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 market gambling results for October 2011

Last week, the Macau Gaming Inspection and coordination Bureau posted, as usual, the monthly total for the SAR’s gambling revenue.  At 26.8 billion patacas, the take was an all-time high–and a 42.3% year on year gain.  The figures for this year and last are as follows:

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%
May 24,306 17,075 +42.4% 103,334 72,211 +43.1%
Jun 20,792 13,642 +52.4% 124,126 85,853 +44.6%
Jul 24,212 16,310 +48.4% 148,337 102,163 +45.2%
Aug 24,769 15,773 +57.0% 173,106 117,935 +46.8%
Sept 21,244 15,302 +38.8% 194,350 133,237 +45.9%
Oct 26,851 18,869 +42.3% 221,200 152,106 +45.4%

Interestingly, Hong Kong-based analysts didn’t take this as an unambiguously good result.  They point out that, although Golden Week in early October was a rip-roaring success this year, the year on year growth of the market for the month as a whole was the lowest since January.  That’s obviously correct.

They conclude from this that Macau’s wealthy Chinese customers are feeling the pinch of the mainland’s efforts to slow economic growth, and are gambling less as a result.  A corollary, not so clearly spelled out, is that casinos are posting gambling winnings as revenues today that will ultimately have to be written off as uncollectable receivables.  That may also be true, although the bond rating agency Fitch says there’s no evidence of any of this so far. Fitch, in fact, estimates that the Macau gambling market will grow by at least 20% next year, double the rate that the more pessimistic analysts are calling for.

One notable feature of recent months’ results is the market share shift toward the companies with newer casinos, located in Cotai.  This suggests there’s gambling space in other, older casinos that is going unused.  There are any number of explanations for why this may be happening, like transportation bottlenecks that prevent visitors from reaching Macau, or casinos turn away “iffier” credits.  But it’s also possible that we’re reached a phase of market maturity where simply getting to Macau and gambling anywhere isn’t enough.  Some gamblers may be choosing not to go to Macau unless they get a minimum level of service.

If so, we should expect a more sedate rate of growth than the 45% or so we’re experiencing now.  But the more important investment issue may well be to separate winners from losers.  That’s certainly been the case so far in 2011, as Galaxy and China Sands have left other casinos in the dust–especially SJM and MGM.


Macau’s August 2011 gambling results: another record

August gaming results for Macau

Prior to the opening of Friday trading in Hong Kong, the Macau Gaming Inspection and Coordination Bureau released its monthly report for August on the gambling “win” of the casinos in the SAR.   Here are the fig

* 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%
May 24,306 17,075 +42.4% 103,334 72,211 +43.1%
Jun 20,792 13,642 +52.4% 124,126 85,853 +44.6%
Jul 24,212 16,310 +48.4% 148,337 102,163 +45.2%
Aug 24,769 15,773 +57.0% 173,106 117,935 +46.8%

Source: Macau Gaming Inspection and Coordination Bureau

Interestingly, despite this unexpected good news all the major Hong Kong-listed casino companies, except China Sands, went down by more than the market (the Hang Seng was off by 1.8% overnight).

The prevailing sentiment in Hong Kong seems to be that the Macau gaming market’s gains will never be any better than this and that a slowdown to 20% growth rate or less is imminent.  The reaction to today’s GICB announcement just confirms the same market reaction–selling–that a recent Deutsche Bank research report expressing the same sentiments provoked.

If extensive press reporting of the researcher’s reasoning–a falloff in Chinese buying of German luxury cars presages a general reduction in spending–are correct, her conclusion is a little loony.  So the DB report probably isn’t the reason for the selling.  But it apparently did voice worries that investors have had, perhaps on general principles, perhaps simply because the stocks have been such spectacular performers over the past year or two.

It is true that 2011 will be a tough act for Macau to follow.  My own feeling, however, is that the SAR has at least a couple of more years of substantially above normal growth before it settles down to an expansion rate more in line with that of China’s nominal GDP.  I think “settle down” would mean 10%-12% annual revenue growth for the market and a 15%-18% annual gain in aggregate profit.

