This is the inaugural edition of the monthly Union Gaming Analytics (UGA) index of gaming operators. Since this is the first edition, we will describe the methodology we used in compiling it.
For reference, the index is compiled of 23 global gaming operators ranging in market cap from $33.4 billion (Las Vegas Sands) to $221 million (Isle of Capri). To take into account company size, we have comprised index weights based on market capitalization. Las Vegas Sands has a much larger relative weighting compared to Isle of Capri, so a stock movement in Las Vegas Sands would have a more profound impact on the composite weighting. Finally, since we are looking at global operations from a variety of countries (the U.S., Macau, Singapore, Hong Kong, Malaysia, South Korea and Cambodia), we adjust the weightings by market cap into U.S. dollars.
The UGA Index for the period ending Dec. 31, 2012, was up 24.6 percent year-over-year to 190.4. As an illustrative example, if an investor bought $100,000 of the index on Dec. 31, 2011, the investment would hypothetically be worth $124,649 on Dec. 31, 2012. Note, however, that the UGA Index is for illustrative purposes only. Overall, it was a good year for investors in gaming stocks. In particular, we saw notable outperformance in names with significant exposure to Asia. In comparing the UGA Index to the broader markets, the Dow Jones Industrial Average was up 7.3 percent year-over-year and the S&P 500 was up 13.4 percent year-over-year.
Top index performers include the following:
Cambodian-based NagaCorp Limited was up nearly 140 percent and only contributed 0.1 points to the index, due to the company’s relative small size by market cap. For investors unfamiliar with NagaCorp, the company is already the premier gaming destination in Indochina and has numerous growth initiatives in motion. Visitation to Cambodia was up 26 percent in November and 24 percent YTD (2012); the strong visitation growth was a clear positive for Naga.
Hong Kong-based Galaxy Entertainment was up 113 percent and contributed 13.5 points to the index. The company is a Macau operator with two assets in Macau—one on the Peninsula and one on the Cotai Strip. Macau gross gaming revenue (GGR) was an all-time record in December 2012 ($3.5 billion U.S.) up 20 percent, and for the full year GGR was up 13.5 percent. We believe the company has been increasing its market share of Macau GGR.
Melco Crown was up 75 percent and contributed 4.3 points to the index. The company is a Macau-focused operator with two properties. For the full year 2012, Macau GGR was up 13.5 percent.
Underperformers include the following:
Genting Berhard was down 16.4 percent and contributed 6.3 points to the index.
Boyd Gaming was down 11 percent and contributed 0 points to the index. Though Boyd had a sequential increase in December from November, the stock was down year-over-year. This is broadly related to low growth across the domestic regional gaming markets and concerns over the Atlantic City gaming market, which continues to be one of the most challenged markets, due to new gaming supply along the Northeast corridor. For the full year 2012, the Atlantic City market was down 8 percent to $3.05 billion.
Genting Singapore was down 8.3 percent and contributed 9.5 points to the index. In our view, while the long-term prospects for the market remain solid, there are concerns regarding near-term performance. In particular, we see a softening VIP segment—a function of customers’ assets tied to global equity markets—with limited visibility on increased visitation.
While December is typically a slow month for the stock market given the holiday season, we saw several notable developments amongst gaming operators that influenced several stocks in the UGA Index this month.
Click to enlarge chart
Pinnacle Acquires Ameristar
On Dec. 21, Pinnacle announced it will acquire all of the outstanding common shares of Ameristar for $26.50 per share (20 percent premium to prior days close) in cash, for a total EV of $2.8 billion. The deal obviously sent shares of Ameristar higher, given the premium paid. In addition, shares of Pinnacle were also up 22.5 percent in the month of December. The market clearly liked the deal, given the share price appreciation we saw in both companies. The deal seems to make sense given Pinnacle’s core competency (regional markets). In our view, given the slow growth environment throughout the domestic regional gaming markets, we wouldn’t be surprised to see additional consolidation amongst the group in 2013.
MGM Milestone Refinancing
MGM Resorts International was up just under 15 percent in the month and, given the size of the company, was a notable contributor to the upside in the index this month. The company made two significant announcements that led to the stock appreciation. In early December, the company announced a major refinancing of all its secured debt that is anticipated to lead to $230 million in annual reduced interest expense. The refinancing was a net positive for MGM shares as the lower aggregate cost of capital and significant interest savings will lead to higher cash flow. Furthermore, it provides MGM with incremental flexibility in its balance sheet and reduces consolidated leverage slightly.
