Macau casinos

I haven’t written about the Macau casinos for some time, mostly because I haven’t had anything useful to say.  The fact that I’ve called this group horribly wrongly over the past year or so hasn’t encouraged me to make predictions, either.

I’ve traded around in the group (and, in the case of Wynn Macau and Sands China, their US parents, as well) but have kept my overall position size by and large intact.  Shows what I know.

It has seemed to me, wrongly, that all of the bad news about the casinos in Macau has been in the public domain for some time.  The anti-corruption campaign being waged by Beijing–that has made high rollers wary of exhibiting their wealth at the gaming tables–has been going on since 2013.  Restrictions on visitation rights from the mainland to Macau put in place last year have done the rest of the damage.

Both of these factors have been well-known for a long time.  Therefore, it has seemed to me, much/most of the potential damage had to already be factored into the prices of the stocks.

Wrong! The Macau casino stocks have been sold down again and again when the SAR’s gaming authority has announced each month the (highly predictable) year on year gambling revenue decline.  Figuring we were at the bottom six months ago as far as the stocks are concerned, as I did, has clearly been the wrong position to take.

As I’m writing this on Wednesday night, however, the stocks I pay particular attention to–Wynn Macau, Sands China and Galaxy Entertainment–are each up by more than 10%.

Why is this?

It’s because the mainland has rescinded the travel restrictions it inaugurated in 2014.  As far as visiting is concerned, we’re back to the older, more favorable rules.  This plus has been already reflected in US trading over the past two days, but only in overnight trading tonight in Hong Kong.

Are we at the bottom now?

For someone like me, who already has a significant position, this question has no action-related relevance.  And, as I’ve mentioned above, I’ve been wrong about these stocks for a considerable time.  Still, it’s hard to ignore a 10%-15% increase in stock prices.  Also, the second half of 2014 was the period when the Macau gambling market began a serious swoon. Therefore, year on year comparisons for the overall market should soon begin to improve.  We don’t need current results to get any better.  More than anything, the improving comparisons will be coming from deterioration in the base year, 2014.

So. yes, I think this is the bottom.

I also think that the upturn in the gambling market won’t be a rising tide that lifts all boats, was it has been in the past.  I think Wynn Macau, and to a lesser extent, Galaxy Entertainment, have the most to gain.

 

October Macau gambling results

Just at midnight, New York time, the Macau Gaming Coordination and Inspection Bureau (DICJ) posted its report of aggregate casino win for the SAR during October.  The win, that is, the amount gamblers lost in the SAR, was MOP 28.0 billion (US$3.5 billion).  That’s up by 9.8% month-on-month, but down 23.2% year-on-year.

The result had been widely anticipated–and heavily publicized by the companies themselves, the government of the SAR and Hong Kong-based securities analysts.  Consensus estimates of the decline seem to me to have centered around -21% yoy.

The Hong Kong casino stocks were up a couple of percent in midday trading today when the DICJ report appeared.  Despite the wide publicity, the stocks immediately lost all their morning gains.  They drifted lower throughout the afternoon, ending down by around 3% for the day.

How could  stocks drop 5% on news that had arguably so fully anticipated?

I don’t think it’s that win was down 23% instead of 21%.  Both are equally weak.  More likely, in my view, is that short-term traders used the DICJ report to take profits after the stocks’ 15% gains in recent weeks.  It’s also possible that the market hadn’t grasped the current Macau casino situation as fully as I had thought.  It could be, as well, that the discounting mechanism for stocks nowadays in Hong Kong works more like the bond market in the US (reacting to strongly to current news as it hits the media) than the stock market.  (I doubt this last, but it has been a while since I devoted a serious chunk of my time to studying the Hong Kong market.)

my take

I’m not in a huge rush to buy, partly because I already have a pretty full weighting, both through the Hong Kong stocks and through WYNN and LVS.

My working hypothesis is that cyclical lows–10%+ below today’s close–have already been made.

Could the stocks drop another 5% from here–i.e., get halfway back to the lows of September?   …maybe, especially since the market upturn I anticipate will likely be in the spring or summer of 2015.  But it would take at least that much to get me interested again.  For now, I’m content to watch.

overnight rally in Macau casino stocks

In trading today, the Hong Kong stock market was up by around 1.3%.  But the Macau casino stocks traded there all rose by 5% or more.  One exception–the former monopoly casino operation, SJM (I’m not a fan), which rose by “only” 2.5%.

The near-term situation for the Macau casinos isn’t good.  Francis Tam, the SAR’s finance minister, has recently said that October will be a particularly weak month for casino win and that he doesn’t expect recovery until the second half of next year.

The reasons for the slump are also clear:  the mainland crackdown on corruption in general and conspicuous consumption in particular; protests in Hong; and, for October, the difficulty in matching the mammoth month (second-best in history) the casinos had this time a year ago.

Why the rally?

Two reasons, I think:

–the Macau casino stocks have been beaten down this year, are relatively cheap, and enjoy considerable support from their above-average dividend yields.  The group, ex SJM, had been up by 10% or so from its lows in late September – early October, even before today.

