Becoming an owner not a consumer

Bet on the casinos not on the tables

I’m personally not a big fan of gambling as casinos have an edge over their customers. Even if the casino loses the winning punter tends to splurge on restaurants and shopping sprees within the casino giving the casino owners another opportunity to take the money back. That’s why I was interested in looking at Macau’s casino stocks which have halved over the past year. The halving in these stocks was enough of an excuse to go on a plane and have a closer look. Meeting with gaming executives I was curious to see whether they gambled and if so where. They can’t gamble at their own casino but the answer was always no. Of course they don’t gamble they know the statistics involved! On average whenever a mass market gamer drops $100 on the table they walk away with $75 leaving the casino with $25. VIPs are treated better on average walking away with $97 after spending $100. After meeting with them it reminded me that it pays to be an owner rather than a consumer of a good business.

Becoming an owner and not a consumer

As consumers we know a lot about what we buy and why we like it over competing products. We can use this to benefit our portfolios. If people really like the product we should consider the stock. Some businesses (like casinos) are so profitable that management and staff would rather own the business than use the product.

As for Macau it is struggling in February gaming revenues were down by half due to the austerity and anti-corruption campaign in China. High rollers are not taking the risk of being seen gambling. It’s not worth drawing attention to themselves as the risk of a corruption investigation means that they may never be seen again. Macau’s future lies in catering to mass market consumers not VIP’s. Macau has plans to become like Las Vegas where it is as much about buffets, shows and conventions than just gambling. The leader in this transformation is Las Vegas Sands (LVS). They are famous for owning theme based properties such as the Venetian in Macau and Marina Bay Sands in Singapore. The Marina Bay Sands casino is their newest addition with a beautiful infinity pool on top it holds a 94.8% occupancy rate at an average daily rate of $414. Both of these properties give guests unrivaled entertainment, shopping, conventions and even Gondola rides. They are aiming for a travel experience rather than the gambling only properties commonly seen in Macau.

The Vegas strip Macau style

Las Vegas Sands had the vision to construct the equivalent of the Las Vegas Strip in Macau calling it the Cotai Strip. They even built the land! Cotai was a land reclamation project joining two islands together. The reclaimed land is being developed to rival the Las Vegas Strip in entertainment having already passed it in gambling revenues. Las Vegas Sand properties including the Venetian have prime position on the strip. They are also opening a French themed casino the Parisian Macau in 2016. Las Vegas Sands not only owns the casinos but the hotels and shopping malls at its properties.

Source: Las Vegas Sands investor presentation

Macau versus Vegas

The transition from VIP’s to mass market customers will be difficult due to Macau’s high table minimums. It’s amazing that the average minimum bet last year was around US$250 this has been trending down to around $40 at some tables. The threshold for opening a VIP account has also been lowered from over USD$25,000 to $13,000. As these levels reset the longer term trend looks more promising as less than 2% of Chinese have visited Macau versus the 10% of Americans who have been to Las Vegas. There are 16,000 hotel rooms in Macau increasing to 28,000 over the next three years compared to 160,000 in Vegas.

While China’s anti-corruption drive is having an effect longer term the structure of the market is promising. The casinos are not like the hotel business where anyone can compete. The casino market in Singapore is a duopoly there are only two players Marina Bay Sands and Resorts World Sentosa. There are also only six operators allowed in Macau. It is not like America where if someone has the money they could build a casino. Short term the environment looks tough but the casinos always have an edge against their customers. It pays to listen to the gaming executives be an owner not a consumer of a great business. Bet on the casinos not on the tables.

Jason

http://www.decisiveassetmanagement.com/

Decisive does not have a long position in Las Vegas stock (LVS). The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.

Industries change but sin stays the same

Consumers are adopting new products faster than ever before. Change that historically took decades now occurs in years. Finding industries with growth and staying power is key. You could manufacture the best VCR or horse carriage but it didn't matter when DVD's and cars came along!

