The "luck adjusted" EPS over the last 6 months using the average monthly RCT of $1.62B, 3% hold, and 1.07% commission is $0.60.
Q2 was a low hold quarter just as as July was a low hold month (hold was above average for the first 4 months) but knowledgeable investors should be looking at a normalized run rate when valuing the company's stock..
"Some premium mass players may have gone back to be VIP players, which does not bode well for margins. Deutsche here:
We note that several premium mass focused casinos (MGM, COD, Plaza) lost mass mkt shr in July but gained junket roll/VIP rev mkt shr. This may suggest that some premium mass players had gone back to become junket VIPs. This could either be because: (i) the ban on UnionPay mobile devises pushed premium mass players towards junkets for cash access; or (ii) junkets poached premium mass players in view of underlying weakness in VIP demand (triggered by the new round of anti-corruption arrests in Guangdong)."
A shift back to VIP from premium mass, if it is really happening, is obviously good for IKGH.
Iao Kun outperforms market in July
Despite the soft July in Macau, when gaming revenues fell for the second straight month, junket operator Iao Kun Group outperformed the market after posting a 7 percent revenue increase last month. The company reported yesterday that revenue from its VIP rooms in Macau totalled US$1.6 billion in July, 7 percent more than a year ago (US$1.5 billion in July 2013). The win rate for last month was 2.32 percent.
For the first seven months of the year, the junket firm amassed US$11.03 billion, up 10 percent from the same period last year, at an average of US$1.58 billion per month. Even with the VIP segment plunging in Macau this summer, Iao Kun was able to get more revenues in July than the year to date month average.
The company runs five VIP rooms in Macau: in StarWorld Hotel & Casino, Galaxy Macau Resort, Sands Cotai Central, City of Dreams and Le Royal Arc Casino.
The case for buying IKGH is 1. it is growing RCT in a declining VIP market due to its cash agent initiative, something they say has a lot of room to run. 2. While mass growth will be the GGR driver in Macau in the coming years VIP has the potential for a strong rebound if the political winds shift and the economy continues to improve. 3. At 6x trailing non-GAAP EPS it is not unreasonable to assume the HK listing will raise the multiple. 4. Should credit conditions improve, even without changes on the political front, better margins are possible which could have an out sized effect on net income.
I was surprised IKGH's RCT was as good as it was. As we all know hold will even out over time.
If you assume IKGH's RCT was down in June and July because of the WC effect (it was down about 20% in those months across the board in Macau) then it appears the run rate for them is something around $1.7B during a normal month. However, that is based on the first half year results for VIP which we are being told by the experts may decline in the second half. In Q4 there will be added regional competition when MPEL opens COD Manila and Solaire ramps up its business. So I expect RCT to average in the $1.6-1.7B range at best for H2, an improvement over last year.
Also, there has been a shift in thinking about what is influencing the VIP business from mostly the economy and credit conditions to mostly the government's crackdown on corruption. As for the corruption crackdown, some see it as a pretense for a political purge of reform opponents. As time passes this may diminish at a time when the economy is improving so things in the VIP world could get better heading in to 2015.
VIP in Q1 was very strong and has weakened since. There is no reason to believe IKGH's RCT is going to jump up to $2B just because the extreme slowdown from the WC is over. If VIP continues to improve for the rest of the year, AND IKGH sees fit to increase credit, they could get closer to $2B but that would also require continued success in their cash agent initiative, IMO.
Expecting $2B is setting them up for falling short.
I'm much more excited about the possibility, and I stress possibility, of this........
RCT $2B x rev share .465 x 3% win rate minus RCT $2B x 1% commission minus montly expenses x 12 = $68M in NI or over $1.00 in non-GAAP EPS. P/E of 6-10 in HK = a double or triple.
They said they are in the early stages of the cash agent initiative so if that is true it is possible $2B a month average may be coming heading towards 2015. I just read an article saying Union Gaming thinks the Chinese government is putting more of a squeeze than ever on VIP's which is why the high roller numbers in Vegas have been better over the last few months. If that's right then the VIP slowdown in Macau is about more than the economy.
IKGH's conservatism has been much discussed. They claim it is warranted because of DSO trends. Clearly they have a strong aversion to credit default. I suppose the listing application could be a factor but they reined in credit 2 1/2 years ago so they are conservative by nature.
If they feel they can issue more credit in an improving economy not only will RCT increase but a drop of the commission percentage from 1.07% to 1% would give them $13M more in earnings based on a run rate of $1.7B and 3% hold.
That is the title of an article at Macau Business Daily on the possibility a better Chinese economy will mean better VIP play.
"The VIP market in Macau will likely rebound in the second half of the year, after a punishing first half in which the segment that generates the majority of revenues here suffered losses with UnionPay and junket crackdowns, tables shifted to mass floors and gamblers being diverted by the World Cup. According to a Morgan Stanley report released this week, the dark clouds hovering above the VIP sector are finally vanishing.
The gaming analysts from the US bank expect growth to improve in the VIP market in the second half of the year. Three main drivers are listed: better macro indicators coming from China, the end of the World Cup and an improving liquidity within junkets in Macau. With more gamblers at the tables, more credit available and rising confidence, high rollers are set to fuel casino revenues for the rest of the year.
In the second quarter, VIP revenues suffered a severe blow, dropping 6 percent year-on-year, dragging June revenues in Macau to their first decrease since 2009. Revenues from high rollers dropped 2 percent in May and 17 percent in June year-on-year, three times more than the market average here and the first decline in the segment since 2012.