–the third-quarter earnings report from Wynn Resorts (WYNN), which contains information about its subsidiary Wynn Macau (HK: 1128), shows that the situation isn’t quite as bad as the consensus had been expecting.

what the WYNN report brings home

WYNN is a high-roller specialist.  In theory, then, 1128 should be hurt the most of all the casinos in Macau by the current slow contraction of the VIP gambler business.  Nevertheless, the Wynn Macau EBITDA (earnings before interest, taxes, depreciation and amortization–more or less, its cash generation) was basically flat with 3Q13!

Two reasons for this favorable outcome:

–the replacement of high rollers in Macau by the mass affluent (read:middle class, upper middle class) gamblers, who are much more profitable

–gamblers gravitating toward the better casino operators.  When the market was very hot a year ago, gamblers had trouble just locating a place to stay, so they ended up wherever they could find a bed and a seat at the table.  Now they have choices–and the market is sorting itself out into relative winners and losers.  In my view, this benefits the operators with Las Vegas experience.

what to do

For some time, I’ve been writing that I’ve been nibbling at Wynn Macau and Sands China–I already own a lot of Galaxy.  October win figures will likely be poor.  I’d use any weakness to add to those three.

 

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.

 

 

 

 

2Q14 results for Wynn Resorts (WYNN) and Wynn Macau (HK: 1128)

it’s been same old, same old for the big casino operators…

I haven’t written about WYNN and its subsidiary Wynn Macau (1128) for a while.  That’s mostly because I perceive the company to be in a holding pattern.  It has two casino operations:  Las Vegas and Macau, the latter through 72%-owned Wynn Resorts.

–In Las Vegas, all the major casino resort operators, WYNN included, upped their operating leverage by opening big new casino and hotel capacity in 2007-08, just as the recession was unfolding.  Demand dropped through the floor.    Profits disappeared faster.  Results since have been consistently weak as the casinos wait for demand to pick up and/or for weaker entries to close up shop.

–In the Macau market, which is now many times the size of Las Vegas, 1128 has been capacity constrained for some time.  Its next expansion, the Wynn Palace, isn’t slated to open until early 2016.

…until now

Las Vegas

For WYNN, the near-term story is Las Vegas.  And the change is for the better.  Room revenues in 2Q14 were up by 7.3% year-on-year in the quarter.  Average room rates rose to $283, up from $268 in 2Q13.  Occupancy increased from 88.4% from 86.9%.  To my mind, the room rate rise is a particularly important indicator of increasing demand.

In addition, the amount bet at WYNN’s Las Vegas tables was up by almost 15%, year-on-year.  The company’s win percentage was an unusually high 27.4%. vs.  the company’s expected range of 21% – 24%.  In all likelihood, the “extra” win from this quarter will be offset by sub-par “luck” in coming periods.  But, again, the more interesting number is the sharp jump in table games betting.

Slot machines were flat.

Management said on the earnings conference call that the 2Q strength was continuing into 3Q.

Macau

In Macau, the individual pluses and minuses for 1128 may be a little different, but the near-term profit profile–flattish–remains the same.

Overall market growth in Macau has slowed as an economic lull in China and Beijing’s anti-corruption campaign have tempered VIP’s  enthusiasm for high-stakes gambling.  This has been offset by a sharp jump in visits by the mass affluent, who–unlike their high-roller counterparts–are more concerned with being entertained than at winning a lot at baccarat.  They also want to eat, shop and go to shows.  So from the casinos’ point of view, they’re great customers.

While it waits for the new capacity the Wynn Palace will bring, 1128 is refurbishing its existing hotel and casino spaces.  It’s also raising salaries considerably, both to reinforce its reputation for superior service and to retain staff.  While these actions may make profits a bit weaker than they would be otherwise, it makes sense to use the current lull to set the stage for stronger growth in a year or two.

my take

WYNN has a market cap of $22 billion.  Its stake in 1128 is worth $16 billion, meaning that Wall Street is valuing the Wynn name, Las Vegas operations, royalties from Macau and the potential of future casino development in, say, Japan, at $6 billion.  That’s roughly 25x earnings.

WYNN shares yield 2.3%, 1128 about double that.

Last year, I sold the 1128 I had held since just after the IPO, partly because my casino holdings had become too large a part of my portfolio, partly in anticipation of the current fallow time.  I’m beginning to think about buying it back.  But I’d prefer to do so in the mid- to high-HK$20s.  Rightly or wrongly, I think I have time before the market begins to discount the opening of the Wynn Palace–with a presumed strong profit upsurge–in 2016.

I bought a lot of the WYNN I hold during the market collapse in early 2009.  I may be influenced by the tax I’d pay if I sold (I hope not, because this is virtually always a bad way to think), but I’m content to collect the dividend while I wait for Las Vegas to recover and the Wynn Palace to open.  To me it sounds as if the first may already be happening, which would be good news for WYNN shares.

What would I do if I owned nothing in this sector?

The least risky thing to do would be to buy a small amount of either WYNN or LVS and try to add on weakness.  LVS has the better near-term profit profile; WYNN has the better management, in my view.  Their valuations are similar, although their business models are a bit different.  LVS runs convention hotels; WYNN focuses on the high-roller niche.  (I own both.)

The most attractive firm I see at the moment is Galaxy Entertainment.  It’s a Macau-only operator and trades either in Hong Kong, or on the pink sheets–so it’s riskier than the other two.