Macau gambling: October 2012 results = an all-time record high

Last week, the Macau Gaming Inspection and Coordination Bureau released its report on “Monthly Gross Revenue from Games of Fortune” for October 2012.  Here are the figures:

* 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%
Oct 27,700 26,851 +3.2% 251,011 221,200 +13.5%
Source: Macau DICJ

Golden Week, an important celebratory and vacation period in China, comes in October.  So the month typically marks the yearly high point for casino revenues.  So, too, it appears, in 2012.  In fact, last month was the all-time high water mark for casino “win” (i.e., the amount lost by bettors, which is what the casinos count as revenue).

The October figure can be taken in two ways:

1. the positive viewpoint:  It’s a staggeringly high amount.  Macau casinos in the aggregate took in $3.5 billion during the month.  This would imply that gamblers put down bets totaling $70 billion+ over the period.  That’s roughly the GDP of either Indonesia or the Netherlands.  It’s also an all-time record for Macau, achieved during a period of austerity in China.

2.  the negative:  The year on year comparisons of Macau’s gambling revenue appear to have bottomed in July, with a +1.5% gain.  That was followed by +5.5% and +12.3% in the two succeeding months.  One might have hoped that the accelerating trend would continue in October, thereby providing more evidence that a market rebound is in progress.  It didn’t.  The yoy comparison of +3.2% is the weakest in recent memory, save July.

From an investment point of view, I find it interesting that the market has chosen #1, the bullish interpretation.  All the casino stocks spiked up on publication of the figures.  Not only that, but other stocks tied to a rebound in Chinese high-end consumer spending, like Chow Tai Fook Jewellery, did as well.

At the very least, the DICJ figures from May onward appear to be saying that the Macau gambling market is bouncing along the bottom.  Stock price action seems to imply not only Hong Kong market belief that the situation won’t deteriorate from the current level, but that a period of stronger growth is imminent.  If so, the biggest beneficiaries will be companies like Galaxy Entertainment and Sands China (I own shares in Galaxy and in LVS), which have recently opened new casinos in Cotai.

Macau casino gaming, September 2012

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.

Macau gaming in May 2012: a small month-on-month gain

the May DICJ report

Last week the Macau Gaming Inspection and Coordination Bureau released its monthly report on the gambling “win” achieved by the casinos in that market.  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%

Source: Macau DICJ

Month on month, the Macau gaming market expanded slightly, continuing the pattern of recent months.  What makes the May figures noteworthy, however, is the year on year comparison, which is very weak by recent standards.  There is an issue of the timing of the Golden Week holiday, which occurred in April this year and May last.  That’s typically an extra-strong period for the casinos.  We can easily correct for the calendar by averaging April and May results.  This gives a 14% year on year gain for the casino business over the two month period.  A little better, yes, but not what we’ve become used to.

stock market implications

This is a situation with lots of moving parts.

On the plus side,

1.  Let’s start with the Macau market.  If we assume the market is mature, then it will likely grow in line with nominal GDP in China.  Let’s put that at +10%.  Let’s also assume that the Macau government continues to have a policy stance that encourages profit growth, so that massive overcapacity like that no in Las Vegas doesn’t emerge.

If so, then operating profit growth from casino operations will likely be around 15% annually.  The development of non-casino operations–conventions, shows, dining…–probably boost the overall profit growth rate to +20%.

2.  There’s considerable evidence that the Macau gaming market isn’t mature and will continue to grow at a (considerably) higher than +10% rate, as better transportion links bring in gamblers from farther-away provinces, and gamblers in larger numbers from nearby locations.

3.  The Macau-related casino stocks have lost 1/4 to 1/3 of their market value over the past two months and are trading at about 15x trailing earnings.  The numbers are actually much messier than that, due mostly to costs of newly-opened capacity, but I think 15x is a reasonable yardstick to use.

1-3 suggest to me that earnings growth prospects are good and valuations are very reasonable.

On the negative side,

1.  If we’re bouncing along a cyclical bottom caused by a slowdown in the Chinese economy, monthly casino win may not rise much from the current rate over the remainder of 2012.  If so, several months of flattish–or even negative–year on year comparisons are in store for the second half.

