Macau gambling, Macau gaming stocks: May 2011

the Macau gambling market continues to boom

It’s really late in the month for me to be writing about the recent strength in the Macau gaming market.  Nevertheless, here are the latest figures from the Macau Gaming Inspection and Coordination Bureau:

     * 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%

Another (ho-hum) stunningly strong month for the market in April. Another all-time revenue record, surpassing March’s high water mark even though April has one fewer day in it.  Early market chatter for May is that business is, if anything, better this month than last.

not all the stocks are following suit

Here’s the month-to-date performance of the US- and Hong Kong-based stocks:

S&P 500     -1.9%

WYNN     -1.4%

LVS     -12.0%  (disappointing(?) 1Q11 earnings)

MGM     +15.5%  (IPO of MGM Macau priced–more on this tomorrow)

Hang Seng H-shares     -5.1%

SJM     +7.8%  (reported strong 1Q11 results–up 85% yoy)

Galaxy     +7.4% (opened a new casino, to mixed reviews)

Sands China     -7.2%

Wynn Macau     -7.5%

what to make of this?

The US first:

I don’t see any general pattern, other than possibly the market misinterpreting what casino revenues are, that is, that they’re casino winnings, not revenues, and thus can fluctuate randomly, quarter to quarter, around a longer-term average.

MGM is a star performer, on the idea that when we have a publicly traded yardstick to value its Macau holdings, the US parent will benefit.  We’ll see.

I haven’t read the LVS 10Q carefully enough yet (although I bought a small amount on the selloff after the earnings report), but the market may be mistaking bad luck during 1Q11 for weakness in the company’s business.  The earnings report is the main reason, I think, for the poor performance of LVS.

WYNN, in contrast, is benefiting from a misreading of its phenomenal good luck in 1Q11 in Las Vegas as being the new norm.  That may be the reason the stock hasn’t been hurt by the fall in Wynn Macau shares.

In Hong Kong:

Here, I do see a pattern.  There’s an enormous (around 15%) difference between the weak performance of the higher quality companies, Wynn and Sands, and the strong gains of the lower tier ones, Galaxy and SJM.  Although I would find it hard to buy either of the latter two (I might be able to stomach Galaxy, but certainly not SJM), the fact that demand for gambling is so super-strong means that there’s a lot of business to be had by everyone in the market.  So it’s hard to find too much fault with the market rotating into the lower multiple names.  It’s also unreasonable to expect multiple expansion to continue for 1128 and 1928 without at least a sympathetic response from the others. 

My sense is that the correction in Wynn and Sands is just about over.  Still, while I perceive a quality difference worth paying up for in 1128 and 1928, the Hong Kong market disagrees.

what I’m doing

I’d sold about 10% of my 1128 holding at HK$27.  I tried, unsuccessfully, to buy it back two days ago, below HK$24.  Fidelity won’t let me buy 1928, and I won’t touch the others, so I’m going to do nothing for now.

I regard WYNN as the best company, but I think it’s a little pricey at the moment.  I’m trying to work though the huge amount of data in the LVS 10K, to see if it might be a way to get slightly different exposure to Asia, exposure that includes Singapore.  My biggest concern is LVS’s net US$7 billion in debt, and a repayment schedule that goes into high gear next year.  Most of the borrowings are linked to the properties in Macau and Singapore, where all the cash flow is, so matching assets and liabilities isn’t an issue.  At first glance, absent another recession, likely gross cash flow seems more than adequate to meet mandatory repayments.  It’s the continuing large capital spending bill that I haven’t quite gotten my arms around.

Two recent Macau gambling developments

Pansy Ho has resigned from the board of MGM Macau

Macau Business reported on February 28th that Pansy Ho stepped down at the end of last year from the board of directors of the casino company, MGM Macau, that she and MGM Resorts International jointly control.  MB’s source is a Wall Street Journal article that says the Macau casino regulator confirmed the move.

Why do this?

As I posted on February 1st, Stanley Ho appears to have transferred his controlling interest in the largest casino operation by revenue in Macau, Sociedade de Jogos de Macau (SJM  HK:0880), to a number of relatives, including his daughter, Pansy Ho.  I say “appears” because Mr. Ho has since denied doing so more than once, and–depending on the day–is suing to have the interest returned to him.

The transfer forced Pansy Ho to make a choice, since Macau law bars anyone from having operating control over more than one casino concession.  Although Ms. Ho herself hasn’t said, as far as I’m aware, why she left the MGM Macau board, the move suggests she is going to try to recast herself as a passive investor in MGM Macau.  That way she may be able to keep her ownership interest in the venture (maybe as a safety net) while she actively engages in an intra-family struggle for operating control of the much larger SJM.

The association between MGM and Pansy Ho is a controversial one.  The joint venture was the price MGM had to pay to get a seat at the lucrative Macau table.  The Nevada casino regulators decided, after extensive hearings, that Ms. Ho was a suitable business partner for a casino operating in that state.  But the New Jersey Casino Control Commission, considered the gold standard for regulatory compliance, decided otherwise last year.  It ruled that Ms. Ho was more or less an extension of her father, Stanley, whose ties to Chinese organized crime made him (and, therefore, her) “unsuitable” to hold a casino license in New Jersey.

The NJCCC gave MGM two options:  sever ties with Ms. Ho, or sell its casino interests in the Garden State and leave.  MGM chose the latter course, even though declaring oneself a forced seller isn’t a move calculated to get a good price for your assets.

