Global Gaming and Casinos Industry Specialist, Casino Business Review LLC

Howard J Klein

I am a 25+ year c-level executive of the casino industry in operations, marketing, international development and strategic planning. Currently, a consultant specializing in the casino space. Industry expert contributor and publisher of a subscription letter called "The House Edge". Extensive experience in marketing and development in the Asian gaming market while a senior executive at Caesars, Ballys Grand and Trump Taj Mahal.
Part of senior executive teams that valued acquisitions and mergers with companies in the casino, hotel, d entertainment rant  and restaurant space.

Global Gaming and Casinos Industry Specialist

Equity Bottom-Up

<ul>
<li>The sector has been weak, centered on fears of China economic woes, vague regulatory concerns, slowing visitation and GGR growth over the next two quarters. This follows a pattern of bearish overreaction by the market to essentially tangential issues. Visitation will remain strong.</li>
<li>Core rationale remains bullish.MGM China has more room to run due to its new Cotai property propelling 6-month enterprise-wide revenue to June 30th to a 30% increase.</li>
<li>Nearly 50% off its 52 week high MGM China looks very attractive before Golden Week results are estimated by mid-October.</li>
</ul><p><em>Note: This insight has been prepared as Typhoon Mangkut barrelled through Guangdong, Hong Kong and bears down on Macau. Our primary concern, of course, is for the safety of the people in its path, among them many close personal friends. Within the last hours, we have talked with colleagues on the ground who believe that public services, transportation, </em>and<em> the casino sector will be up and running before the start of Golden Week. This insight is written based on that assumption. Mother Nature as always, will have the last word.</em></p><p>The Macau gaming sector, like most other jurisdictions around the globe, is comprised of what I characterize as microscope stocks. Gaming is a high visibility, tightly regulated industry that generates far more financial and general media than most, As a result, the investment community tends to have it under a constant microscope as it were, examining "microbes" big, small and rattling trading patterns on even the most remotely relevant events. As a result, investors must accept short-term volatility in the light of the intermediate and long-term realities that clearly trend bullish. Most recently for example, after three successive months of lower double-digit growth of GGR, the trend was reversed in August, with a reported healthy 17% upside that surprised many analysts. Yet sector stocks remain weak in our view, still beaten down, principally by the worries about the knock-on effect to Macau visitation and GGR of the macroeconomic picture in China. Clearly, China may never see the booming double-digit GDP growth of years past, but even at the best current estimate of 6.6% GDP growth by a panel of economists queried by Reuters, we see the propulsive elements that drive Macau growth, continuing unabated.</p><p>Example: There are genuine well-documented challenges to the Chinese macro picture for certain, among them, concerns about an aging population. Ssome analysts have pointed to that reality as bearish for the long-term prospects of Macau visitation. Yet there is an irony here. An aging population can also be seen as bullish for the sector viewed from an inside the industry perspective--a factor rarely alluded to in appraisals of the long-term prospects of Macau gaming. The age demo of mass slot players trends much older than that of table games. In the US, slot and modest budget table games, players trend considerably older in average age than other demos. The average age of a Las Vegas patron is about 45 years. That swings higher as you move from VIP to mass segments. We have seen the same phenomenon in Macau. Its demo trends younger depending on time frame. Our takeaway, of course, is that it is necessary to not fall victim to conventional wisdom about how macro trends can operate bearish for casino stocks.</p><p><strong>Golden Week early bookings</strong></p><p></p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/064/074/original/Macau-street.jpg?1537191755" class="editor-image img-responsive" data-smartkarma-image-id="64074"></figure><div class="content-caption">Macau can now accommodate more overnight Golden Week guests than last year.