July Macau GGR Decline Lower Than Most Forecasts - Recovery Slow But Clearly Under Way

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Includes: LVS, MPEL, WYNN
by: Howard Jay Klein

Summary

August could move GGR to flat or single digits plus year over year, and trigger an upside move for WYNN and LVS.

A strong fall will produce disproportionate spikes for stocks in the entire sector.

We still like WYNN and LVS as most likely to move up fastest, as we near new property openings.

"I am not going to say I told you so, but I did…" -- Nouriel Roubini

Let's leave the party hats and noisemakers in the closet awhile longer. But July's GGR report on Macau revenue from the Gaming Inspection and Coordination Bureau confirms our view that a slow but steady recovery, especially in mass gaming, is well under way. Despite much dissent from bears and shorts on Macau-centric gaming stocks that saw a continuing and dramatic slide, we kept writing that we thought the worst was indeed over and that, sooner rather than later, a strong upside would develop for the stocks. There could be blips up or down, but the trend is clear: Macau is regaining momentum.

I never like to say "I told you so" because, like almost everyone who is proven to be on the right side of a trend, one can be victimized by gloating. I never gloat nor wag my finger at skeptics and tell them "I told you so." They've got their views, which I respect, and I have mine. I've been right and wrong, but overall, basing my analysis on my own set of industry-centric appraisals intermixed with some standard security analysis, my track record is what it is -- pretty good. And the percentage returns on my blind trust of gaming shares over time have been solid.

So, yes, I did say this would happen -- but please understand that that's no gloat. There's nothing to gloat about; nor would I even if there were. It's simply an expression of the fact that the roots of my calls come from my own 360-degree view of the industry and how gaming managements, employees, and consumer behavior works in our industry. And, of course, my own take on how existential factors are best weighed over time.

Here's What Happened in July

July GGR in Macau showed a 4.5% year-over-year decline. Analysts forecasts for the month had swung wildly between -8% all the way up to +8.5%. The total of $2.2 billion was led by improvements in mass play. One of our on the ground industry sources inform us that "we saw very strong momentum gains in mass in the last 6 days of the month. We think it will sustain itself into August. But we have typhoons in the weather picture. That could rain on our parade for sure, pun intended." He said this while cautioning overoptimism. "But there's no denying it any more, the market is in a healing state."

For the first 7 months of 2016, Macau officials have reported an accumulated decline of 11.9% below 2015. No happy number for certain. However the first 7 months of 2015 had shown a 31% year to date decline in GGR over 2014, producing a strong y-o-y improvement in 2016 GGR recovery.

Officials there now echo management confidence that stabilization has arrived, nascent as it is, but its hard to confirm its reality.

August

Estimates are all over the place once again. Sanford C. Bernstein is looking for a 2% increase in GGR for the month despite the weather issue. We agree that August should show a continuation of recovery and have run our own numbers. And as we always point out, every month of historical gaming revenue reports are subject to the bogey men of hold percentage, weather, strong or weak offers and plain player fatigue economics nobody can ever really predict.

Hard lessons from the gaming battlefield teach us that you should never forecast a month or quarter from analysis of known behavior of the database and y-o-y comparisons alone.

What I learned, often the hard way, was that you never know, during a given month who had lost their job and cancelled a casino trip. More and more these days we see layoffs that are sudden, larger and penetrate deeper into economies than in the so-called recession recoveries of the past. This is true all over the globe.

Or who had gotten the flu or worse, who had been divorced, who had a family wedding or funeral, who had moved, who had a sudden financial challenge, who had suddenly decided they'd lost too much money and opted to stay away. Who had a baby, and who simply had gotten spooked by bad news about the larger economy.

You never know the pulling power of competitive offers. Its not as simple as comparing the dollar value of comp against comp. Or even the draw of entertainer one against entertainer two. There's a hidden chemistry in a decision to visit a casino no amount of fancy research has ever been able to unlock. Just look at the fortress algorithm performance of the Caesars database post recession.

Hello Chapter 11.

You work hard to train employees to deliver supreme customer service 24/7. But for every 10 bad experiences a player may have on the casino floor, in a restaurant, in a snotty aside from a harassed dealer, perhaps one will be reported. Customers vote with their feet, every single month. And either all or none of the above could impact a month's revenue profile.

We've set our own spectrum after talking with operating people in four properties, evaluating average table wins, average bet patterns, slot handle, body traffic, etc. against our instinctive sense of how momentum works in gaming markets on the road to recovery.

We see either a y-o-y flat number, up to the possibility of a y-o-y 4% upside. Although opening late in the month we think Wynn Palace will have a blockbuster opening week with spill over from "gotta see" general increases in body traffic.

Our gold standard, as we have written many times on Seeking Alpha, is when Macau GGR goes flat y-o-y it usually sets the stage for an upside climb. We urge investors to always take the long view. And always caution readers to use a wide-angle lens beyond the stock price and not merely to follow the lock step upgrades or downgrades of analysts. This is no critique of those calls. They have their know-how and metrics, I have mine. I respect them but often think the nature of their mandate creates a herd mentality.

Here's my sense of where we are headed over the next 90 days in Macau:

1. Both August and September should see upsides fueled by the openings of Wynn Palace and the Parisian. Simply put, more total bodies in town translates to more gaming and non-gaming revenue. If August does move to flat or a single digit plus, September's numbers should continue that momentum going into the fall.

