Macau and ATM machines

During its days as a Portuguese colony, Macau was reputed to be a key center used by the mainland underworld to launder its ill-gotten gains.  The main laundromat, as it were, was allegedly the  collection of casinos run under a monopoly granted to the Ho family.

After the return of Macau to Chinese rule, the government moved quickly to break the monopoly and to guide the casino industry toward the Las Vegas model through technology transfer by granting casino licenses mainly to prominent US Las gambling operators with a Disney-esque approach to business.

A second political problem threatening the legitimacy of the Chinese Communist Party began to arise during the last decade as fabulously wealthy political insiders began to flaunt their riches through elaborate, ostentatious gambling jaunts to Macau.  A crackdown ensued, which also served the long-term interests of Macau by strongly redirecting the emphasis of the Macau gambling industry away from high-roller VIPs toward middle class and upper middle class patrons.  This, by the way, follows the development of the gambling market in the US.

During US trading hours yesterday, media reports from Hong Kong surfaced suggesting Beijing was beginning to crack down on middle class gamblers as well as VIPs.  The stories said the daily limit that mainland residents vacationing in Macau are allowed to withdraw from their (renminbi-denominated) bank accounts through a local ATM would be cut in half from–MOP 10,000 ($1300) to MOP 5,000, effective tomorrow.

Given Beijing’s plans for Macau’s economic development, this report made little sense–although, realistically speaking, who knows what Beijing’s day-to-day thoughts are.

The US-traded Macau names immediately dropped by around a tenth in a flattish market.  In today’s Hong Kong trading, Macau gambling stocks fell by 7% or so (expressing about half the negative sentiment in NY)–with the strongest (relative) performance by Ho-controlled SJM.

After the close of Hong Kong trading, mainland authorities “clarified” the initial report, saying that, yes, the per transaction limit on ATM withdrawals by mainlanders in Macau was being cut in half, but that the total daily limit would remain unchanged.  No reason why the clarification took 12 hours to be made.

In early US trading today, Macau-related stocks have made up about a third of their losses from yesterday.

As a holder of Wynn Resorts, Wynn Macau and Galaxy Entertainment, I’m going to sit on my hands.  If I held nothing, I’d be inclined to buy a bit.  My preference would be for the Hong Kong names, however, for two reasons:  the US market is being driven now by dreams of a domestic industrial revival, so foreign casinos aren’t at the top of institutions’ wish lists; and investors who dumped out their Macau holdings in a panic yesterday will be loathe to buy them back at a higher price, at least for a while.

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.

the evolution of Macau gambling

an old fashioned winter here

We woke up to see  two foot snow boulders blocking our driveway this morning, a product of the second of three snowstorms hitting the northeast US this week.

Macau gambling stocks sold off sharply in Hong Kong overnight on reports that the year-on-year revenue gains are starting to shrink in percentage terms.  I find this a little weird.  Of course the comparisons are narrowing.  We’re cycling past the period of weakness surrounding the change in Communist Party leadership in later 2011 – early 2012.  Who didn’t know this?  In particular, who didn’t know this when the stocks were shooting through the roof less than a month ago?

Anyway, on to today’s topic, the evolution of Macau gambling.

— When Macau was a Portuguese colony, it had a single monopoly casino operator, Stanley Ho.  Although I’ve visited a lot of Asian casinos, I never made it to Macau.  Friends told me operations were dull, potentially dangerous and with a strong influence from the Chinese underworld.  …sort of  like Las Vegas in the very early days.

–When Macau reverted to Chinese rule, the new government decided to remake its gambling industry into a Pacific clone of present-day Las Vegas.  To do so, it invited in WYNN–and later LVS–among others, to set up shop.

–The early focus was on the high-roller gambling niche.  This required the least infrastructure.  It tapped an already existing clientele that was able to sidestep the considerable administrative hassle involved at that time in leaving the mainland.  The government intention was always to create a large mass-market gambling result in the SAR, however.

–The high roller business isn’t as easy as it might seem.  Clients are typically highly skilled gamblers, who lose, at high stakes baccarat  (the dominant game in Macau), around 3% of the money they bet.  However, they require perks while they’re gambling.  The intermediaries who steer them to a given casino (sometimes the high rollers themselves) also collect commissions for doing so.  The commissions can amount to half the pre-amenities take by the casino.