On Dec. 21, MGM announced the bulk sale of 427 condo units at CityCenter’s Veer Towers. We hadn’t seen a residential sale of this magnitude in quite some time, which clearly signals a rebound in the Las Vegas condo market. While the announcement was a clear positive for MGM, we believe it has possible ramifications for all Las Vegas Strip and locals casino operators.
N.J. Online Gaming Bill Sails through Senate
During the month, an online gaming bill (AS2578) passed through the New Jersey legislature. The governor has a 45-day clock (to Feb. 3, 2013), to veto the legislation, sign the bill or do nothing (in which case the bill will become law). A key difference between the proposed New Jersey bill and other states’ is that any game that is played in a casino can be offered via the Internet (not just poker). Boyd Gaming shares were up 20 percent, likely benefitting from the news through its Borgata stake. The potential passage of online gaming in New Jersey could also have positive implications for the shares of MGM and Caesars.
Key January 2013 Trends to Monitor
During January, we get into 4Q12 earnings season. While we don‘t have formal earnings dates yet, most companies will likely report in the late January/early February time frame. Earnings season is an obvious needle mover for the index.
MGM China recently received its gazette for its Cotai project in Macau several months ahead of expectations. The next milestone for MGM China’s Cotai project will be to receive construction approval. For Las Vegas-based gaming operators, the Consumer Electronics Show was held recently, so we will look for the impact on January visitation, ADRs and spend (gaming and non-gaming). New Year’s Eve is always a marquee event in Las Vegas and we will look for more data points for this key date as well. For the Las Vegas locals market, jobs and housing market data points continue to look promising, so we will see if this continues into January, as a sustainable trend is needed in order for a noteworthy recovery in the market.
In Massachusetts, Wynn Resorts recently announced its intention to build a $1 billion casino-resort in Everett, Mass., along the Mystic River. The process for selecting winning bidders in the state will be a key issue to monitor during 2013.
In Macau, a partial smoking ban went into effect in the New Year. Early indications suggest little impact on visitation or gaming spend thus far, but it is certainly a development worth monitoring. Finally, Li Gang was named the new chief of the Central People’s Government Liaison Office in Macau. The change should occur sometime in early 2013, and even though Li has reiterated that Bejing’s policies towards its SARs (i.e., Hong Kong, Macau) will remain unchanged, this is an event that also warrants further monitoring.
Operator update
Index
Union Gaming Analytics Operator Index
This is the inaugural edition of the monthly Union Gaming Analytics (UGA) index of gaming operators. Since this is the first edition, we will describe the methodology we used in compiling it.
For reference, the index is compiled of 23 global gaming operators ranging in market cap from $33.4 billion (Las Vegas Sands) to $221 million (Isle of Capri). To take into account company size, we have comprised index weights based on market capitalization. Las Vegas Sands has a much larger relative weighting compared to Isle of Capri, so a stock movement in Las Vegas Sands would have a more profound impact on the composite weighting. Finally, since we are looking at global operations from a variety of countries (the U.S., Macau, Singapore, Hong Kong, Malaysia, South Korea and Cambodia), we adjust the weightings by market cap into U.S. dollars.
The UGA Index for the period ending Dec. 31, 2012, was up 24.6 percent year-over-year to 190.4. As an illustrative example, if an investor bought $100,000 of the index on Dec. 31, 2011, the investment would hypothetically be worth $124,649 on Dec. 31, 2012. Note, however, that the UGA Index is for illustrative purposes only. Overall, it was a good year for investors in gaming stocks. In particular, we saw notable outperformance in names with significant exposure to Asia. In comparing the UGA Index to the broader markets, the Dow Jones Industrial Average was up 7.3 percent year-over-year and the S&P 500 was up 13.4 percent year-over-year.
Top index performers include the following:
• Cambodian-based NagaCorp Limited was up nearly 140 percent and only contributed 0.1 points to the index, due to the company’s relative small size by market cap. For investors unfamiliar with NagaCorp, the company is already the premier gaming destination in Indochina and has numerous growth initiatives in motion. Visitation to Cambodia was up 26 percent in November and 24 percent YTD (2012); the strong visitation growth was a clear positive for Naga.
• Hong Kong-based Galaxy Entertainment was up 113 percent and contributed 13.5 points to the index. The company is a Macau operator with two assets in Macau—one on the Peninsula and one on the Cotai Strip. Macau gross gaming revenue (GGR) was an all-time record in December 2012 ($3.5 billion U.S.) up 20 percent, and for the full year GGR was up 13.5 percent. We believe the company has been increasing its market share of Macau GGR.
