Back from Singapore/Macau, we offer up our observations
“The use of traveling is to regulate imagination by reality, and instead of thinking how things may be, to see them as they are.”
- Samuel Johnson - 18th century literary titan, essayist, lexicographer, poet, editor, critic, and famous talker.
In the spirit of Dr. Johnson, last week the Hedgeye Gaming, Lodging and Leisure team’s fearless leader traveled more than 19,300 miles over five days and conducted 15 meetings in Singapore and Macau for a firsthand understanding of what’s really happening.
CALL TO ACTION
Without a clear resolution on most of the current issues facing Macau, the stocks look like trading vehicles over the near-term, up and down. Volatility should reign, although for long-term investors, the outlook seems secure – Macau should continue to thrive.
June may have been impacted more than expected by low VIP hold and with Q2 expectations matching the stock prices (that is, low), earnings season may not be so bad. However, the VIP slowdown is real and the junkets were noticeably more pessimistic. The smoking ban may be enforced against the premium mass which is a concern. We’re not seeing it yet but could premium mass face margin pressure as competition thickens? Remember, the spread between junket commissions and premium mass rebates/comp levels remains wide.
For active investors, the short term trade looks long to us as does the entry point for long-term investors. The intermediate term move could be negative with the smoking ban and continued weakness in VIP volumes. As always, we will continue to be active with our Macau calls. Stay tuned.
THE TRIP
We began the research trip with meetings in Singapore including the local gaming operator, the Singapore Tourism Board and a local market contact/long-time friend of the firm. We begin with a few first-hand observations regarding the Singapore gaming market:
- No real catalysts present to spark a resumption of GGR growth but the market looks stable.
- The mass segment looks flattish as the government remains concerned over casinos stripping wealth from the locals.
- Q2 strong for non-gaming in Singapore (due to school holiday) but typically not for VIP
- No impact from China credit/liquidity issues – recall, Macau style junkets do not operate in Singapore.
- No impact on inbound tourism/visitation from the disappearance of Malaysian Airline Flight 370.
- Singapore government officials fear that the planned integrated resort in Bintan, Indonesia may eventually include casinos. Even though the Muslim hurdle remains a large obstacle to legalized gaming in Indonesia, this situation warrants close monitoring. While Bintan is not a heavily Muslim area, the area is a well-known tourist destination. A description of the planned resort can be found at the following link: http://news.omy.sg/News/Local-News/story2014045
Genting Singapore - unfortunately the positive catalysts appear to be outside of Singapore (Korea and Japan), both of which now appear to be delayed.
- Singapore – Genting’s Mass share could get back to the 47-48% range. The property made some customer loyalty program missteps but marketing executive is no longer with the company and changes have been made. The problems began in 2013 and continued throughout most of the year. Took away benefits from non-premium players. Readjusted in Q1 2014 and gaining back some customers.
- Despite persistent stock weakness, buyback not likely
- Dividend raise is a possibility
- Japan – Cabinet committee will decide if a gaming bill will be introduced in the fall
- Genting Singapore has a good shot at Japan and unfortunately this seems to be the only catalyst for share appreciation
- Jeju, South Korea – Subsequent to our meeting it was announced that groundbreaking has been delayed to 3Q 2014. Genting will not discuss the gaming aspect of its project until the company applies for and obtains a gaming license.
- Hedgeye is actually optimistic on the project but South Korea is likely not a catalyst until a gaming license is secured and the company can speak more freely about the casino contribution.
- A CIMB analyst report suggesting Genting’s Jeju land will not be secured is patently false per the company. Genting anticipates no land issues despite the analyst’s contention that it has been designated for other use
Following a mere 18 hours on the ground in Singapore, we went wheels-up for Macau, where we held meetings on Wednesday and Thursday.
