Finally! An investment bank finally made a more comprehensive and revenue-factor identifying piece of investment research into Macau than an armchair analyst!
They’re pretty spot on in nearly everything, so here’s where I’ll summarize things that they did particularly well:
- VIP estimates that differ from the street by actually talking to junkets and getting information out that way! Bravo!
- The luxury car sales and Fine Wines Index and their correlation with Macau is brilliant. Not shocking to me, but better executed than anything I’ve done, for sure!
- Readers of this blog know that casinos are not complete by the time the doors open. DB does as well. Most analysts tend to forget that and go “Ooh, new shiny! Buy!”
- Identifying the potential for a larger shareholder (Permira) to reduce their holdings in Galaxy. This is where I got truly beat and something you would not have been able to find here. More discussion below.
- On that note: Galaxy earnings out tomorrow!
Now, one firm actually do their due diligence properly, and this raises the entire spectrum of the Macau market by 6%+ on the day it happens. Wish I had that market moving power for common sense, but anyway, I was able to front run this pretty well, so I guess I shouldn’t complain. There were fairly good entry signals in both Galaxy and SJM on Monday that were identified during he weekend anyhow, so the question is not one of missed opportunity, but more one of how much money you made.
On Galaxy, the question is, there’s a 12.7% stake that Permira holds… will it all be sold? I very much doubt it for two reasons. 1) it’s still a good investment as the report by DB shows. 2) The market volumes are not good enough as the Permira stake represents roughly HK$10 bn, and the highest volume day was on September 2nd (due to a massive chunk sale), for HK$6.1 bn and recent volumes are at best 10% of that at HK$650 mn. The September sale also forced a 6.2% drop in market value overnight (close-to-open basis), although the market was slightly less exuberant back then if you remember. Scaling it back a little, and saying a 25% (3.2% of market cap) reduction in the Permira stake, would if proportional to the September 2nd sale alone reduce the value of the stock by 2.5%, but factoring in better earnings prospects, positive technicals and market environment this could all fade, or if it’s significant at all given intra-day swings. Rule of thumb: 0.8 multiplied by the stake sold is the initial value depreciation on this basis, but then again, any back-door dealings are difficult to estimate so don’t make any bets just yet. Keep in mind though on the relevance of the “last sale move analog” application: Today’s swing was 6.8% of the opening price and 7.1% of close! The last two weeks have had a daily range that was 4.13% of the closing value on average.
So why does Deutsche recommend to hold off? Well… you know, the premise of all investing is to buy cheap and sell dear. If selling pressure remains, be somewhat wary of institutional players padding their books on the dips! I bet there are a whole lot of wealth management divisions or larger funds hunting Chinese consumer demand that can’t wait to sweep the stake out of Permira’s hands, so why not run the price down first? If you can move the market, you better do it in a way that offers you alpha!
I also question the thing that they mainly value Galaxy for their mass market appeal on their hotel room bank in Cotai, and not calling Galaxy a VIP play in line with Melco or Wynn. Excuse me, but did you guys forget about Star World and the busloads of tycoons that inhabit it? (Smell the smoke of expensive cigars!) Or the VIP-centric areas of the Galaxy Casino and the fact that their hotels are shock-full although their premium hotel rooms are not selling at steep discounts a la Venetian or non-Crown Plaza hotels in City of Dreams? Their cheap rooms, fine, but look at where it costs you to get a top suite! DB’s analysis is a bit too good to overlook something like this, so it makes me wonder, that’s for sure. Earnings tomorrow are interesting, but I shouldn’t need to tell you that.
SJM? Well, they upped their target price to HK$20.7, a 3.5% move and moving it to 9% above where I consider it easily tradable, although it makes me wonder if I do have to add a rung to my 15-17-19 strategy. 8.5 EV/EBITDA though, 6% dividend yield and previously discussed extremely poor win ratios which is entirely luck based. Also, the P/S here is amazing compared to anything else in Macau, and a string of better luck plus some more mass-market gaming that helps the satellite casinos looks like a bargain.