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

Smartkarma Webinar | Asian Casino Outlook 2022: Challenges and Opportunities

Galaxy Entertainment:  Change in Sentiment Among Greater China Managers

Equity Bottom-Up

Galaxy Entertainment Group / Equity Bottom-Up

<ul>
<li>The recent plunge and overnight recovery of casino stocks were evidence of a larger fear that has spooked some global markets: building post pandemic inflationary pressures.</li>
<li>Even though China's inflation rate is expected to rise only to 2% next year some investors have begun to worry about contagion from other nations.</li>
<li>The US inflation rate for the 12 months through April jumped to 4.2% in the CPI, raising fears that fiscal and monetary stimulus could dampen pandemic recovery.</li>
</ul><a target="_blank"></a> Casino sector stocks were rattled last week as investors began to worry that inflationary pressures could trigger labor and supply shortages that would damage operating margins dramatically. High margins going forward will be sustained because of operating cuts made during the pandemic that did not impair service or customer experience. Key gaming stocks with a large Asia presence were also hit. The dip of these selected stocks since March went against far more bullish outlooks for both the Macau and US gaming markets seeing accelerating revenue recovery as the pandemic pressures began to ease. We contacted several buy side institutions we know who had reduced their positions in these stocks over the last two months. We wanted to know if the decisions to lighten their holdings in these stocks was related to growing inflation fears. Out of six institutions, all said that concerns about inflationary pressures building post pandemic was among the several key considerations in those moves. Overall they remained bullish on the sector awaiting 2Q21 earnings results as the next measure of improving gaming consumer sentiment. They cited concerns about labor costs rising in the US and cost of goods in both US and Asian casinos in food cost inflation and other factors. I asked whether they believed that inflation could cool, or stop revenue recovery in the coming quarters through early 2022. All believed it was a factor. But history proves quite the opposite as we shall note later in this insight.<section class="figure"><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/206/506/original/21341.jpg?1621162448" class="editor-image img-responsive" data-smartkarma-image-id="206506"></figure></section>Above: A percentage of severe job cuts could remain in place in casinos, but investors worry that it could cause worker shortages later and drive up the price of labor in service industries.</section> Recent trading levels of selected gaming stocks Wynn Resorts Ltd:March 17: US$140APRIL 29: US$129May 11: US$128May 13: US$120 Wynn Macau:March 17: HK$16.260April 19: HK$15.080May 10: HK$13.600 Las Vegas SandsMarch 11: US$63.16April 28:US $61.46May 13: $54.78May 14: US$57.89 Galaxy Entertainment Group Ltd (0027HK)March 17: HK$78.250May 10: HK$66.950May 14: HK$62.100 Las Vegas as a Petrie Dish for Macau It has been our long held contention that even powerful inflationary pressures do not damage the prospects of gaming stocks. Our view is based on the operating history of casinos during inflationary periods. Given the clear differences of time, gaming cultures, economic activity there are still several useful parallels for us to compare Las Vegas during a rampant inflation period (1976-1980) in the US and today’s clearly more complex and larger world economy. We begin with the baseline, simple adage of economic truths about the causes of inflation: Too much money chasing too few goods. Hence, the price of goods rises rapidly out of shortages or disruptive factors such as commodity prices that spike sharply increasing pass along producer costs. The basic “goods” of a casino are of course, the intangibles of entertainment experiences. But the actual “goods” paid by the consumer, are the gaming chips. And in the larger inflating economy, consumers will see prices of such things as food, clothing, etc rising, yet gaming consumers will still see the same prices of the casino “goods” i.e., chips bought, remain fixed. Whether inflation, recession, depression, or prosperity, a twenty -five dollar chip still costs twenty five dollars  and is not raised to twenty eight dollars to reflect inflation. In the area of cost of goods such as food for dining outlets, or supplies, casinos operate multiple dining outlets priced from popular, low cost food, all the way to gourmet rooms. So a dining experience is always available at an affordable price. Furthermore, a given amount of dining is comped for players so cost per se, isn’t an inhibiting factor in a decision to “buy” in a sense. Because gaming trips are periodic, not commuting, rising costs of transportation also do not apply to casino customers. The Las Vegas during a period of rampant inflation noted below had these characteristics in common with Macau today—as an example: It was a national monopoly. The only US state legally able to conduct casino gambling was Nevada. Macau enjoys that status re: China today. Las Vegas had a large concentration of