Source: http://www.nytimes.com/imagepages/2008/02/10/opinion/10op.graphic.ready.html

A major driver of stock performance is the industry. Whether the industry is in growth or decline can have a significant effect on a stock. We can see this industry effect in Australia with the end of the mining boom it didn't matter which iron ore stock you owned they all fell. Credit Suisse has provided us with some historical charts detailing the impact of industry change. We can see this in the composition below of the USA and UK  markets.

Source: Credit Suisse Global Investment returns yearbook 2015

Rail stocks dominated the market with over 50% of total equity value but 115 years later are less than 1% of both markets. New industries such as technology in the US and oil and gas in the UK sprung up to take their place. With change accelerating it is becoming more difficult for investors but over history one thing stays the same. The out performance of so called sin stocks. In the USA the best performing industry was tobacco and in the UK alcohol. Both industries show dramatic out performance of the market. I'm not a big fan of products that potentially kill your customers (smoking) but I definitely do understand the need for a drink when Friday comes around.

Source: Credit Suisse Global Investment returns yearbook 2015

These two industries share many similarities. Both products are addictive and its hard to see how the industry could get disrupted. They tend to have high margins as their input costs are quite low. These products tend to be branded unlike the poorer performing industries like the paper, steel or textile industry where sales prices are commoditised. Some of the oldest companies in the world are involved in the alcohol and beverage industries. We can never know what the future holds but we can be certain that a hundred years from now human nature will remain the same. Drinking, gambling and smoking seem to be a very Australian past time. We're likely to see these so called sin industries at the top of the next hundred year list.

Jason

http://www.decisiveassetmanagement.com/

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.

Yoox Net-a-porter its all about the box

In big news two leaders of the online luxury market have agreed to merge in a market changing transaction. YOOX is known for its operations expertise running the back end technology and logistics for luxury brand sites. While Net-a-porter runs its own luxury branded site. Clued into the fashion world Net-a-Porter even produce their own magazine whose content is becoming even more important for social media and sales. The combination will let each partner lean in on each others strengths. I mean look at Yoox's boxes they could sure use Net-a-Porters fashion sense!

Just like Tiffany it's all about the box

Together the pair would claim about 15% of the online luxury market with 2.1 million customers. It's the perfect transaction creating a market leader and being accretive in the first year there is a reason the stock was up on the news. Even with the rise the combined company trades at a EV/EBITDA discount to Asos and Zalando.

The fashion partner of choice
According to McKinsey online sales represent only 4% of the luxury retail industry but are expected to grow at double digits for the next couple of years. Bain and Co estimates that 40% of luxury brands don't sell their bags online. These online brands are realising that more and more people are buying online and even more researching online before they buy. Most luxury brands just need a partner. As can be seen below there will be three business lines.

Source: Yoox Net-A-Porter presentation 

The two businesses are complementary Yoox is known as an off price brand while Net-a-Porter is in season. They are also successful in different markets Net a Porter is big in the UK while Yoox is big in Italy. I'm normally skeptical of 'revenue synergies' but I think it makes sense in this case with more customers and different offerings they will be able to serve more customers and more importantly brands. The merger will accelerate growth they expect no redundancies in the company. The combined entity is too big for luxury brands too ignore. There is no one else with scale that luxury brands can work with. As can be seen below Amazon and other sites trade on value for money. Their average orders are too low for luxury brands.

Source: Yoox Net-A-Porter presentation 

Opening doors to the world's luxury fashion store
The smart part about the transaction was how it was structured. Richemont (who owned Net-a-Porter) will own 50% of the entity but only have 25% voting rights so that the combined entity will remain independent. This independence is important because of Yoox's relationship with luxury retailers. With increased customers and offerings the combined company should be able to convince other luxury brands to transact online. As the founder of Net-a-Porter says "the best way to predict the future of fashion is to create it." With YOOX's operational savvy and Net-a-Porters fashion sense the future of fashion is here.

 Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive has a long position in Yoox (YOOX).

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.