</div><p></p><div class="content-highlight"><p>While it is still relatively early to make a definitive call on Golden Week (October 1-7th) revenues and footfall, we have some early information that suggests a highly bullish outlook triggering an upside in y/y GGR results between now and year's end. Reports this week indicate that at five Macau properties are already sold out for Golden Week and many others rapidly selling rooms. They are: Wynn Palace, Wynn Macau, Grand Lisboa, MGM Cotai, and the Parisian. Note that three of the five sellouts are new properties, supporting our contention that new supply eventually grows the market despite possible short-term cannibalization.  The "must see" factor plays heavily into the paradigm. Should this trend continue, Golden Week 2018 will blow away 2017 results and validate the resilience of the Macau sector to overcome macro headwinds, the temporary blips of lower holds, (Q2 performance was driven lower primarily by lower hold) as well as macro concerns about impacts of China's credit woes, tariff disputes, etc. </p></div><p><strong>Best bet in the sector now for an attractive entry point: MGM China Holdings, Ltd.(2282HK)</strong></p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/064/075/original/charts.gif?1537191839" class="editor-image img-responsive" data-smartkarma-image-id="64075"></figure><div class="content-caption">A very tempting entry point for MGM China</div><p></p><p>Note: All amounts shown in HKD unless otherwise specified.</p><p>Price at writing: $12,72   52 week range: $11.10 to $25.50</p><p>MGM reported its 6-month (Through June 30th) results that benefitted powerfully from the opening of its Cotai property. So percentage wise, increases in occupancy, revenues and total footfall for MGM will skew much higher than peers and at the current trade, energize conviction buying. </p><p>6-month results show enterprise-wide revenue up 30% y/y to HK$9.1bn. Adjusted EBITDA was HK$2.3bn up from HK$2.3bn y/y. (Note: EBITDA includes costs associated with pre-opening expenses).Main floor table games were up 37% y/y to HK$5.2bn and slots up 65% to HK$1.1bn. VIP Table Games win was up 11% to HK$4.5b. MGM Macau, the company's core property showed an 8% decline to HK$3.7bn on main floor table games which some analysts were quick to attribute to cannibalization via migration of MGM core players to the newer property. There is an element of migration for certain--but that is not why results were 8% down on the games sector. It was far more attributable to low hold of 17.9% vs 20.8% for the period than migration.</p><div class="content-highlight"><p>As we have pointed out during prior openings of other new properties on Macau, the migration is expected, in fact, encouraged by marketing. Management wants its customer base to sample its new property and develop it as an alternative for customers to generate more comp point rewards or change of luck movements common in the business. The key here is that it really doesn't matter in the final analysis which pocket the revenue falls into--its the same pair of pants. Slot win was up 16% at the property indicating strong visitation of must-see mass business. Our internal metrics based on historical trends in measuring the cannibalization absorption arc shows on average it runs 90 to 120 days before total new demand, catches up with new supply producing an overall total revenue gain for existing properties as well as new supply. MGM is largely past that point. Its incremental growth going forward should show the largest percentage-wise spike y/y in the market. That should be bullish for the stock considering it now sits 50% lower than its 52 week high.</p></div><p><strong>Junket Rooms and Mansion Suites will open for Golden Week</strong></p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/064/076/original/143642586.jpg?1537191916" class="editor-image img-responsive" data-smartkarma-image-id="64076"></figure><div class="content-caption">MGM capacity expansion ready to pay pff</div><p></p><p>The MGM Cotai junket program kicks off for Golden Week as does its Mansion tower of ultra-luxury suites coordinated to house an expected increase in VIP arrivals. At the same time, we are estimating that MGM Cotai will show the highest percentage y/y mass and slot revenue increase in the sector coming in at around 53% y/y up. </p><p><strong>The takeaway: </strong>Because we believe a change in momentum for MGM led by its new capacity at the Cotai will resonate with investors who are on the sidelines concerned about cannibalization is past due, we are putting a PT on the stock at HK$18.50 by the end of this year or before.</p>


