vegas, non-gambling amounted to half of casino industry profits.  So growth in Macau has potentially a long way to grow.

The overall Macau market is facing capacity constraints that will only begin to easy next year.  In a sense, the current lull in new capacity additions is ending up being luckily timed, since it coincides with a slowdown in the VIP market.

All in all, it seems to me that the March-May gains in casino win are more indicative of what the rest of the year will be like than January-February.

The related stocks have sold off by about 20%–more than I would have expected–in a flat Hong Kong market over the past few months.  Stocks like Sands China and Galaxy Entertainment, which have little VIP exposure and lots of mass market, have declined at least as much as Wynn Macau, which is in the opposite position.

I find the Macau stocks hard to figure out.  It’s not their profit potential, it’s the way they trade in the Hong Kong market.  The current situation of little capacity addition was well-known a year ago.  The VIP slowdown could equally well have been anticipated.  I think the mass market and non-gambling profit development has been much more positive this year than the consensus expected.  In other words, the negatives are no worse, and the positives are a lot better.  Yet the stocks went up last year and have sold off so far in 2014.

My take?  I’m in this for the long haul.  I sold my Wynn Macau quite a while ago and have been looking for a reentry point.  Not yet, though.  I continue to own Galaxy Entertainment and would own Sands China as well, if it were easier for a US citizen to buy.  I’m looking to add to my holdings, but am in no rush.

Macau casinos, after their stock market decline

a weak few months

Macau casinos, and their foreign parents, have been bludgeoned in the stock market over the past couple of months.  Several reasons:

–general worry about stocks that had gone up a lot

–the Ukraine situation, which has unnerved European investors

–fear that the the current anti-corruption/anti-excessive consumption drive by Beijing will hurt the VIP business which has been the heart of Macau casino profits, and

–the possible proliferation of casino openings elsewhere in China, or in other Asian countries like the Philippines or Japan.

what, me worry?

Every portfolio investor acts on small amounts of imperfect information.  That’s why we don’t put all our eggs in one basket (Bernard Baruch to the contrary).   From where I sit, a lot of the negative things now being said about Macau seem to be (mistaken) attempts to explain the stock price drops.   I don’t think they have much factual basis.  Of course, even the best stock market investor is wrong 40%+ of the time.

For what it’s worth, here’s my take:

–So far there’s no hard evidence so far that Beijing’s anti-corruption campaign is having any negative effect on the VIP gambling business in Macau.

–More important, the Macau gambling market is no longer being driven solely by VIPs.  The new sweet spot is the mass affluent, a market segment that’s now the source of most of the SAR’s growth.  How so?  VIPs bet huge amounts, but they’re semi-professional gamblers.  They lose on average about 3% of the amount they bet; the casino rebates half of that, either to the high roller himself or to the middlemen who has brought him there.  So margins are razor-thin.  The mass affluent, on the other hand, are seeking entertainment.  At table games, they make much smaller bets, but they lose about a quarter of what they wager–and they don’t care that much.   A mass affluent pataca bet is worth 15x-20x in casino operating profit what a high roller pataca is.  Hordes of them are now descending on Macau.  (There’s also a shift among winners and losers within the market, but that’s another story.)

The mass affluent also want non-gambling entertainment.  In the salad days of Las Vegas, shows, concerts, restaurants…brought in just as much profit as the casino operations.  In Macau, this business is still in its infancy.  But I see no reason why Macau in the end will be any different.

–Transportation links are still being built to allow more far-flung areas of China to reach Macau, meaning market saturation is still years off.

–It makes no sense to me to believe both (1) that Beijing’s crackdown is aimed squarely at casinos and (2) that the government will give permission for more casinos to open in other areas of China.  But this is what some bears are saying.

–Macau has critical mass and lots of amenities.  Chinese is the dominant language.  Kidnapping high rollers isn’t an issue.  Japanese casinos, whatever they may eventually look like, are years away.  Singapore has already been up and running for a considerable while–and Chinese junket operators aren’t welcome there anyway.  Some VIPs will certainly try out the Philippines or other venues.  I just don’t see this as a big deal.

 

Yes, I trimmed my Macau exposure significantly last year–because my position size was much too large.   At this point, I’m a potential buyer, not a seller.