A lot of things have happened in this market when I’ve been too busy trading it and learning the language to actually write about anything. Mea Culpa finished, and here’s what I’ve already front ran you and JP Morgan, CLSA and a bunch of other people about for the last few days.
I’ve done this before, but everyone seems to be tripping over themselves at the moment because of the idea that Macau gambling revenue is returning and that the potential for Chinese easing just skyrocketed. (More on this specifically later.)
Basically, everyone is going in and outdoing themselves to see who can raise forecasts for Sands fastest. JPM lowered theirs and still ended up on a HK$31 per share. Like… you know, a 35% target above price when posted is nothing unusual right? 20% on top of the all-time high seems fair as well. Property developments and stuff, I heard. Similarly, Galaxy is winning accolades as the moment with the brokers, based on… their Galaxy Macau property and VIP gambling exposure.
They probably distill their analysis down a bit, but their analysts are surely not paid in gambling chips because then they’d know a lot more substantial on-the-ground info. Can anyone actually try forecasting junket forward demand based on room rates and availability? Since most of the big houses are analyzing sands on this criterion, you guys might wanna ask yourself if the massive discounts they give out for their top rooms at Venetian fairly often is really that positive for them. Surely, mass market gaming etc, but the question is if Galaxy won’t be top dog on the Cotai Strip both in terms of average room margins and the VIP surge. Sure, margins are lower on the gambling side, but these guys just paid for a HK$ 50 000 / night suite and are putting HK$ 500 000 per hand of Baccarat… I have a feeling the dealers couldn’t care less about the higher “margin” on my HK$ 200 per Blackjack hand, even if I lose my bankroll.
That said, both Sands and Galaxy are good plays, but in terms of Sands, I wonder if we can be this optimistic this year, I think HK$28 seems like a more fair P/E given their lower leverage and more heavy operational costs moving forward with increased plans on the Cotai Strip. One thing that seems to be endemic to Macau is that… things never truly really get finished. Galaxy still has under-construction components, and one would wonder why on earth they’re still, 6 months after open, having spots of open area on the main gambling floor. It might be my Texas Hold’em fascination talking, but if they’re trying to talk up a resort, and mention VIP stuff, why not move over your HK$10 million poker games to the one place that actually accommodates continuous week long play without having to leave the casino for relaxation? Mentioning undone, Melco – try just walking around their property City of Dreams, and avoid laughing at the transition to bamboo racks and bare concrete beyond the main entrances. This might have been fixed as of late, but seriously, it was still there 4 months ago. They couldn’t even run a poker room with decent margins in probably the most empty casino of the Cotai majors…
That aside, the gambling part of me still loves the leverage and profile of Galaxy. High net worth clients will get a boost from the market moves as of late if they’re sustained, and that in itself might be a good driver beyond the 1.5-2 beta multipliers you can fish out in the gambling sector. Chinese easing possibilities, and post Chinese New Years capital re-commitment could spark the markets rather aggressively higher, which is always good for the big players especially. Highly positive Galaxy.
Hang Seng Index:
Thought the topic of market inflows et cetera was a fair bridge, and this looks quite good. We’re currently looking into the 18 800 – 19 200 range which I doubt needs further introduction than a tag search for the HSI. Again, volumes are great, and the markets closed marginally down, which is a “reload” effect and the real gems are to be found in volumes which have by far the better correlation to market moves. Again, you bounce up against the 19 200 level (which happened today) which is a super-important S/R line since the US downgrade 5 months ago, and the highest level for the index in 2 months, and yes, resistance appears. Volumes were slightly shy of Tuesday however, meaning essentially a 1-month high, and then a doji pattern (not a marubozu) appearing, which indicates that price action is equivalent at these levels. The doji legs are unbalanced in favour of the short side, but the sell-off failed to hold, which is likely indicative of the bond sales that were due out later today from Europe and superficially important. Stale market, but not bidless even after massive resistance, so given the action in overnight markets, my HSI target for tomorrow’s close would be 19 600, compensating for the lack of run today, and positive risk assessments in overnight markets.
Looking at the triangles posted earlier, try to catch the ones that have already broken. Positive gold action which appeared earlier today, and the 252 + 63 Day bounce, triangle break and superb volume for Luk Fook (590) made that a given entry at the market close today. Also got me a good Magic D daily cross in negative area indicating a massive swing rise opportunity, so I’m happy. Targeting 35-38 range where trading gets a little bit thicker, but watch correlation with gold closely.
ICBC (1398) has done a very formidably predictable and “calm” break out, so this still has juice in it until at least 5.26 – massive resistance plus three-quarters SMA coming together there in the near future. Policy path changes in China could sway it, but the event would be after Chinese New Years, so be slightly wary. More importantly in the immediate term is that the SMA’s are out of phase and therefore weaker (in-phase does a lot more justice to intermediate MA’s while out-of-phase pretty much makes you have to look at each MA with more than a 5 or 10 day difference individually, so less predictive power per MA used and less clustering of orders at any one of them). BOC would have been the better to take from profitability, but it’s also much more difficult to trade! The big question is now whether the quarter can see a return to the 6 handle for ICBC. Low volumes today though on the doji. No info on orders placed, so very little clue on interest, but overnight markets are bullish, so fingers crossed.
Galaxy (27) is of course a choice still, analysis is still valid and recent market action (spurred by brokers reminding everyone what they should know) has been solid off the triangle break, but there’s still much much more to take out here. Target HK$18 within the quarter.
China and inflation:
We got the numbers, 0.1 percentage units (2.5%) above consensus of 4.0. Oil could be the main driver here, and that means spoooooky given recent geopolitical events. Hard to tell either way what the next figure is going to be.
What’s easier to tell? If things were bad and China expected a quicker policy easing fix, numbers would be fudged lower. Apparently, things are in wait-and-see mode at the time of writing, which also makes sense given the new years considerations. Wait and see until this day in February or March, and then we’ll talk. Again, there’s essentially 2 weeks of trade in China until then, so this will be quicker than you may think. It’d simply be poor tact to fudge numbers now.
The Iack-in-the-Box is of course oil/energy feed through effects which could further spur food inflation and other costs vital to greasing the economy. However, these are likely slightly delayed due to price stickiness, and I presume that easing could start to be signaled before the effects kick in, by which time Greece will probably be rubble anyhow and easing will have been the right choice. Notice that I wrote signaling, not execution, that’s all that’s needed for the equity markets to go up!