2.  This may not be the bottom for the gaming market.  I’m willing to guess that it either is or is close, but…  The speed at which the Macau government acts on pending applications for construction of new casinos–one more has supposedly been in Macau’s plans for 2012–could be a reasonable indicator.

3.  Competition is beginning to emerge from other Asian countries.  The Philippines, focus of a legal dispute involving WYNN, is an example.  I tend to think, however, that other than Singapore, other areas will probably not be able to offer the combination of a high level of service in the casinos and physical safety elsewhere that Macau offers.  Still, competition is a potential risk.

4.  This may not be the bottom for the stocks.  During the panicky days early last October, Hong Kong-traded gambling stocks reached much lower lows.  Their US counterparts, however, are at or very close to the October levels where they stopped falling .

Like most situations, what to do in this one comes down to risk preferences.  None of these stocks are for the very risk averse.  My favorite continues to be LVS (I bought a small amount yesterday).

Macau gaming in February 2012: important signs of market strength

Macau gaming results

Yesterday, the Macao Gaming Inspection and Coordination Bureau released its report of Gross Revenue from Games of Fortune for the SAR’s casinos during the month of February.  Results were:

* 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%

Source: Macau Gaming Inspection and Coordination Bureau

The monthly figures require a little interpretation, since the important New Year holiday, which prompts a surge in casino visits, fell in January this year vs. February in 2011.  Sure, bears were apparently saying, January looks good.  But that’s only because of the holiday.  Wait until you see how ugly February will be.

Now February is in.  Despite the difficult comparison, gambling revenue grew 22%+.  Looking year to date, and thereby avoiding the issue of the timing of the New Year holiday, the Macau market is growing at 28%+, almost 3x the rate the gloomier analysts in Hong Kong had been predicting.

stock market reaction

The biggest stock market beneficiaries of the Macau government announcement have been Wynn Resorts in the US and Wynn Macau in Hong Kong.  This, despite the uncertainty–and the negative publicity–stemming from the break between Steve Wynn and Kazuo Okada.

The market moves do make some sense.  1128 is the main source of WYNN’s profits, so what’s good for the subsidiary is good for the parent.  And the continuing rapid growth of Macau suggests for 1128 that:

–regulators may approve its application to build in new casino in Cotai more quickly, since possible oversupply of gambling space is less of a worry, and

–the clear appeal of rivals just-opened casinos–just to see them, if nothing else–won’t mean that 1128 will struggle to find customers of its own.

NOTE:

Earlier today, WYNN filed an 8k saying that it had, in effect, received Macau government approval for a proposed new casino to be built in Cotai.  WYNN almost immediately retracted the filing, saying only that it had been made in error.  The stock, which had risen about 7%, was suspended for almost two hours for dissemination of the retraction news.  It hit a new intraday high after reopening but is sagging a bit as I’m writing this.

My guess is that the retracted 8k will prove to be factually correct, but that WYNN’s agent jumped the gun on making the announcement.  If so, what’s most striking to me would be how quickly the approval would have come after Kazuo Okada was removed from the WYNN share register.  Of course, it’s also possible that the approval has been prompted by the absence of the market slowdown Deutsche Bank analysts have been predicting for some time.  It could be that the timing is just coincidence, but I’m not sure that’s the right way to roll.

Macau gambling market results for November 2011: has a slowdown begun? …does it matter?

the Tang report’s conclusion

Macau gaming stocks began a late-August swoon when Karen Tang of Deutsche Bank, an influential securities analyst in the Hong Kong market, published a report on the casino stocks there.  In it, she predicted that a sharp and protracted slowdown in spending by high-rollers in the Macau gambling market would soon begin.  According to Reuters, she said that revenue growth would slow to +34% year on year in October 2011, +32% in November and +20% in December. Growth might shrink to as little as +10% during 2012.

her reasoning?

Affluent Chinese were no longer spending on European-made luxury cars.  She and the DB economics department felt that this was the harbinger of a widespread pullback in consumption by the wealthy.  Finally, they thought, the affluent were succumbing to the Beijing government’s attempts to rein in economic growth on the mainland.

does the argument make sense? 