Prior to putting two feet on terra firma in Macau, we hoped to hear more clarity and resolution from management and in our meetings on the topics of UnionPay, smoking ban, junkets liquidity, junket credit, a stabilizing outlook for the VIP segment, and Chinese macro issues. While we feel better about the UnionPay issue, we walked away more dispirited and less optimistic for an imminent upturn in VIP. Nevertheless, hold may have played a bigger role in June’s VIP demise and near term earnings expectations have reset lower – both could provide a scenario for near term upside in the stocks. The next test of VIP resiliency will be October’s Golden Week. As always, there are pushes and pulls and while we feel better about the long and intermediate duration, the stocks look like trading vehicles up and down over the next several months.
The Good
- UnionPay just not an issue going forward. Punters using the illegal terminals will simply migrate to the traditional and legal UnionPay outlets to withdraw money. While the government could force UnionPay retail outlets off the casino floor, the only impact would be a 20ft longer walk for the patron or stopping into a UnionPay retail outlet on the way to the gaming floor. It’s certainly in the government’s power to force more meaningful restrictions on UnionPay but we struggle to see any motivation for such action.
- Junkets are understandably in a more foul mood than there optimistic concessionaire brethren. Despite disappointment with the stock price action, non-junket players and industry observers were remarkably upbeat.
- We believe Q2 estimates are fine for most of the operators and at a time where buy-side expectations are low for a change, earnings announcements could be a positive catalyst.
- Hold in the 1st half of June may have been lower than we anticipated. We expect hold adjusted YoY June growth to be nicely in positive territory. The release of the June monthly detail in early July could be another positive catalyst, on the margin.
- Galaxy Macau is nailing it in the VIP segment, despite the slowdown. Two new junkets and a new VIP area are providing the boost.
- Sands China seems to be making a VIP push – without sacrificing mass. New management has considerably more skill and experience in this notoriously elusive segment for the company. I think this time is different and so will market share growth. Across the largest room portfolio in Macau, Sands China comps only 35-40% of rooms to gaming customers. There appears to be a lot of underutilized room inventory that could be yielded up to junket players. Stay tuned.
Metza Metza
- It is still uncertain whether premium mass areas will be excluded from the smoking ban. We believe premium mass is more likely than not to be impacted from the inconvenience of a full smoking ban but it is no way settled. In fact, senior management of all the concessionaires met while we were in market formulating a coordinate strategy to lobby the government for a smoking ban exclusion. Despite the dismissive front face to investors, there is consternation among the operators lest why even bother with the lobbying?
- VIP business definitely took a turn for the worse and while it may not improve meaningfully, the last shoe to drop may have dropped.
- The shift of low end VIP to premium mass seems to be continuing, at least in the view of most operators although there was some dissent on this kind of migration.
- Whether it’s after the fact justification or reality, the operators seem to present the World Cup more as an excuse for weak numbers than our previous conversations.
- Premium mass continues to attract the focus of most operators. SCC opened the Dragon Palace in May with 50 premium mass tables and even SJM is making the push.
The Bad…
- Our thesis regarding difficult Mass comps looks intact. As we pointed out in our recent note, most of the casinos yielded up the tables (by raising table minimum bets) last year from July-November. Deceleration in Mass growth could provide a hurdle for further share appreciation over the intermediate term. Recall, most of the sell-side continues to recommend Macau gaming on the thesis of ‘robust’ or ‘strong’ mass segment growth exceeding 30% year-over-year.
- Most agree that a full smoking ban – even in VIP rooms – is inevitable. It’s all about how much time they can buy.
- Wynn Macau appears to be more conservative to their junket approach given the environment. Our hopes of more commission advancement to fuel junket liquidity and thus growth have likely been dashed.
- Some of my contacts are concerned that the government could delay some Cotai openings to spread them out. This was the theory a couple of years ago and now it’s resurfacing. Permit delays would be the likely stalling tactic.
- More than one of my sources is concerned with margin pressure in premium mass. As long as the spread between junket commissions and premium mass rebates/comps remains as large as it is, there is potential for someone to spark a war, even before Galaxy Macau opens Phase 2. We haven’t heard that there is any movement and we certainly haven’t seen it in the margins.
