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.

online gambling in the US

from sayonara to Cy Young

It isn’t that long ago that the US authorities were hunting down and arresting the owners of internet gambling websites, accusing them of Ponzi scheming and assorted other bad stuff.

Yet, late week the state of Nevada legalized internet gambling. New Jersey may not be far behind. In fact, the Borgata hotel/casino in Atlantic City has begun to offer in-room gambling through the TV set.  It plans to expand soon to gambling through mobile devices like phones and tablets that are hook into the wi-fi network on its grounds.

What’s changed?

The gambling market in the US is saturated, that’s what.

There’s already too much casino capacity in the domestic market (arguably, ex Las Vegas). And there’s more on the way, as new casinos open up in Massachusetts, New York, Florida and who knows where else. Yes, these new venues do attract a few people who’ve never gambled before. But to a large degree they take business away from casinos in neighboring states. Just look at Atlantic City.

I’m going to write about this topic in two posts. Today, I’ll cover some general principles. Tomorrow, I’ll write about the stock market implications for the casino industry in the US.

1.  saturation

Early in my career as an analyst I heard a pithy statement of basic marketing from a hotel executive who was explaining why his company—and the whole industry in the US, for that matter—was diversifying from mid-market hotels into new areas, like luxury and no-frills offerings. He said: “ You don’t start selling chocolate ice cream while the market for vanilla is expanding. You only do it after the vanilla ice cream market matures.”

What’s stuck with me through the years is that if you see a company deviate from what it’s always done successfully, it’s a very good bet the traditional business is nearing the end of the line.

That’s what’s happening here.

Nevada is by a mile the biggest gambling state in the union; NJ is #3, having just been surpassed by its neighbor, Pennsylvania.  I can’t imagine that the legislature in either state would be legalizing internet gambling without the encouragement of the major casino operators.

2.  self-cannibalization isn’t good, but it’s the best alternative

Yes, the advent of online gambling means that some people—we don’t know how many, or how much revenue they represent—will gamble online rather than go to a casino. My guess, which isn’t worth much, is that poker will be the first game to feel the effects of online competition, and the one most deeply hurt.

Online revenue is money that will be lost to the casinos. The corporations that own the casinos have two basic choices:

–they can either pretend online gambling isn’t going to happen, or do everything they can to oppose legalization. In either case, they suffer the full revenue loss. Or,

–they can get out in front of the trend, establish their own online operations and recapture at least a portion of the money they stand to lose. Maybe they’re lucky and end up net winners. But even if they aren’t, unless they completely botch their online operations they’re better off than by ignoring the issue.

3.  real estate doesn’t go away quickly

Hotels, including casino resorts, typically last many decades.  Once they’re built in an already saturated market, overcapacity is the order of the day until/unless the market expands to absorb it.

Casinos are particularly tenacious, because operators can increase table game gambling capacity simply by changing the little table betting limit signs.  Though a more expensive proposition than a $5 sign, slot machines can be swapped in or out quickly.

Structures do age, especially if management doesn’t continually spend on refurbishment.  A hotel, for example, may start out as  Marriott.  If the owners decide at some point to run it to maximize cash, they stop refurbishing.  The hotel may may then become a Great Western, then a Knights Inn…  Ultimately, it will be converted into, say, a nursing home and disappear as a hotel.  But that process can take twenty years or more.

More tomorrow.

imminent crackdown on high rollers in Macau?

an anti-corruption campaign

Overnight The Times of London published an article saying that the new administration in Beijing will begin a crackdown on corruption in China shortly after the start of the new year late this month.  This will included an attack on organized crime (triad)-related money-laundering junkets by gamblers to Macau.

Most Hong Kong-traded Macau gambling stocks sold off by 5%-7% on the news–the one exception being, oddly enough, MGM China ( HK: 2282), which is strongly linked to Stanley Ho’s daughter, Pansy.  US-traded gambling stocks with Macau exposure are selling off today as well, although to a much lesser extent.

What’s going on?

–I’m assuming the report is true, even though I’ve never–ever–seen The Times break an important stock market-related story.  If I had to guess, this is a deliberate leak from the police in Hong Kong.