In my opinion, no.   There’s been no sign of falloff in any other area of Chinese luxury spending.  Maybe the new cars were ugly, or the potential buyers had no garage space left.  I’m not saying that Chinese gamblers aren’t going to spend less in Macau in the coming months.  That could happen.  I’m only observing that I don’t think the luxury car situation is evidence in favor of this conclusion.

I think Ms. Tang would have been better off arguing that the Macau casino stocks were fully priced for the best possible outcome and therefore had no near-term upside.  That would mean that they could only go sideways or down–reason enough to take some profit in the sector.

Nevertheless, the Tang report was enough to drive the sector down very sharply in late August and throughout September.  At one point, some stocks had lost close to half their value before beginning to rebound.  …and then the Europe-related selling began.

what does all this mean for us today?

Well, the November Macau gambling market results were posted on the website of the Macau Gaming Inspection and Coordination Bureau on the afternoon of December 1st.  Here they are:

Monthly Gross Revenue from Games of Fortune in 2011 and 2010
Monthly Gross Revenue Accumulated Gross Revenue
2011 2010 Variance 2011 2010 Variance
Jan 18,571 13,937 +33.2% 18,571 13,937 +33.2%
Feb 19,863 13,445 +47.7% 38,434 27,383 +40.4%
Mar 20,087 13,569 +48.0% 58,521 40,951 +42.9%
Apr 20,507 14,186 +44.6% 79,028 55,137 +43.3%
May 24,306 17,075 +42.4% 103,334 72,211 +43.1%
Jun 20,792 13,642 +52.4% 124,126 85,853 +44.6%
Jul 24,212 16,310 +48.4% 148,337 102,163 +45.2%
Aug 24,769 15,773 +57.0% 173,106 117,935 +46.8%
Sept 21,244 15,302 +38.8% 194,350 133,237 +45.9%
Oct 26,851 18,869 +42.3% 221,200 152,106 +45.4%
Nov 23,058 17,354 +32.9% 244,258 169,460 +44.1%

Source: Macau DICJ

As you can see from the bold figures, after being wildly wrong about October growth prospects, Ms. Tang seems to have predicted the November results reasonably accurately.

Is there any significance to the November prediction?  My guess is that there isn’t much meaning for the stock market, even if this turns out to be more than a lucky guess.  For one thing, the stocks are much cheaper today than they were when the original report came out.  For another, Beijing has just publicly signaled that it is reversing its money policy to favor GDP growth.  So stocks should now be beginning to discount a reacceleration of the gambling business in Macau–not a slowdown.

It will be interesting to see how the Hong Kong market evaluates this situation.  My hunch is that the mid-November lows will hold, but that the market will want to see at least the December market results before becoming more bullish.

Macau market gambling results for October 2011

Last week, the Macau Gaming Inspection and coordination Bureau posted, as usual, the monthly total for the SAR’s gambling revenue.  At 26.8 billion patacas, the take was an all-time high–and a 42.3% year on year gain.  The figures for this year and last are as follows:

Monthly Gross Revenue from Games of Fortune in 2011 and 2010
Monthly Gross Revenue Accumulated Gross Revenue
2011 2010 Variance 2011 2010 Variance
Jan 18,571 13,937 +33.2% 18,571 13,937 +33.2%
Feb 19,863 13,445 +47.7% 38,434 27,383 +40.4%
Mar 20,087 13,569 +48.0% 58,521 40,951 +42.9%
Apr 20,507 14,186 +44.6% 79,028 55,137 +43.3%
May 24,306 17,075 +42.4% 103,334 72,211 +43.1%
Jun 20,792 13,642 +52.4% 124,126 85,853 +44.6%
Jul 24,212 16,310 +48.4% 148,337 102,163 +45.2%
Aug 24,769 15,773 +57.0% 173,106 117,935 +46.8%
Sept 21,244 15,302 +38.8% 194,350 133,237 +45.9%
Oct 26,851 18,869 +42.3% 221,200 152,106 +45.4%

Interestingly, Hong Kong-based analysts didn’t take this as an unambiguously good result.  They point out that, although Golden Week in early October was a rip-roaring success this year, the year on year growth of the market for the month as a whole was the lowest since January.  That’s obviously correct.

