EPETF - Emperor Entertainment Hotel

[DTEJD1997]

Hey all:

 

Anybody else here an investor in Emperor Entertainment Hotel (EPETF)?  I bought mine on the OTC, but it's home market is Hong Kong, ticker (0296).

 

For those not familiar with this company, it is a hotel and casino in Macau.  They are one of the smaller casinos and they cater towards the mid-market, not quite so much the high rollers or whales.

 

One neat fact is that they kilogram bars of gold encased in lucite and set into the floor of their lobby.  Thus, patrons can "walk the yellow brick road".  I've heard that gamblers are a superstitious lot, so maybe this might have some appeal to them?

 

The stock has had a bit of a run lately, almost every day it seems to be going up.  I initiated my position a while back, so I'm a happy shareholder.  Even with this latest run-up, I still think it is cheap, especially compared with it's larger competitors.  The P/E is approaching 10...but the company essentially has no debt, a good amount of cash, good property, and of course those gold bricks!  Interim earnings will be released soon, and I am going to wager that they will be good.  So maybe the forward P/E is something like 8.5 or 9?  Maybe we will see a bump in the dividend too?

 

Of course there are risks....

 

A). It is a Chinese company.  This makes some people nervous.

B). it is a small cap.

C). The largest shareholder has an interesting past.

D). It is a casino company.

E). They lease their gambling license.

 

I think a lot of these fears/problems are overblown when you really look into them.  So maybe Emperor trades at a discount to their competition.  The question is what should that discount be? A 50% discount seems rather much to me, especially when you look at the balance sheet and financial metrics.  Almost forgot about the dividend, which is currently about 4%.

 

The end result is that this is a cheap company, reasonably well run, and is likely to make good returns for the foreseeable future.  The stock is very cheap at 8 or 9 times forward earnings.

 

They will be announcing interim earnings for the period ended Sept. 30th soon, so I'm wondering if "smart money" knows the results will be good, hence the recent run up in price.

 

Any thoughts?

[Hielko]

I put this name on my watch list a few weeks ago because it certainly looked cheap, but never researched it in-depth... one potential worry I had is that gambling in Macau could be a bit of a fad right now. The casino industry there is huge: Vegas doesn't even come close. Is that sustainable?

[DTEJD1997]

Hielko:

 

I was shocked to learn that Macau has 6X the gambling "handle" that the strip does in Las Vegas.  You are right, Macau is a MUCH larger market than Las Vegas.

 

Almost every form of gambling is banned in main land China.  So if a Chinese citizen wishes to seriously, legally gamble, they have to travel.  What area is closest?  Macau.

 

Macau has competition from a lot of different places, Vegas, Manilla, Singapore and others.  Macau has an advantage in that they are so close to mainland China.  It is a lot easier and cheaper for most Chinese to go there instead of the other places.

 

I think that the powers that be will keep gambling situated in Macau for the foreseeable future.  I don't think you will have legal gambling in every Chinese city like we do in the USA.

 

You could make an argument that as the overall standard of living and GDP increases in China so will the level of gambling.  When people have disposable income, they might wish to gamble...

 

There certainly could be a pullback in the level of gambling in Macau if the Chinese economy does poorly.  Long term though I think China will prosper, and thus Macau will too.

[Hielko]

I don't think macau is this big just because the Chinese love to gamble (they certainly do), but it's probably also related to capital controls in the mainland and the amount of money in circulation that isn't from totally legit sources. That's probably not a sustainable situation in the long run.

 

I don't know if you follow Wynn Resorts/Steve Wynn, but if you want to learn more about the casino business start reading what he writes :).

 

PS, DTEJD1997: it's amazing how I encounter your name all over the web, always looking at the same companies.

[DTEJD1997]

Another day, another 4% up!  ;D

 

EPETF is up strongly at the open of the HK market.  Good volume too!

 

I think somebody is expecting something good.

 

As to capital flowing into Macau, I am sure there is some amount of goofiness going on.  I also suspect it might be a way to get capital out of the country...BUT there is no denying there is a TREMENDOUS amount of gambling going on.

 

Remember, most Chinese have never been able to gamble.  There is probably a huge amount of pent-up demand.  I remember when the Windsor casino first opened back in the mid-90's.  People from Detroit FLOCKED across the border to gamble.  People were standing in lines a block long.  Once you got in the casino, you had to wait to play a game.  People were not used to being able to gamble close to home, so they went nuts...at least at first.  After a couple of years, no more line to get in.  Excitement died down somewhat.

 

Perhaps the same thing is going on in Macua, but on a much, MUCH larger scale?

 

I've heard that China's middle class is as big the USA's, a couple of hundred million people.  They have almost no where to gamble but in Macau.  The USA has had Vegas and Atlantic city for 30+ years.  Then 15 years ago a lot of jurisdictions opened up.  Now, there are probably more jurisdictions that HAVE gambling than those that don't.

 

Also, Macau will pull gamblers from some other Asian countries, not a huge amount, but some...