At one point, a potentially ruinous bidding war broke out in Macau, as less successful entrants sought to “buy” high roller business by conceding virtually all their profits to junket operators who brought the VIPs.  The government stepped in, though, and set limits on commission payments, saying its goal was to ensure that all the casinos remained profitable.

–During the past year or so, Macau reached the tipping point where there were enough hotel rooms, restaurants and entertainment to foster a mass market tourist business.  There were also much better transportation links (even better ones to come) and a much more relaxed attitude by Beijing toward travel to Macau.

The important thing to note is that mass market gambling operates by different rules.  It’s much more a “normal” resort hotel business.  Negotiation with the client is at a minimum.  Very little personal attention is required.  Gamblers bet less–but they’re generally not very skilled, so they can lose 20% – 30% of the money they wager.  Therefore, allocating casino space to them can still be very lucrative–especially so for operators who don’t have a knack for running high roller operations.

Put in different terms, you no longer need to be Steve Wynn to succeed in Macau.  The market is expanding to include Sheldon Adelson’s wheelhouse, as well.

Two investment consequences:

–most casinos are increasing their allocation of floor space to mass market gamblers because, for them at least, it’s much more profitable to do so.  So they’re making more money.

–the reduction in the number of casinos using price as their main tool to attract VIPs means that downward pressure on the profits for Wynn Macau-like operations is abating, as well.

Everyone becomes more profitable!

PS:  When I wrote this post I hadn’t yet looked at the website of the Macau casino authority.  The DICJ reports that monthly revenue from the SAR’s casinos was up only 7% year-on-year in January.  I think the true run rate is well more than double that figure.  The main reason for the weak reported outcome, I think, is the timing of the Lunar New Year.  As the New York market works this out, both WYNN and LVS, which were each down by over five percent in early trading, have rallied close to breakeven.

gambling stock arbitrage

on a winning streak

Macau gambling stocks have been on a tear recently.

During the past three months, the S&P 500 is up by 4.5%, the Hang Seng down by 1.8%

Over the same time span, Galaxy Entertainment (HK: 0027) is up by 24.4%; MGM China (2282) is up by 30.3%; Sands China (1928) has gained 32.8%; and the current star of Hong Kong (although a severe laggard until the current run), Wynn Macau (1128) is up by 40%.

The three months have seen advances by the US parents of the Macau gambling stocks, as well, but of a lesser magnitude.  MGM is up by 12.5%. LVS by 21.5% and WYNN by 21.9%.  MPEL, an unusual situation, is ahead by 25%.

arbitrage situation?

This performance differential has created an unusual valuation situation:

WYNN, for the first time I can remember, is trading at a slight discount to the value of its interest in Wynn Macau, meaning the company’s US holdings–the brand name, royalty/management fees from 1128, and the Las Vegas operations–are being valued on Wall Street at right around zero.

LVS is a less clear case, since its valuable Singapore gambling subsidiary is 100%-owned, and therefore not publicly traded.  Still, LVS’s interest in 1928 represents about 3/4 of the parent’s market cap.  Even if we valued Marina Sands at 40% of the worth of Sands China, a figure I think is too low, the total of the two subsidiaries represents about 115% of LVS’s worth on Wall Street.

MGM, in my view still by far the weakest of the Las Vegas Big Three, doesn’t get my hands racing to fill out a “buy” ticket.  But MGM does look far less risky than it has seemed to me in the past.  That’s because the value of its holding in MGM China now represents over 70% of the parent’s market cap.

why the strength in Hong Kong?

…and why should 1128 be leading the pack?  After all, Wynn Macau is presently capacity constrained, and its new casino complex won’t open until 2015.

I think the ongoing rebound in the Macau gambling market is part of the reason the stocks are strong.  Wynn Macau has been getting attention because it has been a severe laggard among the Macau casino companies in Hong Kong trading over the past year.  But I think there’s another important reason as well:

To my mind, the Hong Kong market has already understood the enormous potential size of the mainland gambling market in a way it failed to do initially.  I think it also has come to appreciate the earning power of the Las Vegas gambling model, which it woefully underestimated at first.  Now, the mind of the market, realizing that Macau has a superior product, is turning to the possibility that the Macau gambling companies can duplicate their success in other areas.  The catalyst for this is the introduction of a bill in the Japanese Diet to legalize casino gambling in that country.