They conclude from this that Macau’s wealthy Chinese customers are feeling the pinch of the mainland’s efforts to slow economic growth, and are gambling less as a result.  A corollary, not so clearly spelled out, is that casinos are posting gambling winnings as revenues today that will ultimately have to be written off as uncollectable receivables.  That may also be true, although the bond rating agency Fitch says there’s no evidence of any of this so far. Fitch, in fact, estimates that the Macau gambling market will grow by at least 20% next year, double the rate that the more pessimistic analysts are calling for.

One notable feature of recent months’ results is the market share shift toward the companies with newer casinos, located in Cotai.  This suggests there’s gambling space in other, older casinos that is going unused.  There are any number of explanations for why this may be happening, like transportation bottlenecks that prevent visitors from reaching Macau, or casinos turn away “iffier” credits.  But it’s also possible that we’re reached a phase of market maturity where simply getting to Macau and gambling anywhere isn’t enough.  Some gamblers may be choosing not to go to Macau unless they get a minimum level of service.

If so, we should expect a more sedate rate of growth than the 45% or so we’re experiencing now.  But the more important investment issue may well be to separate winners from losers.  That’s certainly been the case so far in 2011, as Galaxy and China Sands have left other casinos in the dust–especially SJM and MGM.

 

Macau’s August 2011 gambling results: another record

August gaming results for Macau

Prior to the opening of Friday trading in Hong Kong, the Macau Gaming Inspection and Coordination Bureau released its monthly report for August on the gambling “win” of the casinos in the SAR.   Here are the fig

* 1 HKD = 1.03MOP (Unit:MOP million )
Monthly Gross Revenue from Games of Fortune in 2011 and 2010
Monthly Gross Revenue Accumulated Gross Revenue
2011 2010 Variance 2011 2010 Variance
Jan 18,571 13,937 +33.2% 18,571 13,937 +33.2%
Feb 19,863 13,445 +47.7% 38,434 27,383 +40.4%
Mar 20,087 13,569 +48.0% 58,521 40,951 +42.9%
Apr 20,507 14,186 +44.6% 79,028 55,137 +43.3%
May 24,306 17,075 +42.4% 103,334 72,211 +43.1%
Jun 20,792 13,642 +52.4% 124,126 85,853 +44.6%
Jul 24,212 16,310 +48.4% 148,337 102,163 +45.2%
Aug 24,769 15,773 +57.0% 173,106 117,935 +46.8%

Source: Macau Gaming Inspection and Coordination Bureau

Interestingly, despite this unexpected good news all the major Hong Kong-listed casino companies, except China Sands, went down by more than the market (the Hang Seng was off by 1.8% overnight).

The prevailing sentiment in Hong Kong seems to be that the Macau gaming market’s gains will never be any better than this and that a slowdown to 20% growth rate or less is imminent.  The reaction to today’s GICB announcement just confirms the same market reaction–selling–that a recent Deutsche Bank research report expressing the same sentiments provoked.

If extensive press reporting of the researcher’s reasoning–a falloff in Chinese buying of German luxury cars presages a general reduction in spending–are correct, her conclusion is a little loony.  So the DB report probably isn’t the reason for the selling.  But it apparently did voice worries that investors have had, perhaps on general principles, perhaps simply because the stocks have been such spectacular performers over the past year or two.

It is true that 2011 will be a tough act for Macau to follow.  My own feeling, however, is that the SAR has at least a couple of more years of substantially above normal growth before it settles down to an expansion rate more in line with that of China’s nominal GDP.  I think “settle down” would mean 10%-12% annual revenue growth for the market and a 15%-18% annual gain in aggregate profit.

Investment interest would then presumably turn to sorting out relative winners from relative losers. That may be happening now.  My pick for top of the winners’ column is Wynn Macau (1128); my sense is that Hong Kong’s is SJM (0880).

Ultimately, relative earnings growth will determine who’s right and who’s wrong.  For now, it seems to me that the selling of the past week or so among the Macau casino stocks already pretty well discounts the imminent maturity of the industry.  In Wynn Macau’s case, I think the price suggests Hong Kong views it as an average performer–no worse, but certainly no better.