gaming properties appealing to a diverse consumer profile. From low cost, low limit mass gaming halls, to mid-range properties, all the way up to luxury properties like Caesars Palace, opened in 1966 with average RevPars related to room rates, etc. way above the town’s average. Today, Macau visitors have the same choice. Budget conscious players can book inexpensive rooms, dine cheaply and play low limit games to their heart’s content. Premium mass and VIP players have their choice of the most posh accommodations in the town and are mostly comped. There is a distinct mentality present in the characteristics of gamblers that crosses age, ethnicity, economic lines as distinguished from that segment of the general population of countries who do not gamble. The psychology of players who arrived in Las Vegas back in the day, is not substantially different from those who visit Macau today. That mind set is distinct. It is perfectly comfortable with the idea that one arrives at a casino hoping to win, and more likely willing to lose in exchange for a unique, entertaining escape from the pressures of everyday life. Proof of casino resiliency to all but one macro trend In 1990, the Research in Business Economic Journal published a Robert Morris University study of the impact of macro- economic fluctuations on casino revenues in various markets.They studied GDP variables, recessions ,booms, inflations mild and severe and the misery index. In all these cases they found only one factor that posted a statistically notable move: GNP. Other than that, all the macro trends, including inflationary pressures registered virtually no provable statistical impact on gaming revenues.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/206/510/original/56913726_7.png?1621162714" class="editor-image img-responsive" data-smartkarma-image-id="206510"></figure><div class="content-caption">Inflation fears may rattle stocks but reality suggests more stability thus far in pandemic endgame months.</div></section>Going forward, follow up studies revealed that severe recessions, such as that of the 2007/09 global financial crisis which battered GDPs globally, did take a bite out of gaming revenue in most markets. But by contrast, inflation did not materially impact win. Because casinos are able to adjust such key operating factors as the number of games open and staffed, hours of operation in dining outlets and of course, room rates to reflect flexible demand, they can endure severe recessions to a degree. But there is clearly damage. In the stagflation era of 1976-1980, when inflation ran rampant over the globe and economic activity had materially slowed, the Las Vegas gaming market reached its first landmark, winning US$1b from players that year in the teeth of macro inflationary pressures. Three major resorts also opened that year. In the heavily impacted          global recession year of 2009, Las Vegas gross gaming revenue fell to US$5.5B from $6.1b in 2008—which also was impacted by the financial crisis that began in 2007. At the same time, Macau reported 2009 GGR of US$14.921b, up from US $13.2b in 2008, an increase of US$1.3B. But even in that macro -economic downturn, the momentum in both markets quickly resumed growth. In the pre-pandemic base year of 2019, Macau posted a US$37.7b GGR, while Las Vegas had US$6.5B IN GGR. During the interim years both markets experienced macro shock waves on their way to recovery. In the US, the aftermath of a deep recession with a large component of unemployment. In Macau, the massive regulatory crackdowns from Beijing that hit GGR in 2015 hard. Yet in both cases, an inherent resilience to bearish macros events was demonstrated. And we believe that inflationary fears that now appear to have begun spooking the markets in general and specifically, taken a bite out of valuations in the casino sector, are unwarranted. In the US, fears spring out of investors’ concerns about monetary and fiscal stimulus driving up prices. In Asia, despite the relatively low inflation rate in China, there are indications that the market’s worry about bond yields are a stalking horse for worse news on the inflation front to come. Overall, we believe concern over inflation is not a reason to turn bearish on the casino sector. The bear narrative that may still loom over the Macau sector is a lingering lack of conviction that despite steady gains in arrivals and revenues, full recovery is still too far off to reflect itself in conviction buying. As a result we continue to believe that despite the downward trend of the last 90 days, the sector is reaching a highly attractive entry point for those still on the sidelines. If we discount the threat of inflationary pressures, and remain unconvinced that Asia gaming markets in particular, have a long haul ahead before they return to robust growth, we still have inherent value here that militates against a bear outlook. By contrast we think the Macau recovery is steady and underway as already shown by 1Q21 results of revenue increases for Macau centric stocks like Galaxy and Wynn Resorts Ltd. We expect an even more robust earnings profile to show up in 2Q21 performance particularly in the Macau facing sector.<section class="figure"></section>


