Tag Archives: Sands China

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

November 6, 2012 By in Casinos, emerging markets, Entertainment, Industry Analysis, Recent Market Action, Stock ideas Tags: , , , , , , , , , Leave a comment

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.

LVS’s 3Q12: a mixed bag

November 5, 2012 By in Casinos, earnings conference calls, Entertainment, Industry Analysis, Stock ideas Tags: , , , , , Leave a comment

Still no power at home.  Neither hide nor hair of the local utility–which had promised full power restoration by yesterday– spotted since the storm.  Some action, though.  It took down the web page where it made its pledge.

LVS’s results

After the New York close on November 1st, LVS announced its 3Q12 results.  The company reported worldwide revenue of $2.71 billion, up 12.5% from the $2.41 billion it posted during 3Q11.  Company EBITDA (Earnings Before Interest Taxes Depreciation and Amortization), however, was down 5.1% yoy to $925.1 million.  The short story:  lower hold percentage around the world + higher allowances for doubtful accounts in Singapore.

Net income was $382.2 million, $.46 per share, vs. $444.8 million, $.55/sh, in the year-ago quarter.

LVS also announced an increase in the quarterly dividend from $.35/share to $.45, effective in 1Q13–implying a prospective dividend yield, based on pre-market prices today, of 3.9%!

details

strong in Macau

Sands China’s 3Q12 revenues came in at $1.64 billion, up 36.7% yoy.   EBITDA was up 24.3% at $485.6 million.  Net income, however, increased only 17.4% to $326.7 million.

The Macau market was up only in single digits during 3Q12, so there’s really nothing to complain about in the Sands China report.

The huge revenue increase comes principally from increased gambling capacity–the opening during 2Q12 of SC’s new property in Cotai.  Cotai Central produced revenue of $295.9 million in its first full quarter of operation, despite suffering from an unusually low winning percentage.  SC also benefited from a rebound from a bad-luck 3Q11 at the Venetian casino.

On the other hand, Cotai Central continues to lose small amounts of money as it slowly ramps up in the current environment of slow gambling growth in Macau.  And to some degree, it is drawing customers who would otherwise be patronizing SC’s other casinos.

My bottom line:  if–as I believe–the Macau gambling market has passed its cyclical low point and is beginning to expand again, SC is in a very strong position to benefit.

so-so in the US

Bethlehem, PA continues to perk along, posting EBITDA of $32.1 million, up 27% from the $25.2 million it recorded in the comparable period of 2011.

Las Vegas was also up somewhat, with EBITDA of $98.2 million vs. $94.3 million.  Table games play increased by 8.5% yoy, thanks to influx of baccarat players.  But those players were unusually unlucky, leaving behind $30-$25 million more than we should be counting on them to do on average.

My bottom line:  The way I look at it, Wall Street values the US operations of LVS as less than zero.  As long as the company can pay its bills and generate free cash flow–as it’s doing–the quarterly variations in EBITDA during the current prolonged slump in Las Vegas aren’t that important to the stock.

weakness in the Lion City

On the surface, gambling results from the Marina Bay Sands in Singapore look pretty ugly.  That’s mostly because the year-ago quarter was such a blockbuster.  It doesn’t help matters that Marina Bay’s winning percentage from the high roller market it caters to was a third less in 3Q12 than in 3Q11.  Less important in dollar terms, but still worthy of mention, Marina Bay increased its reserves against non-payment of gambling debts by an extra $15 million.

EBITDA for the three months was $260.8 million vs. $413.9 million during what we now know was a cyclical high point this time a year ago.  Adjusting for the abnormally low winning percentage in the higher roller business, EBITDA was flat, quarter on quarter.

My bottom line:  Singapore is a fledgling gambling market.  We have very little past experience to generalize from.  To perhaps state the obvious, the market appears to be considerably more economically sensitive than I would have imagined.  That’s a negative.  If, however, a “bad” year means generating EBITDA of $1 billion and a “good” year means EBITDA of $2 billion–which would be my best guess at present–then Singapore is still a market that casino operators should be pounding down the door to get access to.

the stock

At current market prices, LVS’s ownership interest in Sands China is worth about $24 billion.  Its holding in Marina Bay is worth $18 billion, if we assume that it would trade at a 25% PE discount to Sands China and based on average annual EBITDA of $1.5 billion.  If so, the market is still valuing the US operations of LVS at around negative $5 billion.  This is way too cheap, in my view, especially given that the Macau operations, the largest single source of value for LVS, appear to be at or near the start of a cyclical upturn.

what makes casino stocks interesting investments

October 25, 2012 By in Casinos, Dividends, Entertainment, Industry Analysis, Recent Market Action, Stock ideas Tags: , , , , , , , , , , Leave a comment

I started covering casino stocks as a securities analyst around 1980.  At that time, Atlantic City was still the hot, fast-growing market that investors focused on, although the bloom there was already coming off the rose.  Las Vegas was a backwater.  Neither Singaporean nor Australian casinos existed (legal ones, anyway).  Macau, then a Portuguese colony, was a Ho-family monopoly.