To my mind, and based on the New Jersey finding, the association with Ms. Ho tarnishes MGM’s otherwise good reputation.  Certainly, in my opinion, there will be some American investors who won’t hold the stock because of this.  It may well be harder to get seasoned international casino professionals to work for MGM Macau, as well.

In Hong Kong and Macau, on the other hand, the Ho name isn’t a minus.  It may, in fact, be a plus.  Last summer, both LVS and WYNN voiced their opinion during earnings conference calls that they thought an unnamed competitor was preparing for an IPO.  Since all the other competitors are listed, I presumed the company referred to was MGM Macau.  If so, the departure of Ms. Ho is probably a negative.  And if she had any influence in getting high roller business to come to MGM Macau, one has to ask where she will steer these customers now. My answer:  to SJM.

In the long run, MGM may have a chance to buy Pansy Ho out.  It may be that if she gains control of SJM, the Macau government will require that she divest the interest.  That would be a good thing for MGM, in my view.  But I don’t think that’s likely until the Ho succession is settled.  And that may take a long time.  In the meanwhile, it seems to me MGM Macau has the worst of all possible worlds.

February reached an all-time high in revenue for the Macau gaming market

The previous record, 18.883 billion patacas (one pataca is roughly equal in value to one HK$), came last December.  February got off to a slow start, but that was more than offset by an extremely successfully New Year holiday period.  Overall, the month showed a 40% year on year gain.  The market shows no signs of a slowdown in growth, despite ongoing efforts by Beijing to cool off the mainland economy and an almost 60% expansion of revenue last year.

The following table comes from the Macau Gaming Inspection and Coordination Bureau:

* 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%

December 2010 Macau gambling results

The Macau Gaming Inspection and Coordination Bureau announced December monthly and full-year 2010 revenue for the SAR’s casino industry on Monday.  The numbers are as follows:

* 1 HKD = 1.03MOP (Unit:MOP million )
Monthly Gross Revenue from Games of Fortune in 2009 and 2010
Monthly Gross Revenue Accumulated Gross Revenue
2010 2009 Variance 2010 2009 Variance
Jan 13,937 8,575 62.5% 13,937 8,575 62.5%
Feb 13,445 7,912 69.9% 27,383 16,488 66.1%
Mar 13,569 9,531 42.4% 40,951 26,019 57.4%
Apr 14,186 8,340 70.1% 55,137 34,359 60.5%
May 17,075 8,799 94.1% 72,211 43,158 67.3%
Jun 13,642 8,269 65.0% 85,853 51,427 66.9%
Jul 16,310 9,570 70.4% 102,163 60,997 67.5%
Aug 15,773 11,268 40.0% 117,935 72,265 63.2%
Sept 15,302 10,943 39.8% 133,237 83,208 60.1%
Oct 18,869 12,600 49.8% 152,106 95,808 58.8%
Nov 17,354 12,215 42.1% 169,460 108,022 56.9%
Dec 18,883 11,347 66.4% 188,343 119,369 57.8%
Source:  Macau Gaming Inspection and Coordination Bureau

The December figures represent an all-time high for revenues for the market.  They exceed the seasonal peak of October.  And they are much better than expected, especially so since the Chinese central bank is trying to cool down the mainland economy.

According to a local Macau magazine, Macau Business, a big beneficiary of the gaming surge has been Wynn Macau (1128), which it says has passed Sands China (1928) for second place in market share, with 17% of total market revenues. Presumably, the firm’s profits will benefit from substantial operating leverage.  Stanley Ho’s SJM (Sociedade de Jogos de Macau, 0880), the long-time incumbent, remains the market leader with a 30% share.

The magazine also maintains that MGM Macau has risen out of last place in the market, passing Galaxy Entertainment (0028) to do so.

This news appears to be the reason that the Hong Kong-listed market entrants have been strong this week, as well as their US-traded parents.

Two points to note:

–the quarter on quarter gain in market revenues from September to December is 16%.  For 1128, however, if it has gained one percent of market share for the quarter, its revenue stands to be up 24% quarter on quarter.  If it has gained two points, which I think is closer to being correct, the growth rate in revenues is 32%.  Even without factoring in operating leverage, which 1128 surely has, this means a blowout quarter.  If the Macau Business information is correct, the firm’s accountants will doubtless be hard at work devising ways to hold the earnings down–like increasing bad debt reserves.  But there’ll be no chance of 1128 not reporting a stunning number.

This is good for its parent, WYNN, as well–both because WYNN owns four-fifths of 1128 and it collects management fees based on 1128’s success.

–MGM is off my radar screen because of the company’s connection with the Ho family.  I did notice that both LVS and WYNN mentioned a not-yet-listed competitor (to my mind, clearly MGM Macau) that had begun to rent its casino space to junket operators in return for a very low fee.  Both LVS and WYNN speculated that this firm was trying to generate revenue growth in any way possible so that it could make an initial public offering.  And MGM has raised its market share from 7% to 11%, according to MB. There’s another possible explanation for MGM Macau’s behavior, though.  I only recently learned that, despite the fact that the government has not permitted casinos to add new tables for some time now, MGM has been unable to attract enough gamblers to use all the capacity it has permission for.  It may have feared that this unused capacity would be diverted to someone else if it weren’t put into operation.  Time will tell.