Investment interest would then presumably turn to sorting out relative winners from relative losers. That may be happening now.  My pick for top of the winners’ column is Wynn Macau (1128); my sense is that Hong Kong’s is SJM (0880).

Ultimately, relative earnings growth will determine who’s right and who’s wrong.  For now, it seems to me that the selling of the past week or so among the Macau casino stocks already pretty well discounts the imminent maturity of the industry.  In Wynn Macau’s case, I think the price suggests Hong Kong views it as an average performer–no worse, but certainly no better.

IPO of MGM China this quarter?

MGM China, a new company

Last Wednesday MGM filed an 8k describing the formation of a new company, MGM China, which will be the listing vehicle for the Macau casino properties now held in a 50/50 joint venture by MGM and Pansy Ho.  Each will initially own 50% of MGM China.

an intended IPO

MGM and Ms. Ho intend to sell 20% of MGM China to the public in Hong Kong in an IPO that press reports say will happen next month.  The 8k notes that the parties will use their best efforts so see the IPO occurs before June 30th.

a secondary offering

The IPO will be a secondary offering, meaning no new shares will be created; rather the present owners will sell some of their existing shares.

all shares to be sold by Ms. Ho

The post-IPO ownership structure of MGM China will be somewhat of a change, though, because all the stock being sold to the public will come out of Ms. Ho’s portion.  In addition, Ms. Ho will sell another 1% of MGM China to MGM at the IPO price, giving MGM 51% ownership and clear control.  The underwriters of the issue will have an “overallotment” of 3%, meaning they have permission to sell up to 23% of the company.

post-IPO structure

Depending on the overallotment, the post-IPO structure of MGM China will be:

MGM     51%

Pansy Ho     26%-29%

the public     20%-23%.

One potential sticking point might have been that none of the money raised goes to cash-strapped MGM.  Ms. Ho has addressed this issue by agreeing to use US$311 million of the IPO proceeds to buy MGM convertible bonds.

The IPO will be coming at a good time

The Macau gambling market is booming, with revenues through the first three months of 2011 running over 40% higher than in 2010.  And so are the Hong Kong-listed gaming stocks.  Market leader SJM (0880) is up 35% year to date, Wynn Macau (1128) has gained 58% and Sands China (1928) is 26% higher.

The IPO solves a problem for Pansy Ho

The offering documents will doubtless make the situation clearer, but press reports say Ms. Ho resigned from the board of directors of the Macau joint venture at the end of last year.  I presume this was to allow her to vie for control of the much larger SJM, the flagship of the Ho family gambling empire, that has recently been taken out of the hands of Ms. Ho’s father, Stanley.  Macau law prohibits one person from controlling two gambling concessions.  Her reduced holding in MGM China may be sufficient evidence that Ms. Ho is a passive investor in the firm for authorities to allow her to become chairman of SJM.

One other plus:  MGM has agreed to explore co-investing in property on the mainland with Ms. Ho.

How will Hong Kong investors value MGM China?

I find this a hard one to figure.  As the recent performance of  1128 and 1928 suggest, I think Hong Kong investors are beginning to understand the value of the American casino operation model.  But I have no idea if the market will regard the withdrawal of Ms. Ho from MGM China as a plus or a minus (my guess is that it will be the latter).  At this point, I’d expect the IPO will raise well over US$1 billion, US$2 billion a possibility.  The offering documents, and the May report of the Macau Gaming Coordination and Inspection Bureau on gambling receipts, will make the situation clearer.

MGM’s stock went up 8% on the IPO announcement.

One reason is doubtless the US$300+ million cash infusion.  Another is that MGM gains control of MGM China.  More important, I think, is the tendency of the Las Vegas-Macau casino conglomerates to trade on the value of their listed Macau operations.  For example, WYNN’s holding in 1128 represents 75% of the parent’s market capitalization.  Establishing more firmly what MGM’s Macau interests are worth will likely give the parent stock more speculative appeal.

My very preliminary take is that a $14 MGM price already discounts a $2 billion IPO.  At the same time, this would make it clear that you’re only paying $3.50 or so for the rest of MGM, making the stock look like a turbo-charged warrant on improvement in the Las Vegas market.

Who controls Sociedade de Jogos de Macau (SJM–HK:0880)?