In those days, casino operators basically gave away food, hotel rooms and entertainment.  Non-gaming operations were cost centers, existing solely to induce customers to visit the gaming floors.  That situation has changed dramatically over the years.  In pre-Great Recession Las Vegas, which is the gold standard for today’s global gaming industry, non-gambling operations had risen to equal importance–and profitability–with the gaming floors.

It’s not so much that I find the gambling activities themselves so interesting.  As a professional portfolio manager, they used to remind me a lot of work–but with substantially diminished chances of making money.

Instead, what attracted me to casino stocks as an investor–and still does– is that:

–casinos are very cash generative once they’re up and running, and

–they’re relatively simple to analyze.

Under most circumstances, growth in gambling revenue is a direct function of two variables.  They are:  the increase in nominal GDP of the area where target customers live; and any increase in casino floor space.  So gains in gambling earnings are highly predictable.   Resort profits aren’t as easy to project, but they’re not much more difficult, either.

One caveat:  like many commercial property-based businesses, expansion of Las Vegas-style casinos only comes in $1 billion-plus increments.  So the gaming industry can be subject to periodic bouts of overcapacity, when, after a run of profitable years, everybody in a certain area decides to make a major expansion at the same time.  Think of the current situation in Las Vegas–although that’s by far the worst overcapacity I’ve ever seen.

Funnily enough, it’s precisely the disastrous last-decade expansion in Las Vegas and the current slowdown of gambling in Macau, where the Big Three of American casinos (Wynn, Sands and MGM) all have operations, that make WYNN and LVS attractive.  (As regular readers will be aware, I’m not a fan of MGM.)

Why?  The companies are generating tons of cash and they have no place to plow it back in to new casinos.

In the case of LVS, this means it’s repaying borrowings much faster than I think the consensus realizes.  As for WYNN, the company has just announced a special dividend of $7 a share.  It’s increasing the regular quarterly payout as well, from $.50 to $1.  This means the shares have a prospective yield of  3.4%.

More on WYNN tomorrow.

 

Macau casino gaming, September 2012

October 16, 2012 By in Asian economic development, Casinos, China, Current Market Thoughts, economics, Entertainment, Hong Kong, Industry Analysis, Stock ideas Tags: , , , , , , , , 1 Comment

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.

LVS’s 2Q12–plusses and minuses

July 30, 2012 By in Casinos, China, earnings conference calls, emerging markets, Entertainment, Hong Kong, Industry Analysis, Stock ideas Tags: , , , , , , Leave a comment

the report

After the New York close last Wednesday, LVS reported its 2Q12 results.  Revenue came in at $2.6 billion, up 10.1% from what the company took in during the year-ago quarter.  EBITDA (earnings before interest, taxes, depreciation and amortization) came in at $844.7 million.  That’s $56.9 million, or 6.3%, less than during 2Q11.

EPS were $.44 for the quarter, vs. $.54 in the comparable three months of 2011.  The figures were also considerably below the brokerage house analysts’ consensus of $.60 a share.

Wall Street didn’t like this news. The stock dropped more than 5%, breaking through support levels that had held over the past year, before recovering somewhat.  This is despite the fact that LVS had already lost almost 40% of its market value during the past several months on worries that Chinese gamblers would pull in their horns as the mainland economy slows.  It also didn’t matter that the entire earnings “miss” was the result of random or non-recurring factors.

There was one piece of bad news, coming out of Singapore.  Nevertheless, I think the stock weakness was a knee-jerk reaction to the headline numbers, not a result of analysis of the facts.

details

US

EBITDA was down about $22 million year on year for the quarter, at $91.3 million.  Bethlehem, PA chipped in an extra $5.9 million (the first time I think I’ve ever mentioned this casino in a post).  Otherwise, the business was flattish.  The biggest single reason for the yoy decline was that table games players were much “luckier” than average in Las Vegas.  They lost 16.5¢ of every dollar bet during 2Q12 vs. 20¢ during 2Q11–and a normal loss rate of 21%-24%.