The sector has been weak, centered on fears of China economic woes, vague regulatory concerns, slowing visitation and GGR growth over the next two quarters. This follows a pattern of bearish overreaction by the market to essentially tangential issues. Visitation will remain strong.
Core rationale remains bullish.MGM China has more room to run due to its new Cotai property propelling 6-month enterprise-wide revenue to June 30th to a 30% increase.
Nearly 50% off its 52 week high MGM China looks very attractive before Golden Week results are estimated by mid-October.
Note: This insight has been prepared as Typhoon Mangkut barrelled through Guangdong, Hong Kong and bears down on Macau. Our primary concern, of course, is for the safety of the people in its path, among them many close personal friends. Within the last hours, we have talked with colleagues on the ground who believe that public services, transportation, and the casino sector will be up and running before the start of Golden Week. This insight is written based on that assumption. Mother Nature as always, will have the last word.The Macau gaming sector, like most other jurisdictions around the globe, is comprised of what I characterize as microscope stocks. Gaming is a high visibility, tightly regulated industry that generates far more financial and general media than most, As a result, the investment community tends to have it under a constant microscope as it were, examining "microbes" big, small and rattling trading patterns on even the most remotely relevant events. As a result, investors must accept short-term volatility in the light of the intermediate and long-term realities that clearly trend bullish. Most recently for example, after three successive months of lower double-digit growth of GGR, the trend was reversed in August, with a reported healthy 17% upside that surprised many analysts. Yet sector stocks remain weak in our view, still beaten down, principally by the worries about the knock-on effect to Macau visitation and GGR of the macroeconomic picture in China. Clearly, China may never see the booming double-digit GDP growth of years past, but even at the best current estimate of 6.6% GDP growth by a panel of economists queried by Reuters, we see the propulsive elements that drive Macau growth, continuing unabated.Example: There are genuine well-documented challenges to the Chinese macro picture for certain, among them, concerns about an aging population. Ssome analysts have pointed to that reality as bearish for the long-term prospects of Macau visitation. Yet there is an irony here. An aging population can also be seen as bullish for the sector viewed from an inside the industry perspective--a factor rarely alluded to in appraisals of the long-term prospects of Macau gaming. The age demo of mass slot players trends much older than that of table games. In the US, slot and modest budget table games, players trend considerably older in average age than other demos. The average age of a Las Vegas patron is about 45 years. That swings higher as you move from VIP to mass segments. We have seen the same phenomenon in Macau. Its demo trends younger depending on time frame. Our takeaway, of course, is that it is necessary to not fall victim to conventional wisdom about how macro trends can operate bearish for casino stocks.Golden Week early bookingsMacau can now accommodate more overnight Golden Week guests than last year.While it is still relatively early to make a definitive call on Golden Week (October 1-7th) revenues and footfall, we have some early information that suggests a highly bullish outlook triggering an upside in y/y GGR results between now and year's end. Reports this week indicate that at five Macau properties are already sold out for Golden Week and many others rapidly selling rooms. They are: Wynn Palace, Wynn Macau, Grand Lisboa, MGM Cotai, and the Parisian. Note that three of the five sellouts are new properties, supporting our contention that new supply eventually grows the market despite possible short-term cannibalization.  The "must see" factor plays heavily into the paradigm. Should this trend continue, Golden Week 2018 will blow away 2017 results and validate the resilience of the Macau sector to overcome macro headwinds, the temporary blips of lower holds, (Q2 performance was driven lower primarily by lower hold) as well as macro concerns about impacts of China's credit woes, tariff disputes, etc. Best bet in the sector now for an attractive entry point: MGM China Holdings, Ltd.(2282HK)A very tempting entry point for MGM ChinaNote: All amounts shown in HKD unless otherwise specified.Price at writing: $12,72   52 week range: $11.10 to $25.50MGM reported its 6-month (Through June 30th) results that benefitted powerfully from the opening of its Cotai property. So percentage wise, increases in occupancy, revenues and total footfall for MGM will skew much higher than peers and at the current trade, energize conviction buying. 6-month results show enterprise-wide revenue up 30% y/y to HK$9.1bn. Adjusted EBITDA was HK$2.3bn up from HK$2.3bn y/y. (Note: EBITDA includes costs associated with pre-opening expenses).Main floor table games were up 37% y/y to HK$5.2bn and slots up 65% to HK$1.1bn. VIP Table Games win was up 11% to HK$4.5b. MGM Macau, the company's core property showed an 8% decline to HK$3.7bn on main floor table games which some analysts were quick to attribute to cannibalization via migration of MGM core players to the newer property. There is an element of migration for certain--but that is not why results were 8% down on the games sector. It was far more attributable to low hold of 17.9% vs 20.8% for the period than migration.As we have pointed out during prior openings of other new properties on Macau, the migration is expected, in fact, encouraged by marketing. Management wants its customer base to sample its new property and develop it as an alternative for customers to generate more comp point rewards or change of luck movements common in the business. The key here is that it really doesn't matter in the final analysis which pocket the revenue falls into--its the same pair of pants. Slot win was up 16% at the property indicating strong visitation of must-see mass business. Our internal metrics based on historical trends in measuring the cannibalization absorption arc shows on average it runs 90 to 120 days before total new demand, catches up with new supply producing an overall total revenue gain for existing properties as well as new supply. MGM is largely past that point. Its incremental growth going forward should show the largest percentage-wise spike y/y in the market. That should be bullish for the stock considering it now sits 50% lower than its 52 week high.Junket Rooms and Mansion Suites will open for Golden WeekMGM capacity expansion ready to pay pffThe MGM Cotai junket program kicks off for Golden Week as does its Mansion tower of ultra-luxury suites coordinated to house an expected increase in VIP arrivals. At the same time, we are estimating that MGM Cotai will show the highest percentage y/y mass and slot revenue increase in the sector coming in at around 53% y/y up. The takeaway: Because we believe a change in momentum for MGM led by its new capacity at the Cotai will resonate with investors who are on the sidelines concerned about cannibalization is past due, we are putting a PT on the stock at HK$18.50 by the end of this year or before.

Macau Sector: Brisk Golden Week Bookings Defy Bearish Sentiment, Powers Q3 Kickoff