If the cap fits

Gaming table cap concerns aside, casino stocks are fairing well Despite a funds outflow from the Hong Kong market, investor caution over the US economic recovery, and further interest rate hikes to curb an overheating mainland housing market, Hong Kong-listed casino stocks continue to outperform the benchmark Hang Seng Index. On a year-on-year basis, the five casino stocks recorded an average of more than 20 percent return as against a 2 percent decline overall in the Hang Seng. Outperforming Interestingly, year-on-year, casino operators like SJM, Galaxy Entertainment and the lagging Melco, outperformed the Las Vegas operators such as Sands China and Wynn Macau, as a less demanding valuation helped to boost the stocks’ rebound. Between March 20, 2009 and April 19, 2010, shares in SJM, the largest gaming operator by revenue, and Hong Kong-based Galaxy both doubled, benefitting from rising mainland visitor numbers. Interestingly, the worst performance in valuations (both Return on Asset and Return on Equity) came from the company that tripled its share price last year, Wynn. Relatively stable Wynn Macau remained relatively stable, both in terms of valuations and cash flow, mainly due to a careful capital expenditure plan. Galaxy Entertainment finally announced its long-awaited refinancing plan, which was welcomed by investors and analysts. The company said it secured a six-year HK$8.8 billion loan from a consortium of Asian banks, such as the Macau-based Banco Nacional Ultramarino (BNU), Bank of China, ICBC Macau, HSBC, Hang Seng Bank, and Guangdong Development Bank, with a prevailing interest rate of 4.5 percentage points above HIBOR (Hong Kong Interbank offered rates). The company raised US$350 million in bonds by paying an interest rate of 9.875 percent last year, with a maturity in 2012. Cap confusion Galaxy deputy chairman Francis Lui Yiu tung said the company is not worried about the limid on gaming tables implemented earlier this year by the Chief Executive Fernado Chui Sai On. The government is to cap gaming table numbers at 5,500, an increase from existing numbers of 4,700. This has generated confusion and concern among foreign investors as they try to get some clarity on the issue. Macau based gaming consultant, Ben Lee of IGamiX Management & Consulting Ltd confirmed that there has been a flurry of phone calls since that announcement, as investors and anlysts try to work out the implications for pending projects such as Sands’ parcel 5/6 and Galaxy’s Cotai resort. Real question “The real question here is what constitutes ‘existing tables’? said Lee. “Is it the number of actual tables currently out on the gaming floors or the maximum number of tables that each property had previously been approve ?’ehe asked. In any event, the government has given themselves some manouevring room to deal with the operators, Lee added. For now, the US rival Las Vegas Sands’ Lot 5 and Lot 6 expansion project in Macau’s Cotai area will have about 670 tables at its opening, Chief Executive Steve Jacobs told the Wall Street Journal. Charts and graphics in our paper edition and MB online browseable