Morgan Stanley believes that the VIP segment could go down only 2 percent this month, as the first data coming from casinos points to a fresh recovery with the end of the World Cup and positive macro indicators coming from the mainland."
It's a fair point. From the perspective of any financial metric there is no reason the p/e of MPEL should not be 20% higher with EPS growth of 20-20-35% coming in the next 3 years.
I'll give you an example of hold variations and then let it go. LVS reported EPS of $0.85 in Q2 but the hold adjusted number was $0.77 meaning hold was in their favor. Conversely, Bain has a note out on MPEL saying they will have a $25-50M shortfall this quarter due to low hold.
Over time the important thing to look at is normalized EPS or in IKGH's case what RCT they are averaging.
To illustrate my point on the block buys pull up an interactive 5 days chart. Very near the close yesterday there was a 9,300 share block that crossed at $3.15, immediately followed by a hundred share lot dropping the price back down.
As odd as it may sound to you IKGH does not want to drive the price higher. They want to buy below the point where buying is no longer accretive to earnings so they buy opportunistically when shares are available, mostly below $3.20. If they push the price higher the buyback does not achieve its purpose which is to use their cash reserves to reduce the share count. This helps offset the shares they issue for management compensation and to the prior operators of their acquired rooms as part of the purchase deal. The latter providing an extra incentive for the prior operators to generate roll while not being too aggressive since those operators are on the hook for any credit default until the purchase of the room is complete.
I'm tired of exchanging barbs with you so I'm going to try to be more civil.
To your first point, the win rate, we have gone over this before. No company involved in gaming in Macau has any more control over it than anyone else. Hold effects the results of all of them from quarter to quarter. IKGH's hold in Q1 was extraordinarily high, in Q2 it was extraordinarily low. So your statement that if you are losing money in Macau for a quarter it's "horrid" ignores the statistical reality of high stakes baccarat.
To your second point, the amount they can buy back in any day is indeed limited to........I think it's 25% of the daily average. That average has declined over the last few months so they can't buy many shares per day. If you pull up a chart during the day, as I often do, and use the "interactive" chart Yahoo provides, you can see the volume of the larger blocks. When I say large I mean as compared to the 100-500 share lots the retailers are trading, so in the neighborhood of 2-6K shares. If I had to guess I'd say they will have bought back maybe 300-500K in the quarter by the time they report. You are absolutely right that volume is exceedingly low and would be even lower if not for the buyback. No one should be surprised by that since the US market is not interested in investing in a junket operator
Horrid roll? Up 2% YoY for June when I think VIP was reported to be down 19% for the month due to the WC.
The fact that all you see in the volume numbers of IKGH is small retail involvement and blocks being bought by the company is part of the reason a company trading at a 30% discount to book value and 300% below peer buyout values is listing in HK.
In a research note published on Sunday (before last week’s GGR numbers were available), Morgan Stanley urged more investor patience and believed Macau’s VIP gaming market may well improve in the second half this year.
The reasoning? China’s macro indicators are edging up. China’s GDP grew 7.5% in the second quarter, ahead of the 7.4% consensus estimates. Fiscal and monetary policies there are likely to remain loose in the second half, which is great for the more credit-sensitive VIP gaming segment.
How would an upturn in VIP revenue growth help the Macau market? VIP gaming growth is strongly correlated with P/E multiples. As the VIP segment recovers, we should expect re-rating in the Macau stocks.
Morgan Stanley gave a historical example: After Macau’s VIP revenue fell 8% year-on-year in July 2012, stock prices fell by 10% on average. But as the revenue decline narrowed to 1% in the following August, the stocks rallied by more than 20% over the next three months.
The bank has turned more negative towards Macau names such as Las Vegas Sands, which has higher exposure to the faster-growing mass market, citing “falling mass table yield growth and limited further movements of VIP tables to mass tables. Sands China’s 2Q14 results also suggest diminishing operating leverage, owing to rising labor costs and higher investment in premium mass.”
But the bank is now more keen on the stocks that have strong VIP exposure. Among the Macau names, Galaxy Entertainment (0027.HK) has the highest earnings exposure to the VIP segment.
"When the supply does get unleashed, IKGH hasn't positioned themselves to capitalize, but you haven't figured that out yet either."
All the new capacity won't come on line until very late 2015 assuming there are no construction related delays. You have no idea what moves IKGH may make between now and then to a least maintain their market share.
Good luck with that $1 prediction since based on some of the junket transactions in the last 6-9 months the stock is worth $6 not including the cash in the cage.
School, for you, is in session once again. If you took the time to listen to LVS's conference call you'd know they said the VIP decline is being driven by cyclical factors just as it has before. And they will reverse, just as they have before. The fact is, as I said, VIP had decent growth thru May and IKGH's growth was slightly better than the overall market. Then the WC caused a big VIP decline, just as it did in 2010. Many factors are now contributing to roiling and choppiness in VIP play which are likely to continue for most of the rest of the year. But the consensus in the analyst community is once the capacity constraint on tables changes in 2015 with 40% of the new tables being dedicated to VIP growth will return.
People who have a superficial understanding of things write the pos post you just wrote. Just what I've come to expect from your limited knowledge of how Macau works.
Gosh, what a dope.
As I said, the information you seek is available to you if you want to take the time to read the HK listing application, as I have.
You still haven't proved a thing except that you are finding out saying you have is much harder than actually doing so.