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.

Wynn Macau’s Cotai project

Wynn on Cotai

The reason I see for the recent strength in the shares of both Wynn Macau and its parent Wynn Resorts is a press report that 1128 will receive government approval this coming Monday for its proposed new casino in the Cotai section of the SAR.  The news was first published in the Portuguese-language newspaper Jornal Tribuna de Macau and subsequently in Macau Business.

According to MB, the contract signing ceremony will take place while Steve Wynn is in Macau next week, but the official announcement will not come until the contract is published in the Official Gazette in mid-May.

oops!!

Twice before during the past several months, parties associated with WYNN have, prematurely, announced that the company had received approval for the project.  These breaches of protocol appear to have offended the Macau government and resulted in further delay each time.  In the current case, it appears to me that the leak must have come from the government itself, so the article shouldn’t matter.  When questioned about it, Mr. Wynn said nothing, just that he was hopeful of approval but that the decision was up to Macau.

The Wynn Cotai project, whose design was complete over a year ago, will include hotels, casino(s), restaurants, retail and convention/meeting space.  The size of the casino floorspace isn’t clear, although we know the Macau government is eager to see new projects contain a greater percentage of area devoted to non-gambling activities than has been the case to date.  The project will probably end up costing close to US$3 billion.  Opening could be in early 2016.

The Cotai casino would be good for WYNN and 1128…

Cotai, Sheldon Adelson’s idea for recreating the Ls Vegas Strip in Asia, is becoming the hot new gaming location in Macau.  Also, it’s increasingly evident that both Wynn and Encore in Macau are closing in on the limits of their capacity.  So the new project will provide a concrete (no pun intended) path for future earnings growth–both for 1128 and, by implication, for its parent WYNN.

…and for the SAR as well

After all, Steve Wynn is the premier casino designer in the world.  And his company is a master at catering to high roller gamblers.  It would make no sense for the SAR to deprive itself of his expertise.

approval for another firm coming later this year

The government’s overall idea is to continue to expand its tourism business, but at a controlled rate.  It has announced that this means approving two new projects in 2012.

The two prominent other applicants for permission to build a new Cotai casino complex are MGM China and SJM.  If they’re the two finalists, as they probably are, this presents an interesting–and possibly revealing– decision for the SAR.  SJM, the former monopoly casino operator when Macau was a Portuguese colony, which continues to control about a third of the market, is owned by the Ho family.  Pansy Ho also continues to have significant influence over MGM China, where she has about a 20% equity interest.  Declaration of the winner may give some insight into the direction of government gambling policy.

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.

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.

Spring 2011 developments in Macau gambling

Three are noteworthy, in my opinion:

March market statistics

Last Friday the Gaming Inspection and Coordination Bureau of Macau released its report on gaming revenue for the SAR during March.  The market total was just over 20 billion patacas (roughly US$2.5 billion), a new all-time high.  It’s also up by 48% from the same period of 2010–indicating that the mainland government’s measures to slow down the economy continue to have little effect on Macau.

The revenue number can be a bit deceptive.  Customary casino accounting practice is to count as revenue the amount lost by customers, not the (much larger) amount that they wager.  Given that Macau is mostly a high-stakes baccarat market, where the win percentage averages a tad below 3%, the total amount of all bets placed in the former Portuguese colony last month was likely in excess of US$80 billion.  This suggests Macau may approach the US$1 trillion mark in amount gambled for the full year.

According to soundings taken by local magazine Macau Business, there were no dramatic shifts in market share during the month.  The Ho family’s SJM led the market with a 34% share, followed by Sands China with 16%, Melco with 14%–slightly ahead of  Wynn Macau, which also had 14%.

This news is the main reason WYNN and LVS rose sharply in New York last Friday and the publicly traded Macau casinos followed suit in Hong Kong yesterday.

the Sands China lawsuit

Last year, LVS fired the CEO of Sands China, Steve Jacobs (whom I take to be the executive Steve Wynn described in such unflattering terms in an earnings conference call last year).  Mr. Jacobs promptly sued LVS, maintaining among other things that LVS had instructed him to prepare dossiers on prominent members of the Macau government so it would be able to exert improper influence over them, if need be.  Mr. Jacobs’ allegations have sparked a number of investigations by state and federal agencies in the US.  Last Thursday, Hong Kong announced its Securities and Futures is launching a similar probe.  My instinct is that the affair will turn out to be a monumental case of sour grapes by a terminated executive.  Still, the investigations bear close watching for shareholders of either LVS or 1928.

more Ho sibling strife

This time it isn’t the children and spouses of Stanley who are squabbling with him.  It’s his sister Winnie, who maintains that her holding in the parent of SJM was illegally taken from her.  What I hadn’t realized until I read an article by Macau Business is that the dispute apparently stems from 2001.  In that year, the share registry of SJM’s parent company–that is, the physical book in which the names and ownership interests of all shareholders are recordeddisappeared.  Other than that it is the official record of who owns what, apparently it contained the only evidence of Ms. Ho’s ownership interest.  You can’t make this stuff up.