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The Party's Over

Beware of government policies that kill the goose and the golden egg

The Party’s Over

When Macau was riding high and investors saw blue skies forever, we cautioned that government policies could end the giddy party.

Today, everyone knows that the biggest risk to Macau is government policy.

But the risk isn’t just to Macau, it’s to the rest of the Far East. So, let us warn again: do not believe that casino gambling can grow to the sky in Korea, Philippines, Southeast Asia, Australia or in frigid Vladivostok in Russia.

A lot of money is being invested in those places under the assumption that they can poach Chinese gamblers. Those investing on China’s rim support their claims by citing double-digit gains in Chinese visitation to Korea, Crown Resorts recently growing its high-end Asian play more than 40 percent at its Australian casinos, and rosy projections of outbound Chinese tourism accompanied by descriptions of them being the biggest spenders of all international travelers.

But it isn’t so easy as building resorts to capture gamblers who have quit Macau.

Consider these warning signs:

• The Chinese government has stated clearly that it is not going to let other countries simply lure gamblers who now avoid Macau. For evidence, look at the June arrest of 14 Korean casino executives in China charged with marketing directly to Chinese players on Chinese soil.

• The bloom already might be off the rose. Melco Crown reported that initial high-end Asian gambling was lower than expected at its new Philippines casino. It’s very early for that property and things will change, but a new casino underperforming expectations is not a positive sign.

The other new mega-resorts in Manila’s Entertainment City are reporting early results below expectations, too.

Paradise Co. in Korea reported a 31 percent drop in Chinese VIP play in the second quarter, more than twice the 12 percent decline in other VIP play. At Genting Singapore, a drop in high-end play was largely responsible for a 28 percent second-quarter decline in gaming revenue.

Even properties as far away as River Rock in Vancouver, British Columbia, reported lower high-end Asian play.

• The much-touted diversification into tourist destinations might not make up for losing big gamblers.

Genting Singapore is a case in point. Visitation to its Resorts World Singapore grew 9 percent in the second quarter to more than 18,000 persons a day, yet earnings sank because pure tourism just doesn’t generate the same profits as gambling.

Macau visitation has held up much better than gaming revenues, but profits have fallen, again because it takes a lot of tourists to make up for losing even one guy blowing a million bucks at a baccarat table.

• What happens in China stays in China. The Chinese government right now has bigger concerns than Macau or foreign casinos. It has to figure out how to get its economy moving again.

One attempted trick is the recent devaluation of the yuan.

Analyst Jamie Soo of Daiwa says the devaluation will hit Macau VIP play hard. He forecasts a 20 percent revenue decline that will translate into a 9 percent EBITDA hit.

He also expects mass-market play to fall 8 percent to 10 percent. Further, the economic woes will make gambling in Macau less appealing to many, Soo reasons.

• Policies of neighboring countries matter, too.

Building casino resorts in places like Vietnam and South Korea is a gamble that laws will be changed to allow locals to play because, if not changed, those casinos are unlikely to provide an adequate return on investment.

• It’s always tomorrow. News that casino legislation will not be considered by Japan’s Diet this year is no surprise. As we’ve stated many times, the politics of Japan are a lot more complicated than passing a bill allowing foreigners to come in and make billions of dollars off Japanese citizens.

Likewise, fresh efforts at legalizing casinos in Thailand are not necessarily cause to celebrate. This pony has been ridden many times before and has never made the finish line.

Someday, Japan and Thailand might legalize casinos. And that someday might be soon. But I wouldn’t put a lot of money on it.

Back To The Good ‘Ol USA

Meanwhile, U.S. regional casinos are riding a building wave of prosperity as Americans once again spend on entertainment.

Almost all regional casino companies are worthy of examination for investment.

Penn National has its much-touted growth pipeline. Boyd has a kicker in the rebound in the Las Vegas locals market. Pinnacle’s kicker is its pending REIT deal with Gaming and Leisure Properties. Isle of Capri has been growing revenues impressively as CEO Virginia McDowell has ISLE performing more like a growth company than a mature operator.

Two of our favorites are small companies that fly under the radar screens of most investors: Monarch Casino and Eldorado Resorts.

What these two companies have in common are control by the founding families, flagship operations in Reno and a focus on operating efficiency.

We like companies that are run by founders or controlled by their families. Their interests almost always are aligned with investors because they are the biggest investors, and not because of stock options, but because it’s their company.

Reno is an advantage because the Biggest Little City is also a 21st century city as high-tech companies cross Sierra Nevada from Silicon Valley and discover a low-cost, business-friendly environment in an outdoors wonderland.

Finally, there is operating efficiency.

For Eldorado, that means improving margins at the MTR Gaming properties it has acquired, thus increasing profits even if revenues don’t rise.

For Monarch, that means its under-development destination-quality resort in Black Hawk, Colorado, might generate revenues that are transformational.

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