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.

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.

 

Macau casinos

Talk about an unloved group.

Casinos with Macau exposure have been pummeled over the past six months.  Late summer has been an especially bad period.   Wynn Macau (HK: 1128) has lost a third of its value over the past half year;  its parent, Wynn Resorts (WYNN) has lost a quarter of its market cap.  The only issue to escape relatively unscathed is MGM, a former near-death experience that has apparently turned the corner.

The reason?

…an anti-corruption campaign by the government in Beijing has had high roller baccarat players from the mainland trying to keep a lower profile.  As a result, the overall casino win, the total amount lost by patrons of the SAR’s casinos, has been showing small year-on-year declines for the past three months.  There’s no reason to believe this trend won’t continue for a while yet.  There’s more, but this is the basic story.

I also think, although I have no evidence for this, that institutional investors have generally decided that they want to participate in the upcoming Alibaba IPO but that they don’t want to increase their aggregate exposure to China-related stocks.  So they’re jettisoning a growth story gone cold for one with more obvious signs of life.

Overnight (i.e., this morning in Hong Kong) I bought a small amount of Wynn Macau.

I have no idea if this is the near-term bottom for the Macau gambling market or for 1128.  But the stock is trading at 15x earnings and yielding 5%+.  I think the long-term story for Macau–that it is turning itself into a (much larger) clone of the Las Vegas Strip, that is, a resort destination for the Chinese middle class–is still intact.  I think it’s still early days for tourism in the SAR.  I also expect the current slowdown will increase the competitive distance between the firms I view as the ultimate market winners, Wynn, Sands China, and Galaxy vs. the former monopoly casino operator, SJM Holdings.  SJM still has the largest market share, but is handicapped by its connection to the Ho family.

 

For the moment I’m going to wait, watch and collect the dividend.  If 1128 declines further, however, I’ll probably buy more.

This isn’t an idea for the very risk-averse, since the Macau gambling market ultimately depends on the good will of Beijing, whose mood is difficult to assess.  The extent and duration of the current crackdown on lavish consumption has so far taken even veteran China hands by surprise.  Still, a 5% yield makes up for a lot of warts.  And using a discount broker like Fidelity makes getting in an out easy and inexpensive.

 

 

 

 

Macau gambling: July 2013 results + other stuff (ii)

Last Friday I remarked that the strong year-on-year gains in casino “win” (the amount lost by gamblers, which is much smaller than the amount bet) for the SAR in July have to be taken with a grain of salt.  That’s because many Chinese gamblers decided to stay away from Macau during the run-up to the late 2012 leadership change in the Communist Party.  Why ask for trouble, they thought.

So far, August is shaping up as a clone of July.

On to the “other stuff” that I was too rushed to get to last week.

1. the economics of mass market vs. VIP

So far the story of gambling in the Macau SAR has been about high rollers playing baccarat.  Gradually, though, and with a lot of prodding by the government, mass market gambling–particularly in newer casinos in Cotai–is starting to develop.  This has important profit implications for all the publicly traded casino stocks.

Consider two examples:

A.  one high roller…

agrees to bet a minimum of US$3 million over a two-day stay in Macau.  He loses 3% of the amount bet.  The hosting casino wins US$90,000.

B.  45 mass market players…

each bet US$10,000 over a two-day stay.  They average a loss of 20% of the amount bet.  The hosting casino wins US$90,000.

Catering to group A is a very different business from catering to group B.

One obvious difference is that you need a lot more hotel rooms to house the mass market players (on the plus side, many of them will likely be paying for their accommodations).  Also, unlike Group A-ers, Group B-ers won’t be holed up in a private room all day gambling.  They’ll want to walk around with their companions, see shows, go shopping, eat in nice restaurants.  Therefore, to get them to come to Macau–and to get them to come back–casino operators have got to have very substantial non-casino operations.

That costs money.  The good news is that Group B is also more than happy to pay for entertainment, too.  In fact, the history of the Las Vegas strip shows that the non-casino entertainment business there grew from next to nothing a generation ago to a profit center equal in size to gaming operations by the early days of this century.  Although Hong Kong investors don’t seem to believe this, I think the same process is well underway in Macau.

license renewal

After Macau reverted back to China from Portuguese control, the new SAR granted casino licenses for 20-year periods.  For SJM and MGM China, their licences expire in 2020.  For everyone else, it’s 2022.

Casino companies are reporting that Macau has recently opened negotiations for license renewal.  This comes several years earlier than the market had expected.

Why so soon?

I think it’s because the government’s bargaining position weakens with time.

If it waits until, say, 2018 to negotiate with SJM, which controls almost a third of the gambling market, who has the upper hand?  The government can shut SJM down.  But that would throw a whole lot of people out of work and punch a gigantic hole in the government budget.  There are, of course, any number of casino operators chomping at the bit to get into this market who would be willing to replace SJM.  But it would take years for any of them to acquire land and build casino complexes–and that’s assuming there’s suitable land available for development.

