"Tough times don't last. Tough people do. Remember that"
January was another one of those Chicken Little "sky is falling" months for Macau bears throughout the financial community. Many analysts, including myself, had forecast anywhere from a 7% to (in my case) a 9% yoy increase for the month. Given the new 4,100 room capacity added by the openings of the Parisian and Wynn Palace, a strong growing trend in total visitation and a big chunk of Chinese New Year, sunny skies appeared in the offing.
Then the news broke that gross gaming revenue (GGR) had missed big time, registering only 3.1% yoy growth. Explanations ran the range from "deteriorating consumer sentiment" to a mid-month slowdown. What you didn't read was that in gaming, a single month's revenue results essentially means nothing when you consider all the factors that play into the numbers. This insight apparently was lost on investors who sold off Macau-centric shares registering anywhere from a 7% to a 4% dip in the trade.
And it also presented a gleeful opportunity for day traders and algos to bash the stocks, take a few quick shekels off the table and watch the bulls squirm. That's become something of a game as we have seen all year. The sector is clearly volatile and the spread between upside and downside news day by day is wide enough to encourage lots of game playing by traders who pay zero attention to the fundamentals of the stocks and are simply guided by news.
Was the January number, given all the pluses going in, an omen of break in a six-month upside trend? Could we see the beginning of cannibalization, of the micro impacts of a macro decline in the Chinese economy?
Not so fast. Those are fair questions to ask over, say, a 90-day trend. But in the context of a month nominally up 3.1% as opposed to flat or down, it's an utterly bad strategy for long-term holders to worry about.
We've looked at four Macau-centric stocks again, companies we have been bullish about for almost two years. We continue to hold to our forecasts above the forecasts of gloom and doom that continue to emanate from many quarters.
Here they are and we still think they present good entry points as long-term bets on the world's largest gaming market:
Las Vega Sands (NYSE:LVS)
Price at writing: $51.69 down from around $54/$5
Market cap: $41.6 billion
Percentage revenues derived from Macau: 61%
Our call: $70 by end of Q2 this year
Wynn Resorts Ltd. (NASDAQ: WYNN)
Price at writing: $97.30 down from $102 on the January GGR miss
Market cap: $9.7 billion
Percentage of revenue derived from Macau: 71%
Our call: $135 by end of Q2 this year
Melco Crown Entertainment Ltd. (MPEL)
Price at writing: $16.50 down from $17.50 after the news
Market cap: $8.5 billion
Percentage of revenues from Macau: 89%
Our call: $26 to $28 by Q3 2017
MGM Resorts International (NYSE:MGM)
Price at writing: $28, essentially unchanged since the news
Market cap: $16.9 billion
Percentage revenues derived from Macau: 20%
Key point: Its significantly lower reliance on Macau makes MGM a stronger pick for many analysts. Yet just as the Macau January number broke, we learned that Las Vegas strip casinos - where MGM dominates - fell for the month by 13%. Yet the stock held firm. So while the Macau GGR number was seen as bearish for the sector, the bad number out of the Vegas strip didn't seem to hurt the stock. What's going on here?
It's the herd mentality at work. Macau disappointments have a triple echo effect on trades. While the broad consensus about the prospects in Las Vegas (including the view of yours truly) remains bullish despite a one month precipitous decline there. We're seeing conventional wisdom at work here. However, the January Las Vegas number doesn't stir us at all. We still like MGM, and believe its new property slated for entry in Macau in Q2 or Q3 will be well timed to an upside in the market there.
The takeaway: We think this current dip presents a nice entry point for long-term investors who may have been scared off by the volatile Macau-centric trades we've been seeing. These trades have little or nothing to do with fundamentals on what are a superb group of solid, well-managed companies with strong upside for appreciation and/or dividend bumps this year and afterwards.
Let's consider a few hard facts:
1. The February GGR number will contain some spillover from the Chinese New Year. VIPs generally like to show up when the town is less crowded with tourists. Whatever bankroll conservation we saw in January will be unleashed in February. The aggregate win from both months could reach near 10%, which would confirm that January wasn't a stalking horse for a downside GGR trend forming, as some analysts have suggested.
2. On a further note regarding January's number: we learned that our supposition - that low hold percentage could have played a part in the disappointing number - was validated by calls we made to junket operators and casino floor executives in Macau.
3. This is a business about bodies as we have often written. In January, around 770,000 souls showed up in Macau, up 6.77% yoy. We likewise suggested the GGR number does not include non-gaming revenue which tends to be bigger during CNY.
4. 2016 total arrival numbers are now in. Macau welcomed 30.95 million guests during the year, up around 1%. However, here's the really crucial key: Of that number, 15.7 million were overnight guests, up by 9.8% yoy from 2015. That's 50% of all visitors and supports the premise that instead of cannibalization, we are seeing a move from daytrippers to overnight guests who spend more as room inventories grow. Total room count grew to 36,300 from 32,300. This number is a singularly important one for investors to understand right now. The average room rate fell 11% to $161 per night, but occupancy held at a strong 83.3%. Clearly, there is no deterioration in consumer attitudes toward Macau visitation regardless of the government triggered crackdowns of 2015.
5. Macau visitation going forward: We've talked to our colleagues in the market and several economist friends who have worked in the sector, and we have reviewed our own numbers. As usual, we make no predictions or forecasts given the global factors which can always produce black swans. However, given that caveat, we come up with a long range estimate that Macau visitation will grow to near 50 million annually by 2025. So we have strong companies here, well managed, and with leverage under reasonable control in a monopoly market in a nation of 1.3 billion souls.
Summary: If you are inclined to hold an intermediate- to long-term outlook as a strategy, you owe yourself the time to look at this sector now, determine your risk profile. If there's a good fit, consider taking a position. And remember there's a dividend play here in Wynn and LVS that could see upside yield by Q2. Not saying there will be, but two good quarters, given the history of the companies, could see a dividend raise or a buyback.
Author's Note: House Edge Members of our Marketplace site had an advance look at this research before submission to the public Seeking Alpha site. Shortly afterwards Goldman Sachs upgraded Wynn Resorts with a target of $110. Our target remains $135 by Q2.
Extra disclosure: My gaming portfolio is held in a blind trust run by a former colleague. She has a mind of her own. All I see are periodic dollar summaries of the total value and yield of the stocks. I neither know the stocks nor the weighting of this portfolio. I'll let my kids and grandkids worry about that. I did this ten years ago so as to avoid any possible conflicts of interest with consulting clients in the sector, past, present or future.
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.