–The extent of triad influence in Macau today is unclear.  In colonial Macau it’s thought to have flourished, with the rumored help of the Ho family of SJM Holdings–then the monopoly casino operator.  In my view, one of the main reasons the SAR invited American firms like WYNN and LVS to establish casinos a decade ago was to be a counterweight to traditional influences–partly for their superior technology, partly for their far superior compliance procedures.

–Income inequality, and in particular the vast fortunes that relatives of high officials seem to routinely accumulate, is a topic of increasing political concern in China.  It’s also a specific target of the new administration.  So a crackdown may have more targets than just the underworld.

–The selloff so far has been across the board, ex MGM and MGM China.  If the target is just the underworld, it’s possible that casinos associated with the Ho family, long rumored to have triad connections, would be hit the worst.  If the target is also high rollers in general, add the WYNN interests to the list, since that company specializes in catering to the high roller market.  Arguably, Galaxy Entertainment and the LVS companies will be hurt the least, since they focus on the growing mass market and haven’t had the greatest success in wooing deep-pocketed individuals.

what to do

No one really knows how severe or how long-lasting an anti-corruption campaign focused on Macau gamblers might be.  To pick a number out of the air, it’s possible that the result would be a permanent 10% reduction in the level of gambling in the SAR.  I think that’s probably too severe, but let’s stick with that figure.   After whatever initial downward shock there might be, this would mean a year without much growth in the SAR’s gambling revenues.  The pain would probably be distributed as I’ve described in the previous section.

I believe that the long-term prospects for Macau gambling are excellent–at least unless/until Beijing decides to establish a competing gambling enclave on the mainland.  There’s no sign that’s likely to happen; it’s just the only thing I can see that will upset the apple cart.  I’m all for anything that cleans up illegal activity.  So I look at the threat of a decline in the Macau gambling stocks as a temporary affair and mainly an issue of portfolio risk control.

These stocks have generally been outstanding performers recently, on the idea that the upturn in the Chinese economy now under way will mean a rebound in Macau gambling market growth.  So the stocks may have become outsized parts of your portfolio.  Trim position sizes, if necessary.  Imagine a 20% stock price decline from here.  Are you satisfied to hold all the stock you own now?  If not, cut the position sizes and wait to see what happens.

 

 

the Macau gambling market, December 2012

the monthly DICJ report

Yesterday, the Macau Gaming Inspection and Coordination Bureau (DICJ is the Portuguese acronym) released monthly results for December for the casino  gambling market in the SAR.  The figures were substantially higher than consensus expectations.  This is presumably the reason why the US-based gambling companies with significant Macau presence, LVS, WYNN and MGM, were up so sharply in New York trading.

The amount won from gamblers by the Macau casinos last month was MOP 28.2 billion, or about US$3.5 billion.  That’s an all-time high for the market there.  It’s also up 19.6% year on year, the strongest rate of increase since last April.  (By the way, these “win” figures suggest Macau visitors laid down a mind-boggling US$70 billion in casino bets during December.)

As you can see from the figures at the bottom of this post, the monthly numbers don’t yet show a clear upward trend.  But to my mind they do strongly suggest that the worst for the market is behind it.

it’s the economy that’s important, not just casinos

This isn’t just about casinos and the penchant for wealthy mainland Chinese citizens to gamble.  A 13% month on month jump in gambling activity–last year, when China was beginning to worry about economic slowdown, November and December were flat–likely means that the domestic economy is starting to perk up.  Purchasing Manager statistics from the usually reliable HSBC suggest the same thing.

It may be that stimulus measures from Beijing are beginning to work.  I also think that it’s no accident that the Macau uptick comes the month after new leadership for the Chinese Communist Party has been named.  I’m willing to believe that there’s something to the talk about a crackdown on corruption emanating from Beijing.  But I also believe that it will be limited to scrutiny of the activity of a very small number of families highly plugged in to the previous regime.  Certainly, Macau visitors don’t appear to be be concerned about displaying their wealth.  Another confirming bit of evidence: Hong Kong-based Chow Tai Fook Jewellery (HK: 1929) is up by 35% since Halloween, while TIF is down by 6% over the same span.

The bottom line:  We’ll know more in the next month or two, but the Macau gambling market may be a good indicator that Chinese economic activity is increasing. That should be good for any global company with direct or indirect exposure.  Good for the casino companies, too, although I think the story for them over the next year or two will be the development of their non-casino entertainment businesses.

The DICJ 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%
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: Macau DICJ