Come to an impasse in 2015 instead and there’s still lots of time for Macau to tweak the capacity addition plans of other casino companies and find a new entrant before the old license expires.

Looking from the other side of the negotiating table, the minute the government announced non-renewal of a license, I’d expect the affected company’s business would immediately collapse.

To be clear, I don’t expect any of this “nuclear option” stuff will ever come into the foreground of negotiations, much less happen.  But the threat to a recalcitrant operator still exists, even if it’s unspoken.

One other thing:  if I were Macau and anticipating I might be forced to alter the license of a single casino firm in a negative way, I’d want negotiations with all the others to be settled favorably and announced to the financial markets before I took action.  That way I could make it clear that the government was disciplining a rogue, not taking arbitrary and crazy action against the gambling industry as a whole.

All in all, I expect license renewal to be a non-event.  But the process is worth keeping an eye on.

Macau gambling: July 2013 results + other stuff

Earlier this week the Macau Gaming Inspection and Coordination Bureau (DICJ) posted the total market casino “win” (i.e., the amount gamblers lost to the casinos) during July.  The figures are as follows:

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%

Source: DICJ

For the fifth month in a row, the aggregate win in the SAR exceeded MOP28 billion. For the past two months, the year-on-year revenue growth comparison exceeded +20%.

It’s a bit too early for dancing in the streets, however.  A glance at the relevant date for 2012 shows that part of the apparent strength is due to the weak denominator–that is, the comparisons are easier than normal because growth in casino patronage fell off dramatically in the second half of 2012 both because of softness in the Chinese economy and the desire of big gamblers to maintain a low(er) profile in advance of the once-in-a-decade change in top leadership of the Communist Party.

Here are the 2012 figures:

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%
Nov 24,882 23,058 +7.9% 275,893 244,258 +13.0%
Dec 28,245 23,608 +19.6% 304,139 267,867 +13.5%

Source: DICJ

There’s a second factor that may make the recent figures more difficult to interpret–the development of the mass market in Macau.  High-roller baccarat players in Macau are effectively professional gamblers.  They lose around 3% of the (huge) amounts they bet.  Mass market players bet far less.  But they typically lose 20%+ of their wagers.  As this latter segment grows, market win may accelerate for a while.  I don’t think we’re at that point yet, but I don’t know.

Nevertheless, the continuing resilience of the SAR’s gambling business in the face of reports of softness in the Chinese economy is encouraging.

More on Monday.

Macau Gambling: May 2013 Market Results

The day before yesterday, the Macau Gaming Inspection and Coordination Bureau published the aggregate amount won from patrons by the casino industry in the SAR.  Results were as follows, in millions of MOP (Macanese patacas):

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%

Source: Macau Gaming Inspection and Coordination Bureau (DICJ)

At MOP 29,6 billion (US$3.7 billion), the monthly gaming win for May was the second-highest on record, exceeded only by the MOP 31.3 billion posted during the holiday season in March.  It was also a 13.5% year-on-year gain.  The strong–but not blowout–comparison came against the last healthy month of 2012. From June onward, a combination of economic slowdown and the desire not to attract much attention in advance of the change in leadership of the Chinese Communist Party caused a stagnation in market win until last December.

what to look for in market development

1.  Although what will likely turn out to be a 15% yoy growth rate for 2013 is nothing to sneeze at, it would no longer be the gold rush we’ve come to know and love in Macau.

Normally, I’d guess that maturity for Macau gaming will be 10% annual growth–because that would basically in line with my guess at China’s trend nominal GDP expansion rate.  But since China is attempting a macroeconomic transition away from low value-added manufacturing based on large wage increases rather than currency appreciation, I want to pencil in a higher number.  I’m just not sure what it should be.

2.  In addition, I don’t think Macau is mature quite yet.  Better transportation links will allow the SAR to reach progressively deeper into the mainland for customers.

3. Macau is unique in my experience, because it is dominated by high stakes baccarat played by extremely wealthy, highly skilled gamblers who don’t lose a large percentage of their bets and who have a large chunk of their losses rebated back to them as the price of their patronage.

In contrast, upper income, but not insanely wealthy, gamblers in Las Vegas have percentage losses on their bets of about 10x what the high rollers do.  So the broadening of the market to include more of the first group may bring profits to casinos that are very much higher than Hong Kong analysts now expect.

4.  Market momentum is moving toward Cotai.  That’s the newest area.  It’s also where the new capacity is opening. Galaxy Entertainment and Sands China are the prime beneficiaries.

5.  Former also-rans are now leading the pack.  Operators like Wynn Macau, who have been the most desirable destinations as well as efficient since opening in wringing every last avo (1/100 of  pataca) from their plant and equipment, will stagnate in gaming operations until they can open new capacity.