2. The Wynn (NASDAQ:WYNN) table issue will be resolved one way or another. We think the officials will ultimately authorize more tables beyond the 100 already OK'd. With that and the shift from Wynn Macau, there will be 350 tables at Wynn Palace, mostly to accommodate what management sees as a anticipation of more VIP and premium mass. This will leave 270 tables at Wynn Macau. We've worked through our own drop, average bet and capacity utilization numbers and think these are good numbers to produce total, accretive GGR gains strong enough to move the shares north.

Furthermore, we continue to believe that post-opening, when it becomes apparent that Wynn Palace volumes justify an increase in table allotment, we'll see officialdom, approving more tables for the property. My view is that it could be anywhere from 75 to 150 well before the end of the year.

3. Las Vegas Sands (NYSE:LVS) expanded room inventory from the Parisian will enable them to market room rates aggressively, being able as they are to compensate for room prices with sheer dominance of capacity as demand goes up. More rooms, more bodies. Occupancy percentages may sag somewhat but overall total of bodies on all LVS properties will handily increase and in the end contribute to a stronger performance between now and year-end.

The Takeaway

Wynn was trading around $97 at the time this was written. In the last two months, Wynn has been downgraded to neutral by three houses taking into account some of the negative numbers in its Q2 release and while recognizing some of the positives, essentially passed over them. This was exacerbated by the news that Macau officials had only authorized 100 tables. Many observers saw that -- naively, in our view -- as the final gavel coming down on the issue. As a result, the shares ticked down from around $100 to where it now sits for what we see as flawed thinking.

Here's why:

1. Wynn will get more tables, its just not certain when and how many.

2. As per usual, Wynn historically has operated small casino capacity and produced much higher than average win per table per day than any competitor. That is directly related to the upscale average bankroll of its customer base. So even if there is a time lag between now an whenever officialdom decides to increase its Wynn Palace table allocation, the property's table limits and clientele will go a long way toward compensating for a shortage of gaming total gaming positions.

Once the table issue is resolved and the market moves to flat to upside y-o-y GGR, shares of WYNN will move smartly over 100 and reach our target of $135 by Q1 2017 or before. We believe a strong opening for WP will presage two consecutive quarters of strong gaming and non-gaming revenue that, given the "Steve Wynn premium" baked into the stock, will produce that gain.

So if you own the stock, stay with it. If you are on the sidelines awaiting a downside blip to jump in, I have no problem with that strategy either. Just bear in mind that in Wynn you are investing in the most adept and nimble management in the gaming space whose performance over time has richly rewarded investors.

One follower has written and asked if I foresaw, given a bullish outlook on Wynn, an increase in the dividend -- and if so, when. My sense is that it could happen, if a strong Q4 2016 and Q1 2017 materialize. In reviewing the company's cash and debt situation I think their first priority would be to re-fatten its debt coverage ratio if performance warranted such a policy. It is to be remembered that in 2017 they'll have huge capital outlays as the ramp up of construction on their two pipeline projects, Wynn Paradise Park in Las Vegas and Wynn Everett.

Yet they are proven believers in returning cash to shareholders and I do think a modest bump in the dividend is in the offing no later than the end of Q2. I am not, nor do I have fly on the wall status at Wynn board meetings. But I do know the company well. I understand where the trigger points lie that prompt policies out of a long, highly focused strategy.

If those trigger points appear, the dividend raise will happen without question.

Las Vegas Sands

Shares of LVS were trading around $50 at the time this was written. I've repeated my continuing puzzlement as to why this strong performer's shares tend to pool in a narrow trading range, which in my opinion way undervalues is core competencies and business model. Commenters on these previous posts have raised valid issues; most often is the understandable still skeptical view of Macau's future and LVS's heavy asset commitment there.

Other issues raised relate to the lingering uncertainty about the sale of the Singapore mall, the ongoing so-so performance of Las Vegas strip gaming revenues. Yet non-gaming LVS numbers in Vegas are strong. Its Bethlehem, Pa., property is knocking it out of the park, but clearly facing a challenge two years hence if this November New Jersey voters approve authorization of two new casinos in the backyard of the metro New York area.

All these are sensible concerns, but all are not merely baked, but over baked into the prices of the shares. Not enough weight is given to the solid business model and performance of the company; its strong commitment to dividends and its agility to move quickly with no financial impediments, if a major opportunity opens up in Japan by 2020. On this basis, likewise assuming we are moving into a possible plus situation in Macau, I'm sticking with my call on LVS at $70 a share by Q2 next year.

And just a quick word about Melco Crown (NASDAQ:MPEL), trading around $13.00 at the time this was written: This stock has taken a big beating from Macau factors in general and specifically from the new property Studio City numbers many believed were disappointing and its earnings comments today. On top of that we have the demerge exit of James Packer which has been seen as his vote on the future of Macau gaming.

Yet if you assume as I do that at some level MPEL will likewise benefit from the new properties coming to the Cotai and that their decision to open junket rooms to compete for VIP and premium mass play, to me its undervalued. Its asset base is good, its management knows what its about and is taking steps to move ahead. There is an underlying soundness to the company I like at this price, which I believe, given the uptick in Macau, should result in earnings boosts going forward.

About the author: Howard Jay Klein is a 25+ year C-level executive in the casino industry and now a consultant in that sector. He is the author of Mastering the Art of Casino Management and the publisher of The House Edge marketplace site on Seeking Alpha.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.