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?

December 2010 Macau gambling results

The Macau Gaming Inspection and Coordination Bureau announced December monthly and full-year 2010 revenue for the SAR’s casino industry on Monday.  The numbers are as follows:

* 1 HKD = 1.03MOP (Unit:MOP million )
Monthly Gross Revenue from Games of Fortune in 2009 and 2010
Monthly Gross Revenue Accumulated Gross Revenue
2010 2009 Variance 2010 2009 Variance
Jan 13,937 8,575 62.5% 13,937 8,575 62.5%
Feb 13,445 7,912 69.9% 27,383 16,488 66.1%
Mar 13,569 9,531 42.4% 40,951 26,019 57.4%
Apr 14,186 8,340 70.1% 55,137 34,359 60.5%
May 17,075 8,799 94.1% 72,211 43,158 67.3%
Jun 13,642 8,269 65.0% 85,853 51,427 66.9%
Jul 16,310 9,570 70.4% 102,163 60,997 67.5%
Aug 15,773 11,268 40.0% 117,935 72,265 63.2%
Sept 15,302 10,943 39.8% 133,237 83,208 60.1%
Oct 18,869 12,600 49.8% 152,106 95,808 58.8%
Nov 17,354 12,215 42.1% 169,460 108,022 56.9%
Dec 18,883 11,347 66.4% 188,343 119,369 57.8%
Source:  Macau Gaming Inspection and Coordination Bureau

The December figures represent an all-time high for revenues for the market.  They exceed the seasonal peak of October.  And they are much better than expected, especially so since the Chinese central bank is trying to cool down the mainland economy.

According to a local Macau magazine, Macau Business, a big beneficiary of the gaming surge has been Wynn Macau (1128), which it says has passed Sands China (1928) for second place in market share, with 17% of total market revenues. Presumably, the firm’s profits will benefit from substantial operating leverage.  Stanley Ho’s SJM (Sociedade de Jogos de Macau, 0880), the long-time incumbent, remains the market leader with a 30% share.

The magazine also maintains that MGM Macau has risen out of last place in the market, passing Galaxy Entertainment (0028) to do so.

This news appears to be the reason that the Hong Kong-listed market entrants have been strong this week, as well as their US-traded parents.

Two points to note:

–the quarter on quarter gain in market revenues from September to December is 16%.  For 1128, however, if it has gained one percent of market share for the quarter, its revenue stands to be up 24% quarter on quarter.  If it has gained two points, which I think is closer to being correct, the growth rate in revenues is 32%.  Even without factoring in operating leverage, which 1128 surely has, this means a blowout quarter.  If the Macau Business information is correct, the firm’s accountants will doubtless be hard at work devising ways to hold the earnings down–like increasing bad debt reserves.  But there’ll be no chance of 1128 not reporting a stunning number.

This is good for its parent, WYNN, as well–both because WYNN owns four-fifths of 1128 and it collects management fees based on 1128’s success.

–MGM is off my radar screen because of the company’s connection with the Ho family.  I did notice that both LVS and WYNN mentioned a not-yet-listed competitor (to my mind, clearly MGM Macau) that had begun to rent its casino space to junket operators in return for a very low fee.  Both LVS and WYNN speculated that this firm was trying to generate revenue growth in any way possible so that it could make an initial public offering.  And MGM has raised its market share from 7% to 11%, according to MB. There’s another possible explanation for MGM Macau’s behavior, though.  I only recently learned that, despite the fact that the government has not permitted casinos to add new tables for some time now, MGM has been unable to attract enough gamblers to use all the capacity it has permission for.  It may have feared that this unused capacity would be diverted to someone else if it weren’t put into operation.  Time will tell.

buying Sands China (1928:HK): why, troubles, developments…(lll)


The Macau has been very proactive–and very astute–in cultivating the gambling business in the SAR.  It has, for example:

–introduced sophisticated competitors like WYNN, to spur growth and innovation,

–regulated the pace of capacity expansion, to maintain a balance between supply and demand as well as to regulate the number of construction workers imported into the economy at any one time, and

–prevented destructive price competition initiated by weaker entrants, to maintain a minimum level of overall market profitability.

The main area of planned capacity expansion for the Macau casinos is Cotai, an area that, as I see it, is more or less landfill.  Development of new properties there has two steps:

–an informal one, which consists in preliminary government approval, followed by land remediation and preparation for new construction, and

–a formal one, the preparation of a detailed casino plan and receipt of final government approval.

the Sands China situation Continue reading