What I think we’re seeing now is an anticipatory reaction to the possibility that one or more of the Macau gambling companies will get a Japanese casino license.

buy the parent or the subsidiary?

This is an age-old question–the pure play or the place where the brains of the operation have their own money.

The standard answer is that the safer place is with the parent, but the greater initial sizzle is with the subsidiary.

this situation is a little different

1.  It isn’t clear that everyone in Macau has the money or the inclination to apply for a license in Japan.

2.  It’s not a lock that everyone who applies will pass the local “suitability” tests.

3.  It isn’t clear what part of some of the various companies would hold a Japanese license.  A lot probably depends on the tax regime, but my initial thoughts are:

–for Galaxy Entertainment (0027) there’s no issue

–for WYNN, I presume a license would be held in 1128

–in the case of MGM, having a license inside 2282 means holders of the parent only have a half interest

–for LVS, it’s harder to say, since the company already has two completely unconnected Asian subsidiaries.  It could easily establish a third, meaning that Sands China holders would be left out in the cold.

Macau gambling and the Chinese economy

March 2013 Macau gaming results

The Macau Gaming Inspection and Coordination Bureau has just released its report on the gambling take of casinos in the SAR during March 2013.  The figure is eye-popping.  Last month gamblers exited Macau;s gambling palaces with their wallets lighter by 31.3 billion patacas (US$3.9 billion).

how good is that?

–P31.3 billion is an all-time monthly record for casino win in Macau.

–It represents a 25.4% improvement over the comparable period of 2012.

–The year-on-year gain is the highest for the SAR since January 2012, after which the Chinese economy–and the Macau casinos–began to falter.

–March is also up 15%+ vs. February, which runs contrary to Macau’s (admittedly short) pattern of flattish month-on-month comparisons in the first quarter.

winners?

This is great for the Macau casino industry, and especially for the firms that have recently added capacity, mostly in Cotai, to accommodate extra gamblers.

At the same time, the Macau gambling results give us a good idea about how well-to-do Chinese citizens feel about their economy, their personal earning prospects and their degree of comfort with the newly-installed government.  It’s a solid thumbs-up on all counts.

The figures also suggest that in its newly-launched anti-corruption, anti-ostentation campaign, Beijing is aiming at much bigger fish than high-roller casino patrons.

Macau gambling crackdown?

The Financial Timesamong others, ran stories yesterday attributing the sharp, across the board fall in Macau casino shares in Hong Kong Tuesday to the detention by Chinese authorities of several junket operators who organize groups of high roller gamblers travelling from the mainland to the SAR to gamble.  Government inquiries have apparently also been made to the casinos themselves for information about the structure and betting behavior of some junkets.

To my mind, it’s not yet clear what’s going on.  The possible government concerns, as I see them, might be:

–displays of affluence in a socialist economy.  This has never bothered Beijing before, so I doubt this is the issue now, other than as a formalistic expression of official disapproval.

–possibly illegal flow of foreign exchange out of China.  This is a perennial problem for any country with foreign exchange controls.  The time-honored method of moving funds abroad, however, is through corporate transfer pricing.  But there’s no evidence of a wider crackdown, so I don’t think this is the issue, either.

–money laundering.  This was a notorious problem while Macau was a Portuguese colony, and while the former casino incombent had a monopoly on legal gambling.  Money of dubious origin enters the casino and leaves as legal, taxable gambling winnings–with the casino serving much the same function that urban parking lots sometimes serve on a smaller scale.

This is a serious issue.  In my view, eliminating criminal influence in the Macau casino industry is the prime reason the Macau SAR granted gambling concessions to Wynn Resorts and Galaxy Entertainment.  I’d be surprised and disappointed if Galaxy, Sands or Wynn were involved in money laundering.  Authorities have apparently contacted all three for information, however.

–defining political have-nots.  It seems that a lot, if not all, of the regulatory attention has been focused on associates of the disgraced former head of Chongqing, Bo Xilai, whom Beijing regarded as a threat to the stability of the Communist Party.

my take:  my guess is that what’s going on is some combination of #3 and #4 and that any investigation will end up having little negative impact, if any, on Wynn Macau, Sands China or Galaxy.  But I have no hard facts to base this view on.  So my reaction is to trim my positions–the Hong Kong stocks have been very strong performers recently–and wait for further clarification.

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.