A New Era




In Asia, the Nikkei closed 0.56% higher at 19,943 while the ASX closed 0.19% up at 5,774. The Bank of Japan (BoJ) made no change to monetary policy following a two-day meeting.   The BoJ retained the upbeat stance on Japan’s economy that was originally flagged back in April. The central bank stated that the economy “has been turning toward a moderate expansion.”

Sony to the Global Contrarian Fund and the Asia and Global Managed accounts. The weakening of the yen against the euro is set boost exports in Europe. The real story could be a rebounding domestic market as Japanese spend more at home. The stock still trades at a big discount to its five-year average price-earnings multiple. Sony has completed a major inflection point over the past ten years and recently broke out above major resistance.

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Closer to home, rumours in the press are circling that US private equity firms are due to make their formal bids for Fairfax in the next week or so. TPG Capital and Hellman & Friedman have been looking under the bonnet of the media company, and I expect the review of the books will confirm the tremendous potential of the company’s digital properties, in Domain, as well as Stan. They will also see that there is some value to be had in the traditional assets, through cost cutting and also as media reform gets underway in the wake of Ten’s collapse.

While both PE firms are bidding for the whole company, ultimately the successful bidder will carve Fairfax up, and look to extract as full a price as possible for the various divisions. Many sub-bidders are getting in now ahead of time, with John Singleton and Mark Carnegie lodging an interest for Fairfax’s 54% stake in Macquarie Media. The two are said to be in discussions with other potential media partners including the Seven and Nine networks and News Corp.

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Mr Carnegie used to be an adviser to Hellman & Friedman, and apparently has already been given the nod to proceed with the bid. This is a calculated move by the duo, with a wave of consolidation in the sector likely to unfold if media reform (fingers crossed) does go through parliament.

Full steam ahead

There is something cooking underneath the Macau gaming stocks, with gaming revenues continuing to gather momentum. As we have noted, casino gross gaming take surged in May, rising 23.7% year-on-year to 22.74 billion patacas (about US$2.8 billion). Casino operator MGM China is well placed to be benefit, with the new MGM Cotai resort scheduled to open later in 2017. The company delivered a solid first quarter performance, and is clearly catering to the mass market gaming market. MGM China was up 0.6% on Friday, and is a key holding in the Fat Prophets Global Opportunities and Asian Managed Account Portfolios.

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Macau’s May gross gaming revenue (GGR) was impressive given the early May visit to Macau of Zhang Dejiang, Chairman of China’s National People’s Congress. This likely deterred some punters from visiting, because China has been cracking down on ostentatious spending. There was also a calendar headwind, with one less Sunday in the month compared to May 2016.

May was the ninth consecutive month that gross gaming revenues exhibited year-on-year growth.  The trend now is undeniably positive and follows a couple of lean years.

Tourism to Macau, the only Chinese province where gaming is legal, is increasing. Official data from Macau authorities showed that some 404,073 people visited Macau over the holiday period 27 May to 30 May. We expect the Macau mass-market should continue to grow from these levels.  New properties with world-class entertainment and improved transport infrastructure are set to draw punters from a growing pool of Mainland Chinese eager to travel.

Coming on the back of the strong figures earlier this year, May’s surge in Macau gross gaming revenue pushed year-to-date gross gaming revenue up to 106.38 billion patacas.  This represented an increase of 15.8% on the comparable period of 2016.

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Source: Macau Gaming Inspection and Coordination Bureau

The Macau casino sector has boomed on the back of a more family friendly approach. The casual, or so-called mass-market segment, began picking up early in 2016 and the trend strengthened this year. Casino revenues have also been bolstered by the return of VIP traffic. MGM China has a new resort expected to open in late 2017, which will add to the world-class entertainment scene in Macau.

1Q17 headline numbers

MGM China’s net revenues came rose by 7% in the first quarter on a year ago to US$502.4 million (HK$3.9 billion). The increase was driven by main floor (mass market) table games, rather than VIP play which declined slightly year-on-year. MGM (astutely) has chosen to focus on the mass market, even with its future property opening. Even though the company may miss out on some of the current traction the VIP segment, mass market play is generally more profitable and in our view, has a strong future in Macau.

Main floor table games revenue increased 17% as the hold percentage increased to 22.2% in 1Q17 from 18.0% in the prior year quarter. VIP table games revenue declined 5% with a 16% decrease in turnover only partially offset by an increase in the hold percentage (luck factor), from 3.4% in 1Q17 from 3.0% in 1Q16. Slots revenue increased from US$41.1 million in 1Q16 to US$43.8 million in 1Q17, while non-casino revenue fell back from US$29.6 million to US$27.1 million.

MGM Quarterly revenues

This is a revenues table

Source: MGM (Figures in US$)

Adjusted EBITDA of US$143 million (HK$1.28 billion) was up 25% from $114 million a year earlier. The adjusted EBITDA margin improved 413 basis points year-on-year to 28.5% in the first quarter of 2017. This was due to a combination of more main floor table games in the sales mix and cost reduction efforts.

Revenue per available room of HK$2,000 represented a decline of roughly 6.5% year-on-year. This was most likely due to the competitive environment with more rooms available with the opening of new properties in Macau. The occupancy rate ticked up 20 basis points year-on-year to 94.3% in the first quarter of 2017.

The backdrop in Macau continues to improve with the bar having been set low given the depth of the prior decline in VIP play. We believe the paradigm shift to mass market consumers, that we expect to occur over the next few years, bodes well for MGM China.

We have generally been impressed by MGM China’s track record of ‘hitting above its weight’ in terms of revenue and EBITDA generation. The opening of the MGM Cotai resort later in 2017 should alleviate the capacity constraint that the company has faced in recent years.

MGM China currently trades on an EV/EBITDA multiple of 16.3 times FY17, with this set to decline to 11.5 times by FY18 when the new Cotai property is set to begin contributing. The dividend yield is forecast to rise from 1.5% for FY17 to 2.5% in FY18.

Disclosure: The Fat Prophets Contrarian Fund declares a holding in Sony, Fairfax and MGM China.

Carpe Diem!

CEO | Fat Prophets
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