The recent plunge and overnight recovery of casino stocks were evidence of a larger fear that has spooked some global markets: building post pandemic inflationary pressures.
Even though China's inflation rate is expected to rise only to 2% next year some investors have begun to worry about contagion from other nations.
The US inflation rate for the 12 months through April jumped to 4.2% in the CPI, raising fears that fiscal and monetary stimulus could dampen pandemic recovery.
 Casino sector stocks were rattled last week as investors began to worry that inflationary pressures could trigger labor and supply shortages that would damage operating margins dramatically. High margins going forward will be sustained because of operating cuts made during the pandemic that did not impair service or customer experience. Key gaming stocks with a large Asia presence were also hit. The dip of these selected stocks since March went against far more bullish outlooks for both the Macau and US gaming markets seeing accelerating revenue recovery as the pandemic pressures began to ease. We contacted several buy side institutions we know who had reduced their positions in these stocks over the last two months. We wanted to know if the decisions to lighten their holdings in these stocks was related to growing inflation fears. Out of six institutions, all said that concerns about inflationary pressures building post pandemic was among the several key considerations in those moves. Overall they remained bullish on the sector awaiting 2Q21 earnings results as the next measure of improving gaming consumer sentiment. They cited concerns about labor costs rising in the US and cost of goods in both US and Asian casinos in food cost inflation and other factors. I asked whether they believed that inflation could cool, or stop revenue recovery in the coming quarters through early 2022. All believed it was a factor. But history proves quite the opposite as we shall note later in this insight.Above: A percentage of severe job cuts could remain in place in casinos, but investors worry that it could cause worker shortages later and drive up the price of labor in service industries. Recent trading levels of selected gaming stocks Wynn Resorts Ltd:March 17: US$140APRIL 29: US$129May 11: US$128May 13: US$120 Wynn Macau:March 17: HK$16.260April 19: HK$15.080May 10: HK$13.600 Las Vegas SandsMarch 11: US$63.16April 28:US $61.46May 13: $54.78May 14: US$57.89 Galaxy Entertainment Group Ltd (0027HK)March 17: HK$78.250May 10: HK$66.950May 14: HK$62.100 Las Vegas as a Petrie Dish for Macau It has been our long held contention that even powerful inflationary pressures do not damage the prospects of gaming stocks. Our view is based on the operating history of casinos during inflationary periods. Given the clear differences of time, gaming cultures, economic activity there are still several useful parallels for us to compare Las Vegas during a rampant inflation period (1976-1980) in the US and today’s clearly more complex and larger world economy. We begin with the baseline, simple adage of economic truths about the causes of inflation: Too much money chasing too few goods. Hence, the price of goods rises rapidly out of shortages or disruptive factors such as commodity prices that spike sharply increasing pass along producer costs. The basic “goods” of a casino are of course, the intangibles of entertainment experiences. But the actual “goods” paid by the consumer, are the gaming chips. And in the larger inflating economy, consumers will see prices of such things as food, clothing, etc rising, yet gaming consumers will still see the same prices of the casino “goods” i.e., chips bought, remain fixed. Whether inflation, recession, depression, or prosperity, a twenty -five dollar chip still costs twenty five dollars  and is not raised to twenty eight dollars to reflect inflation. In the area of cost of goods such as food for dining outlets, or supplies, casinos operate multiple dining outlets priced from popular, low cost food, all the way to gourmet rooms. So a dining experience is always available at an affordable price. Furthermore, a given amount of dining is comped for players so cost per se, isn’t an inhibiting factor in a decision to “buy” in a sense. Because gaming trips are periodic, not commuting, rising costs of transportation also do not apply to casino customers. The Las Vegas during a period of rampant inflation noted below had these characteristics in common with Macau today—as an example: It was a national monopoly. The only US state legally able to conduct casino gambling was Nevada. Macau enjoys that status re: China today. Las Vegas had a large concentration of gaming properties appealing to a diverse consumer profile. From low cost, low limit mass gaming halls, to mid-range properties, all the way up to luxury properties like Caesars Palace, opened in 1966 