5.  Non-gambling offerings–restaurants, shows, retail–are in their infancy in Macau.  In pre-Great Recession Las Vegas, they brought in half the industry’s profits.  If Macau follows suit–and I don’t see why it shouldn’t–this could be an enormous positive surprise to Hong Kong investors.  Wynn Macau and Sands China will likely be the stars in this arena.

online gambling in the US–stock market implications

diminishing returns

Internet gambling is just the latest symptom of the diminishing returns disease afflicting smaller casinos in the US.

More states in the US are deciding that casino gambling is a great source of generating tax revenue for them.  They may be reacting to decline in other sources of gambling revenue, like horse racing or lotteries.  Or they may just feel gambling is a good way to replace lost income tax inflow.  Whatever the reason, they’re granting more casino licenses.

For what one might call “generic” or “no-frills” gambling–that is, not Las Vegas-style resort casinos–there’s a diminishing returns aspect to this activity.  All other things being equal, a gambler seeking a “generic” experience will go to the casino that’s the closest to home.  So while  more plant and equipment gets added to the industry inventory, the new capacity results mainly in a reshuffling of revenues based on the new driving distance calculus.

Therefore, as new capacity is built,  industry-wide returns on capital diminish.  We can clearly see this in what has happened when competition emerged for Native American gambling in Connecticut, as well as when rivals began to sprout up casinos in Pennsylvania and New Jersey.  No prizes for guessing what will take place when new casinos open in, for instance, New York and Massachusetts.  It doesn’t help the situation, either, that new casino licenses are often awarded to politically-connected amateurs who don’t utilize their facilities effectively.

adding new features, not just new floor space–where internet gambling comes in

The response of PA to flagging revenues once the novelty of the state’s slot machine-only casinos wore off was to add table games, which siphoned off additional business from surrounding states.  The main victim here was Atlantic City.

NJ’s initial fix-it attempt was unusual, to say the least.  Trenton authorized the addition of new capacity, in the form of a white-elephant hotel built as a speculation during the real estate bubble.  How this was supposed to help the seaside resort’s overcapacity situation is beyond me.  The casino in question, Revel, has just filed for Chapter 11 bankruptcy.  Unfortunately for AC, the capacity won’t disappear.  The owners just change.

New Jersey’s second response has been to decide to add a new feature of its own–legalizing internet gambling for anyone located in New Jersey when he places a wager.  This action might, at least temporarily, keep gamblers from wandering into PA and bolster the local casino license holders, who will run the internet operations.  If so, however, success will trigger a reaction from the jurisdictions whose revenues are suddenly tailing off.

The investment point here is to expect a declining profitability trend for generic casinos of the save-the-local-racetrack-owner kind as the internet gambling trend develops.

exceptions

national/international tourist destinations

Las Vegas is one.  New York City, where Governor Cuomo appears to be dying to allow the Lim family to open a Las Vegas-style resort casino, is another.  Florida, the scene of intense lobbying reportedly from the Lims and LVS, is a third.  I’m not sure whether Boston counts, but it might be a fourth.

Yes, casinos in all of these places would be subject to the negative effects of the spread of generic gambling operations over more states.  But their location allows them to tap into a very large tourist market.

branded casinos

Think Wynn.  Think Las Vegas Sands.  

Companies like this understand how to run complex  casino-shopping-entertainment hotels.  They should be able earn much higher returns than a generic gambling-only establishment run by a local political donor.

In addition, the brand name may induce people to drive a bit farther than they would otherwise.

Combine brand name with an international resort location, and the attractions of a WYNN or LVS casino are magnified.  Visitors will likely pick the brand name.  They may already be customers in Las Vegas, Macau or Singapore.

On top of all that, assuming they have the requisite physical presence in a given state, the branded casinos have a large leg up in establishing online gambling businesses, in my view.

my take

—For a stock market investor, the easiest ways of dealing with the question of how quickly the US gambling business will deteriorate as internet gambling takes hold are:

–invest in other industries, or

–select companies like WYNN and LVS, where the US operations are an insignificant part of the whole.

—For a purely/mostly US gambling company, make sure that it has a strong brand name, high cash flow and low debt.  A Las Vegas base would be better than anywhere else.  High debt and weak Macau presence probably rule MGM out.

—There will also be companies who will act as hardware/software enablers for the internet efforts of the major gambling firms.  ZNGA, for one, has been the subject of speculation on this score for some time.  It’s not clear what role, if any, ZNGA will play, however.  Personally, I regard it as a “fool me once, fool me twice” kind of name.

Also:  I’ve been taking the view for a couple of years that for companies like LVS and WYNN that have prospering Asian casinos, Wall Street places almost no value on their US operations.  I’ve thought that to be a gross underestimate, and, in effect, the shareholder gets the US casinos “for free.”  For both LVS and certainly for WYNN, I think this remains the case.  But if internet gambling takes off, Wall Street may have been closer to correct than I have imagined.