• Melco Crown was up 75 percent and contributed 4.3 points to the index. The company is a Macau-focused operator with two properties. For the full year 2012, Macau GGR was up 13.5 percent.
Underperformers include the following:
• Genting Berhard was down 16.4 percent and contributed 6.3 points to the index.
• Boyd Gaming was down 11 percent and contributed 0 points to the index. Though Boyd had a sequential increase in December from November, the stock was down year-over-year. This is broadly related to low growth across the domestic regional gaming markets and concerns over the Atlantic City gaming market, which continues to be one of the most challenged markets, due to new gaming supply along the Northeast corridor. For the full year 2012, the Atlantic City market was down 8 percent to $3.05 billion.
• Genting Singapore was down 8.3 percent and contributed 9.5 points to the index. In our view, while the long-term prospects for the market remain solid, there are concerns regarding near-term performance. In particular, we see a softening VIP segment—a function of customers’ assets tied to global equity markets—with limited visibility on increased visitation.
While December is typically a slow month for the stock market given the holiday season, we saw several notable developments amongst gaming operators that influenced several stocks in the UGA Index this month.
Pinnacle Acquires Ameristar
On Dec. 21, Pinnacle announced it will acquire all of the outstanding common shares of Ameristar for $26.50 per share (20 percent premium to prior days close) in cash, for a total EV of $2.8 billion. The deal obviously sent shares of Ameristar higher, given the premium paid. In addition, shares of Pinnacle were also up 22.5 percent in the month of December. The market clearly liked the deal, given the share price appreciation we saw in both companies. The deal seems to make sense given Pinnacle’s core competency (regional markets). In our view, given the slow growth environment throughout the domestic regional gaming markets, we wouldn’t be surprised to see additional consolidation amongst the group in 2013.
MGM Milestone Refinancing
MGM Resorts International was up just under 15 percent in the month and, given the size of the company, was a notable contributor to the upside in the index this month. The company made two significant announcements that led to the stock appreciation. In early December, the company announced a major refinancing of all its secured debt that is anticipated to lead to $230 million in annual reduced interest expense. The refinancing was a net positive for MGM shares as the lower aggregate cost of capital and significant interest savings will lead to higher cash flow. Furthermore, it provides MGM with incremental flexibility in its balance sheet and reduces consolidated leverage slightly.
On Dec. 21, MGM announced the bulk sale of 427 condo units at CityCenter’s Veer Towers. We hadn’t seen a residential sale of this magnitude in quite some time, which clearly signals a rebound in the Las Vegas condo market. While the announcement was a clear positive for MGM, we believe it has possible ramifications for all Las Vegas Strip and locals casino operators.
N.J. Online Gaming Bill Sails through Senate
During the month, an online gaming bill (AS2578) passed through the New Jersey legislature. The governor has a 45-day clock (to Feb. 3, 2013), to veto the legislation, sign the bill or do nothing (in which case the bill will become law). A key difference between the proposed New Jersey bill and other states’ is that any game that is played in a casino can be offered via the Internet (not just poker). Boyd Gaming shares were up 20 percent, likely benefitting from the news through its Borgata stake. The potential passage of online gaming in New Jersey could also have positive implications for the shares of MGM and Caesars.
Key January 2013 Trends to Monitor
During January, we get into 4Q12 earnings season. While we don‘t have formal earnings dates yet, most companies will likely report in the late January/early February time frame. Earnings season is an obvious needle mover for the index.
MGM China recently received its gazette for its Cotai project in Macau several months ahead of expectations. The next milestone for MGM China’s Cotai project will be to receive construction approval. For Las Vegas-based gaming operators, the Consumer Electronics Show was held recently, so we will look for the impact on January visitation, ADRs and spend (gaming and non-gaming). New Year’s Eve is always a marquee event in Las Vegas and we will look for more data points for this key date as well. For the Las Vegas locals market, jobs and housing market data points continue to look promising, so we will see if this continues into January, as a sustainable trend is needed in order for a noteworthy recovery in the market.
In Massachusetts, Wynn Resorts recently announced its intention to build a $1 billion casino-resort in Everett, Mass., along the Mystic River. The process for selecting winning bidders in the state will be a key issue to monitor during 2013.
In Macau, a partial smoking ban went into effect in the New Year. Early indications suggest little impact on visitation or gaming spend thus far, but it is certainly a development worth monitoring. Finally, Li Gang was named the new chief of the Central People’s Government Liaison Office in Macau. The change should occur sometime in early 2013, and even though Li has reiterated that Bejing’s policies towards its SARs (i.e., Hong Kong, Macau) will remain unchanged, this is an event that also warrants further monitoring.
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