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
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.
