Aztec Nachos

By Derek On February 3, 2012 Under Broker Notes

“Physicians are rather like undescended testicles, they are difficult to locate and when found, are pretty ineffective.”Susi Greenwood

The Macau gaming sector has been on a tear with January revenue rising 35% y-y alone, slightly ahead of forecasts. Compare this to former head of the brat pack, Las Vegas where gaming revenues are up only single digits last year. According to a Chinese gambler I know, there is a big difference between Macau and Vegas:

“Vegas is fun. Macau isn’t fun. It’s just serious.”

This is amply reflected by revenue composition in Las Vegas where gambling accounts for less than half. I guess the rest is hotels, hookers and hot dogs: “Nevada resorts earned 34.1% of revenue from food, beverage, and ‘other offerings’…” reads the official blurb. Macau reportedly has ‘other offerings’ as well but it primarily exists as a safety valve and a popular way for Chinese to get money out of China. In the 60’s and 70’s across America, most towns had at least one Chinese laundry and when I was a teenager and announced that I wanted to learn Chinese, the idea was met by my unwashed peers with universal derision: “You want to work in a Chinese laundry?” was the most common response. (Recently, I notice all the same people are dying to get their children into Mandarin classes at school in the US. Hmmm…). Today the world’s largest Chinese laundry is the former Portuguese colony.

Recent surveys of China’s rich indicate that although they are not unhappy they are more concerned than ever about the future. Record numbers of Chinese applying for US visas and green cards are further evidence of growing anxiety among the well to do in the Middle Kingdom. With a significant political transition occurring later this year lines of patronage are sure to change and uncertainty will only grow. Whether the new crowd taking up residence in Zhongnanhai (China’s “White House”) is more liberal in their reforms allowing China to avoid massive social unrest or whether they pursue “red” policies taking the country back a few decades, only time will tell. What is relatively certain, though, is the “known unknowns” will mean more good times ahead for Macau.

As I have written earlier, I think one of the big stories this year is Rmb depreciation: the trade nobody is really ready for and an infirmity no physician will be able to cure. Yesterday, the HKMA announced that December Rmb deposits in Hong Kong fell 6.2%, to HK$ 724bn, the largest ever drop in a single month. In 2011, the Rmb appreciated 3% against the USD; half the rate of consensus forecasts. The capital flight we are beginning to see out of China will help this trend reversal continue and will also likely lend further support to rising Macau revenues for 2012.

Consensus forecasts for revenue growth this year for Macau are 20% vs. 42% in 2011. I think given the above factors and in the absence of a crackdown from Beijing, those forecasts are too conservative.

Despite the strong tailwinds pushing the sector along, analyst Adrian Lowe, today has downgraded Sands China (1928 HK) from a Buy to a Hold. The stock is near fair value after rising almost 40% in the last two months and rose 28% in January alone. However, there is risk of taking profit now with the impending opening of Sands Cotai Central and possible Hang Seng Index inclusion. February 10th is when the final decision on index inclusion for Sands China will be made. I would sell then. Sands China trades at 18X 2012 PE.


Our Global Chief Economist, Bill Belchere, writes today in “Macro Matters,” global manufacturing PMIs for January indicate we are “bumping along the bottom.” But the good news is the dip we have been calling for is looking more shallow than feared.

Speaking of dip, this weekend we have “Super Bowl Sunday,” the most watched television broadcast of the year where two American football teams, the Giants and the Patriots, compete for the championship. More importantly, as a former avocado farmer I can tell you it is also the day where the most guacamole of the year is consumed. Guacamole is the main ingredient in nachos and is a dip made from avocados, lemon, salt and Tabasco sauce. Chopped onions and a dash of tequila are also permitted into the mix. The Aztecs used to eat this 500 years ago. In fact, they gave us the word “avocado” which comes from the word “ahuacatl” – or “testicles.” May the team with the most ahuacatls win.

Back to the macro outlook. Recent PMI composition has been of poor quality with inventory restocking comprising the majority of the strength. We need to see final demand accelerate to bring us out of the dip. The good news is while new order growth is falling the rate of decline is slowing. Asian policy response will continue and if leading indicators show final demand improvement we may avoid a deep plunge into the guacamole and alter our bearish view for the first half. 

You can get our research by typing MASR <Go> on Bloomberg.


Derek Hillen, CAIA

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