with average RevPars related to room rates, etc. way above the town’s average. Today, Macau visitors have the same choice. Budget conscious players can book inexpensive rooms, dine cheaply and play low limit games to their heart’s content. Premium mass and VIP players have their choice of the most posh accommodations in the town and are mostly comped. There is a distinct mentality present in the characteristics of gamblers that crosses age, ethnicity, economic lines as distinguished from that segment of the general population of countries who do not gamble. The psychology of players who arrived in Las Vegas back in the day, is not substantially different from those who visit Macau today. That mind set is distinct. It is perfectly comfortable with the idea that one arrives at a casino hoping to win, and more likely willing to lose in exchange for a unique, entertaining escape from the pressures of everyday life. Proof of casino resiliency to all but one macro trend In 1990, the Research in Business Economic Journal published a Robert Morris University study of the impact of macro- economic fluctuations on casino revenues in various markets.They studied GDP variables, recessions ,booms, inflations mild and severe and the misery index. In all these cases they found only one factor that posted a statistically notable move: GNP. Other than that, all the macro trends, including inflationary pressures registered virtually no provable statistical impact on gaming revenues.Inflation fears may rattle stocks but reality suggests more stability thus far in pandemic endgame months.Going forward, follow up studies revealed that severe recessions, such as that of the 2007/09 global financial crisis which battered GDPs globally, did take a bite out of gaming revenue in most markets. But by contrast, inflation did not materially impact win. Because casinos are able to adjust such key operating factors as the number of games open and staffed, hours of operation in dining outlets and of course, room rates to reflect flexible demand, they can endure severe recessions to a degree. But there is clearly damage. In the stagflation era of 1976-1980, when inflation ran rampant over the globe and economic activity had materially slowed, the Las Vegas gaming market reached its first landmark, winning US$1b from players that year in the teeth of macro inflationary pressures. Three major resorts also opened that year. In the heavily impacted          global recession year of 2009, Las Vegas gross gaming revenue fell to US$5.5B from $6.1b in 2008—which also was impacted by the financial crisis that began in 2007. At the same time, Macau reported 2009 GGR of US$14.921b, up from US $13.2b in 2008, an increase of US$1.3B. But even in that macro -economic downturn, the momentum in both markets quickly resumed growth. In the pre-pandemic base year of 2019, Macau posted a US$37.7b GGR, while Las Vegas had US$6.5B IN GGR. During the interim years both markets experienced macro shock waves on their way to recovery. In the US, the aftermath of a deep recession with a large component of unemployment. In Macau, the massive regulatory crackdowns from Beijing that hit GGR in 2015 hard. Yet in both cases, an inherent resilience to bearish macros events was demonstrated. And we believe that inflationary fears that now appear to have begun spooking the markets in general and specifically, taken a bite out of valuations in the casino sector, are unwarranted. In the US, fears spring out of investors’ concerns about monetary and fiscal stimulus driving up prices. In Asia, despite the relatively low inflation rate in China, there are indications that the market’s worry about bond yields are a stalking horse for worse news on the inflation front to come. Overall, we believe concern over inflation is not a reason to turn bearish on the casino sector. The bear narrative that may still loom over the Macau sector is a lingering lack of conviction that despite steady gains in arrivals and revenues, full recovery is still too far off to reflect itself in conviction buying. As a result we continue to believe that despite the downward trend of the last 90 days, the sector is reaching a highly attractive entry point for those still on the sidelines. If we discount the threat of inflationary pressures, and remain unconvinced that Asia gaming markets in particular, have a long haul ahead before they return to robust growth, we still have inherent value here that militates against a bear outlook. By contrast we think the Macau recovery is steady and underway as already shown by 1Q21 results of revenue increases for Macau centric stocks like Galaxy and Wynn Resorts Ltd. We expect an even more robust earnings profile to show up in 2Q21 performance particularly in the Macau facing sector.          

Markets Could Fall, but Not the Sky: Trends Show Casino Sector Resilient to Inflationary Pressures