 

So what would the handle be in Vegas if there were NO OTHER jurisdictions?  Not even Atlantic City?  What if the number of casinos was only 1/4?  You would have a huge amount for those in operation.

 

So maybe gambling might calm down in Macau at some point, but that might be a ways away...

 

I've followed Wynn a bit, but not as much as I should.  He is truly a skilled operator with a fascinating background.

 

PS:  Thanks for the compliment!  It is gratifying to see other members here thinking along the same lines...

 

 

[serendibz]

I actually have the opposite view that they are currently expensive. I bought this 2 years ago when they were trading at around 1 HKD when I thought it was dirt cheap but I have already sold it.

 

Their competitive position is poor and also weakening. This is because they do not own their casino licence as you point out, and they are just a small hotel compared to mega resorts owned by Wynn, Sands etc. They are also developing the Cotai strip so you can expect more mega resorts to prop up in the coming years.

 

Unlike in Vegas, the bulk of Macau's gaming revenues come from highrollers (from China mostly) playing in VIP rooms. The growth of gaming revenues in recent years really surprised me given the tapering of the Chinese economy. Valuation of the other bigger casino players seem really high. It seems quite unrealistic for me that this growth in gaming revenues can be maintained for long.

 

Really do not like their capital allocation. Way too much cash, has nothing attractive to invest in, but does not pay enough dividends. Emailed their ir asking what their plans were with the cash 2 years ago. They did reply but with the standard "we are on the lookout for opportunities that will enhance shareholder value" type of rhetoric.

 

One more thing is that this company is part of the Emperor group of listed companies in HK, which have businesses in film, watches & jewelry, property etc. The founding family has strong links to the underworld in HK and I don't think that they have historically treated minority shareholders in their other companies well.

 

Would avoid Macau casino stocks in general given their high and unsustainable valuation (I think)

[king888]

I actually have the opposite view that they are currently expensive. I bought this 2 years ago when they were trading at around 1 HKD when I thought it was dirt cheap but I have already sold it.

 

Their competitive position is poor and also weakening. This is because they do not own their casino licence as you point out, and they are just a small hotel compared to mega resorts owned by Wynn, Sands etc. They are also developing the Cotai strip so you can expect more mega resorts to prop up in the coming years.

 

Unlike in Vegas, the bulk of Macau's gaming revenues come from highrollers (from China mostly) playing in VIP rooms. The growth of gaming revenues in recent years really surprised me given the tapering of the Chinese economy. Valuation of the other bigger casino players seem really high. It seems quite unrealistic for me that this growth in gaming revenues can be maintained for long.

 

Really do not like their capital allocation. Way too much cash, has nothing attractive to invest in, but does not pay enough dividends. Emailed their ir asking what their plans were with the cash 2 years ago. They did reply but with the standard "we are on the lookout for opportunities that will enhance shareholder value" type of rhetoric.

 

One more thing is that this company is part of the Emperor group of listed companies in HK, which have businesses in film, watches & jewelry, property etc. The founding family has strong links to the underworld in HK and I don't think that they have historically treated minority shareholders in their other companies well.

 

Would avoid Macau casino stocks in general given their high and unsustainable valuation (I think)

 

You are right . VIP gambling in Macau is underworld business. It involves a lot of money laundering ,etc.  Thus result in cheap valuation for many VIP room operators such as IKGH(formerly AERL) , Amax(HK) and Dore .  Grand Emperor is not a go-to destination for retail gamblers in Macau as I have traveled there several times so I think most of its revenue is from VIP rooms.

[Hielko]

Found this blog post about the company today: http://www.argutori.com/emperor-entertainment-hotels-worth-flutter/

 

Note that the author doesn't correctly adjust for the impact of a large minority interest in the company.

[DTEJD1997]

Hey all:

 

Can't believe I missed this...

 

Revenue, earnings & dividends are up at Emperor!

 

Revenue up 21.5%

 

Earnings up 22.2%

 

Dividend up 13.2%

 

Book value is also up of course.

 

All around, things are looking good.  Unfortunately, the stock has come down somewhat from it's recent highs.  It will be interesting to see where this company is at 3 years from now.

[DTEJD1997]

Hey all:

 

Anybody still watching or interested in this?

 

I still own it, and it has had a bit of a bump lately.

 

Revenue, earnings & diidends have been announced a few days ago.  All metrics are down.  However, they are not down as much as I think it would be feared.  The stock still has a strong balance sheet, P/E of less than 5, and still a healthy dividend.

 

I think at some point, restrictions on gaming will be eased in China, and demand for gambling will resume it's upward climb there.

 

Even if things keep at somewhere near the current level, this thing is still crazy cheap.

[Haasje]

How does that leasing of gambling licenses work? I thought only the big four were licensed.

[randomep]

 

I really liked their numbers and wanted to buy a month or two back. But then I researched the owner of the group and found out he is a convicted criminal who threatens to break employee's legs. See the following:

 

https://en.wikipedia.org/wiki/Albert_Yeung

 

That was enough to turn me off....