Macau

Revenues for Sands China (HK: 1928) came in at $1.48 billion during 2Q12, up 22.3% from the $1.21 billion in revenue posted during 2Q11.  EBITDA rose by $41.0 million, or 10.7%, yoy, to $429 million.

That came despite pre-opening expenses that were $25.3 million higher than a year ago, mostly due to the debut of the new Cotai Central casino during the quarter.  In addition, high-roller patrons of the Venetian Macao, who were unusually unlucky this time last year, turned the tables during 2Q12 and took home more than their long-term average amount.  Factoring these two influences out, I think EBITDA would have been up by 20% or so.

One more complication:  during the quarter Sands wrote off $100.8 million it had spent on site preparation at yet another potential Cotai casino location–one the government there has denied Sands permission to develop.  The combination of the writeoff, pre-opening expenses and bad luck pushed net income down by 40% yoy to $160.5 million.

Still another quibble (a minor one, in my view, but apparently more than that to the markets):  LVS opened a significant new casino in Cotai during 2Q12, but its market share for the quarter didn’t expand as much as its increase in gambling capacity.  If the situation stays that way, it’s a problem.  I think it’s way too soon to judge, however.

A final point:  some commentators have criticized LVS for continuing a pell-mell expansion in Macau despite the current slowdown.  Quite the contrary.  Earlier this month, LVS announced it had requested government permission to push back completion of its current Cotai project by three years.

Singapore

Revenue for the Marina Bay Sands was down 5.8% yoy, at $694.8 million. during 2Q12.  EBITDA was down by 18.5% at $330.4 million.  Two reasons:

–high-roller gambling was off by about 6% and those who played were unusually lucky.  About half of the revenue effect–but none of the back luck–was offset by mass market gains.

–the provision Marina Bay Sands made for questionable receivables–which means gamling credit advances to high rollers that may not be paid back–amounted to $39.9 million in 2Q12 vs. $11.4 million in 2Q11.

If there’s a worry in the 50+ pages of the LVS’s quarterly earnings release, this is it.  I’m not particularly concerned.  The provision boosts the company’s bad credit reserve in Singapore to about a quarter of the $822 million in receivables outstanding.  It comes from specific identification of gamblers who have not been paying their bills on time.  It presumably also coincides with withdrawal of credit from these individuals.  So the issue will likely gradually fade away.  It bears watching, though.

overall

LVS estimates that eps would have been $.08 higher if its luck had been in line with long-term experience.  Another $.08 would have been tacked on, save for the writeoff in Macau.  Arguably, then, Wall Street hit LVS earnings right on the nose.

finances

Yes, EBITDA is not growing like it was a year ago.  But it appears to be at least steady at close to a $3.5 billion annual rate.

LVS now has $9.4 billion in debt outstanding (offset in part by $3.5 billion in cash), with borrowing costs of around 3%.  This implies annual net interest expense of a bit more than $350 million.  So pretax cash flow is in excess of $3 billion a year–meaning that the company could be completely debt-free in two years if it were to devote all its cash flow to repaying borrowings.  Quite a change from late 2008.

To my mind, it makes little sense to repay more than minimum requirements of very low-cost debt.  In fact, at 3% the company should be borrowing more.  LVS will have capital expenditures for the coming year of $1 billion.  It will also pay out $825 million in dividends.  But the point still remains that LVS is highly cash-generative.

valuation

LVS has a market capitalization of $30 billion.  Its interest in Sands China has a market value of about $18 billion.  If we award the same EBITDA multiple to 100%-owned Marina Bay Sands as Sands China receives in the Hong Kong market, the former has an asset value to LVS of $18 billion as well.  This leaves the US operations of LVS–Las Vegas, PA and royalty/management fees from Asia–with a value of minus $6 billion.

Of course, I have been making essentially the same argument for some time and that hasn’t stopped the stock price of LVS from plunging.  What’s happened is that the Hong Kong market is now pricing 1928 at $23 a share vs $32 in April.  However, the stock is now trading at about 12x cash flow and yielding 5%.  And that’s with cash flow at, or close to, what I think is a business cycle low.

That’s way too cheap. (Remember, I own LVS.  I’d own 1928, too, but I don’t want to buy on the pink sheets and a glitch in Fidelity’s software prevents Americans from buying the stock in Hong Kong).