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Floating in Macau

Ownership structure of public companies can make stock more valuable.

Floating in Macau

Macquarie analyst Gary Pinge published a recent note in which he said that low float among Macau casino stocks will push them higher than their earnings might otherwise justify.

Float is the number of shares freely available to be bought or sold, normally meaning shares not owned by insiders, or restricted from trading.

The idea is that in stocks, like anything else, scarcity drives up prices, especially if people are bullish about a company.

Thus, he contends, Macau stocks are up not just because of the enormous growth in gaming revenues, and because of optimism about new capacity as every operator opens a mega-resort in Macau’s Cotai district, but also because there are lots of investors pursuing relatively few shares.

There are two reasons for low float in Macau stocks:

1. The pure Hong Kong companies are the creatures of their founding entrepreneurs who continue to hold most of the stock.

2. The Hong Kong-listed subsidiaries of American companies are the creatures of their American parents to whom they pass along most of their profits through dividends.

The result is dominating ownership for all six concession holders as Pinge calculated in this table of float as a percentage of all shares:

MGM China12.1%
Wynn Macau12.6
Melco Crown16.4
Sands China19.3
SJM22.4
Galaxy23.9
Las Vegas Sands30.1
Wynn Resorts46.5
Average23.6%

Note the dramatic difference between the American parents and their Hong Kong-listed subsidiaries. Las Vegas Sands’ float is 50 percent higher than Sands China. Wynn Resorts is more than three-and-a-half times that of Wynn Macau.

And, all three subsidiaries of American parents have the lowest percentage of float.

The floats of American parents Las Vegas Sands and Wynn Resorts also are low by normal standards, accounted for by the fact that their founders are still in charge.

LVS CEO Sheldon Adelson, for example, owns just over half his company’s shares.

Pinge, who has been something of a perma bear on Macau, has become more positive recently, which is almost forced by the continued double-digit, and accelerating, growth in gaming revenues.

And then comes the flood of mega-resort openings that start with LVS’ Parisian in 2015 and continues through 2018 when Galaxy follows its 1,500-room Galaxy II expansion with the mammoth Galaxy III that might add 6,000 rooms.

All together, the six concessionaires intend to increase the number of rooms in the Cotai section of Macau alone from 24,000 to 36,000, which could go to 42,000 if Galaxy III comes along. Plus 10,000 hotel rooms will rise in adjacent Hengqin Island.

More important, the casinos are asking for 3,200 more gaming tables. Pinge thinks the government might only allow another 1,700, plus 350 for the Fisherman Wharf project in the Peninsula section of Macau.

That new capacity, and the seemingly endless market in China, has some observers estimating that Macau gaming revenues will grow from around $45 billion this year to $95 billion in 2018. By comparison, the Las Vegas Strip did $6.2 billion last year.

However, Pinge, still not quite a bull, asks how much Macau has penetrated China. The answer, he says, is that nobody knows.

That answer could come as the new mega-resorts open. And if growth begins to wane, then all that new capacity will dilute the market and deflate stock prices, Pinge cautions.

However, until that dilution comes, there is a tremendous amount of growth that can drive up the prices of so relatively few available shares of stock.

LV Strong

As we head toward the end of 2013, it has been interesting to watch Las Vegas finally achieve recovery this year.

The LV recovery has been long in coming, but it is clearly here now. Housing prices have returned close to their peak, helping fuel the recovery in the locals market, a boon to Boyd Gaming and Station Casinos.

Asian high-end play continues to grow, a boon to Wynn, and to a lesser extent MGM Resorts and Las Vegas Sands.

It’s no coincidence that those three companies also happen to operate Macau casinos. Their Macau operations, in addition to being hugely profitable in themselves, have the happy byproduct of being player development centers for Las Vegas. Gamblers can be jetted into Las Vegas and the companies happily pay just 6.75 percent on their win vs. around 40 percent in Macau.

The Las Vegas convention business is rebounding and is expected to be genuinely strong next year. That, of course, not only boosts visitation, but also average daily room rate, a key statistic for the resort business model of LVS and MGM.

It should be noted that higher hotel room rates can be very profitable. Every additional dollar in rate falls almost 100 percent to the bottom line.

Finally, food and beverage is a significantly more important part of the revenue mix for today’s Las Vegas mega-resorts as gigantic nightclubs sop up huge amounts of money from excessively spending patrons.

If these trends continue, the biggest beneficiary will be MGM, which has the greatest part of the company focused on the Las Vegas Strip.

But it also will be a nice plus for LVS, WYNN, Boyd and Caesars.

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