The answer would have been a bit clearer two weeks ago than it is now.

a (simplified) scorecard to the structure of the Stanley Ho empire

SJM is the publicly traded holding company whose operating subsidiaries run the largest casino operation in Macau.  The SJM empire consists of 17 casinos, four slot machine lounges and two hotels.

Sociedade de Turismo e Diversões de Macau (STDM) holds a 55.7% stake in SJM (through a 99.99% owned subsidiary, STDM Investments) and therefore controls the casino company.  STDM is, in turn, controlled by its largest shareholder, Lanceford, a company that octogenarian Stanley Ho has/had 100% ownership of.

That’s the simplified corporate structure.  Among other complications, Stanley Ho holds stock options directly in SJM, as well as B shares in SJM’s operating subsidiaries.  In addition, Lanceford holds other assets, including about a 10% fully diluted stake in MELCO, another entrant in the Macau gaming market.  At least one family trust enters into the picture, too.

complex structure isn’t so uncommon outside the US

This labyrinthan corporate structure, though strange to US eyes, is very much the order of the day in European or Asian markets.  That’s not where the recent trouble has arisen, though.  The flurry of legal activity that erupted last week in Hong Kong, and resulting JSM shareholder unease, concerns Lanceford.

trading halt in SJM…

On the 24th, SJM requested a trading halt for dissemination of information, namely that:

–Stanley Ho had folded his 4.8% directly held stake in STDM into Lanceford, making Lanceford a 31.7% owner of STDM

–Mr. Ho had distributed 50.55% of Lanceford to Action Winner Holdings, a firm owned by his third wife, and

–he had distributed 49.45% of Lanceford to Ranillo Investments Limited, a company owned by his five children by his second wife.

According to SJM, this left Mr. Ho with no shares in Lanceford (other reports assert he holds two shares, out of 10,000) a mere 100 shares in STDM, so that he no longer had “an attributable interest” in SJM.

…followed by follies

What followed from the SJM announcement was a farcical series of events:

Mr. Ho denied having authorized the transfer and threatened to sue.

He was shown documents he apparently signed instructing his bankers to turn the assets over to the parties listed above.  Mr. Ho denied having signed them–then allowed that his signature might be on the papers but said he hadn’t understood what they were.

The next day, he appeared at a press conference with his kin saying he was fine with the asset transfer.

The day after, he was headed back to court to reverse his asset loss.

As the situation stands now, wife #2 and the children of wife #3 say that the lawsuit has been dropped.  According to Macau Business Mr. Ho’s lawyers say no one has informed them, and the suit is still on.

an elephant in the room remains politely ignored, however

At least, Americans think of it as an elephant.  The Financial Times points out, in an excellent article chronicling the Ho family and this incident, that although rumors abound about Mr. Ho’s triad connections, no official inquiry “has turned up evidence.”

Stanley Ho has, however, been determined by various regulatory agencies in the US and Canada, including the New Jersey Casino Control Commission, to be “unsuitable” to hold a casino license.  Why?  …his links to organized crime in China and his willingness to allow organized crime to operate and “thrive” in his casinos.

The most recent affirmation of this stance came when New Jersey forced MGM Grand to leave Atlantic City when the company refused the Casino Commission’s request to sever ties with Mr. Ho’s daughter Pansy.  Any evidence the Commission considered has not been made public, presumably because the sources of the information would be compromised by doing so.

Though such allegations would be enough for virtually any American professional investor to avoid SJM–and to think that Sands China and Wynn Macau will be the ultimate winners in the Macau gambling market because they have no association with the Ho family.  Not so in Hong Kong, where the only “scandal” referred to in the press is the question of how many of his wives Mr. Ho has actually been legally married to (The Financial Times points out–something I didn’t know–that polygamy was legal in Hong Kong until 1971.)

Lack of concern about underworld influences ironically creates a second investment issue in this case.  With new controlling shareholders, some of whom are unfamiliar to the local financial community and who may have little experience running a company, succeeding an iconic figure, will the day to day management of SJM change for the worse?  As well, what’s the story with the flip-flopping by Stanley Ho?  Would it be a good thing for the Mr. Ho, who is approaching 90, to retain the reins?