Sunny Side Up
Investors reward Wynn in Macau as LVS and MGM MIRAGE prospects also brightenSunday, 14 March 2010
Mixed signals continue to be pumped out of Hong Kong and other stock markets regarding heavily indebted Macau gaming operators that also have exposure to Las Vegas.
On the one hand, investors and analysts like the revenue performance seen in the aggressively growing Macau gaming market. On the other they appear to remain slightly nervous about the general level of gearing of those operators in the Macau and Las Vegas markets in relation to their project debts, though a lot less jittery than they were 18 months ago. They do however still fret about the likelihood of more 'go' 'stop' management of Macau's economy by China's central government in the form of visa restrictions on Mainland residents and on the credit available to VIP players, and continuing modest revenue performance in Las Vegas.
On balance, investors appear proportionately to be rewarding Wynn's performance in Macau more generously than that of its Nevada-based rival Las Vegas Sands Corp. LVS's position is however improving rapidly, with suggestions that construction work on its suspended Cotai plots will begin in earnest during March. Even MGM MIRAGE, a 50% partner in MGM Grand Macau, no longer looks the basket case it was during the height of 2008's financial crisis. In late February the company reported strong performance at its CityCenter property Las Vegas during Chinese New Year adding it hoped to launch a local unit on the Hong Kong stock market in "mid year". It followed that up with news that it has bought valuable time from its creditors. MGM MIRAGE has now secured a deal with key lenders to extend the maturity on part of its US$5.55 billion bank debt by two and a half years.
The guy in the bar
A concept known as 'the wisdom of crowds' maintains that human beings—via a mixture of personal observation, previous experience and common sense—generally tend to arrive at an accurate assessment of weights, measures and more subjective topics such as fair value for a business. That applies even when they don't have access to as much information as the 'quants'—the generally bright and well educated financial analysts that perform quantitative and numerical analysis on a company for investment institutions.
The wisdom of crowds is probably what is being referred to in investment circles by the notion that markets are always 'right'. In the end they distinguish pretty successfully between hype and hyper value, and between hope and hard facts.
Markets may always be 'right' in the long run, but they are not always rational in the short one. Not only can they be manipulated by individuals for quick personal or private institutional gain–they can also seemingly be randomly panicked into behaviour—such as selling off—when key indicators or trends on key indicators seem to be suggesting 'hold' or even 'buy'.
A persistent and underlying volatility in Asian equity markets rather concern about any particular performance trend might explain why Sands China, the Hong Konglisted unit of Las Vegas Sands Corp., saw 4.5% shaved off its share value in the first day of trading after the Chinese New Year holiday in mid-February. It was apparently in reaction to some numbers that came out of the New York market regarding LVS's global results for the fourth quarter of 2009 published on 17th February. It seems that when Hong Kong markets opened the following day, Sands China was being punished for the perceived leveraging 'sins' of its LVS parent globally and the continuing softness of the US market rather than rewarded for the underlying health of the Macau business and its ability to generate cash to service the company's global debt. Or it could have been the markets 'punishing' LVS for the chutzpah of raising US$3.1 billion in Hong Kong from a November flotation of Sands China, saying it would use some of the money to pay back its then US$11 billion debt then announcing within months it planned to raise a further US$1.75 billion in credit.
So when the Hang Seng opened for business on 18th February after the local holidays it must have been galling (to put it mildly) for LVS executives to see shares in Sands China fall 2.49% before lunchtime. LVS's answer was to suspend Hong Kong trading in Sands China pending a market announcement. That was in order to alert the media to the details of the good news story of the local unit's performance. The difficulty was, given that Sands China's original Hong Kong listing came slap bang in the middle of the fourth quarter 2009, the local unit wasn't due to report its own results to the Hong Kong exchange until 2nd March—a full 14 days after the results of the LVS parent.
So even though individual journalists were briefed on the Sands China 'good news' story, for reasons of protocol and the rules of the local market, the company had effectively to sit on its hands and wait for the 'official' reporting schedule of the local unit. The result was the market remained partially out of the loop on the fine detail of the Macau performance and Sands China fell another 2% before the close of trade on 18th February. That's one of the potential down sides of getting your business global market exposure.
By contrast when Wynn Resorts announced its fourth quarter 2009 results on 25th February, shares in its Hong Kong unit Wynn Macau Ltd rose 5.4% to a onemonth high. That was thanks to quarterly earnings before interest, taxes, depreciation and amortisation rising to US$142 million—near double the performance of the equivalent quarter in 2008 and ahead of the expectations of some analysts.
In a separate statement the previous Friday, Wynn Macau said it expected its profit for 2009 to hit HK$2.07 billion (US$266.4 million), exceeding its original forecast of HK$1.47 billion but largely in line with analysts' consensus expectations of HK$2.12 billion according to Thomson Reuters.
The metrics system
Using a company's quarterly or annual results as the basis for selling or marking down its shares in current markets is understandable in terms of identifying trends but does have its limitations. It's a bit like watching a family video of last year's holiday in order to predict what next year's holiday will be like. You know the same people will be involved, you know you're going to the same resort, but you can't account for all the variables like freak weather or a rise in the value of the local currency.
When the local numbers were finally released in their entirety by Sands China on 2nd March they were pretty respectable. The good news included net profit rising 21.7% year on year to US$213.8 million for the year ended 31st December. That was up from US$175.7 million in 2008. It was however below consensus estimates from analysts polled by Reuters of US$219.6 million and short of a US$225 million mean estimate reported by Bloomberg. Nonetheless Macau earnings figures helped Sands China outperform the Hang Seng in trading that morning. Sands China fell 0.4% compared to the Hong Kong market's general downswing of 0.8%.
Sands China said its Four Seasons Macao and Paiza Casino properties attracted about 4.5 million visitors during their first full calendar year of operation. Its Venetian Macao and Sands Macao properties attracted a combined 30.7 million visitors.
The results were the first since the Sands China's initial public offering, which raised US$3.1 billion ahead of its debut on the Hong Kong Stock Exchange on 30th November.
Sands China also told the stock market on 2nd March that construction work suspended on two Cotai Strip plots since November 2008 will recommence later in March. The Shangri-La, Traders and Sheraton hotel sites comprise about 3,700 rooms and are expected to take 16 months to complete. A second Sheraton Tower hotel tower will take about 22 months to finish.
Sands China added it hopes shortly to finalise US$1.75 billion in project financing related to the sites. It stated its aim of 'monetising' its Four Seasons apartments and hotel tower by selling title to outside investors is also likely to be achieved this year.