Casino Industry

Find out why the Macau gambling scene is so important
-The company intends to use the proceeds from this sale to pay off part of their debt -“The stock has traded significantly higher since the announcement of the deal, but we believe that this is a huge missed opportunity for the company in a new, booming market and will hurt the company over the long-term as competition continues to expand in this area” (2). -Caesars is the largest casino operator in the U.S

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-Properties include: Las Vegas, Atlantic City, Indiana, Louisiana, Mississippi, and several other states More on the Macau opportunity, this may be a little outdated: -Only major casino company without a location Macau

-“Caesars bought the 175-acre site in 2007 for $578 million, with plans to develop a hotel and casino, but the company did not apply in the early 2000s for one of the limited number of gambling licenses in Macau, and it never gained a gambling concession from the Macau government” (2) -“As of July 31, 2013, growth in Macau has increased to over 20% on a year over year basis boosted by an increase in the number of Chinese visitors to the country’s only legal casino gambling hub. July’s 29.5 billion patacas ($3.7 billion) revenue was the third strongest figure this year, according to government data, as more middle-class gamblers visited Macau, eclipsing the growth in the number of high rollers. The slowdown in China’s economic growth has kept away some wealthy customers, who often spend 1 million yuan ($160,000) per bet, but it failed to push away Macau’s appeal for China’s rapidly expanding middle-class and their higher disposable incomes” (2) →what are pacatas

Why Maccau Is Attractive for Casino Industry
-The number of visitors to Macau rose 4.2 percent during the first half of the year (in 2013) -“Visitors form mainland China, who account for two thirds of the total numbers, soared 20 percent in July year over year numbers. High rollers account for about 70 percent of gaming revenues, but the share of the middle-class gamers is growing at a much faster rate and Macau’s casinos are trying to diversity entertainment options to attract more of these visitors” (2) -Minimum table bets start at around 300 patacas ($38), compared to a year ago when offering bets for 100-200 patacas ($20) -“In the end, investors should not have seen the sale of this property as a catalyst for the stock, but instead as the huge missed opportunity to diversify the company’s core business and expand into an explosive new market” (2) -because the stock price went up when they sold Macau location -Macau casinos and hotels are now showing strong September gaming revenue -“At the current rate, gambling revenue for the month of September so far is tracking 25.7% higher than the same month a year ago. Macau generates annual gambling revenue topping $38 billion, larger than any other casino district in the world, about five times the annual take of U.S. gambling in Las Vegas” (3) -Macau, a special gaming district on China’s southern coast, is the only place in China where gambling is legal –

-“We believe that the run up in CZR shares has been on the coattails of the other gaming and hotel companies and that the buying has been way overdone. Investors should loko for the stock to pull back substantially after the recent rally” →research if all of this stuff is still true

The most Recent Quarter- Focusing On the Important Aspects of This Business -Most recent quarter is Q2, net revenue was reported by Caesars as $2.2 billion -A decline in casino revenue was “largely offset by increases in F&B, rooms, and managed revenue” -“The company attributes this decline to a combination of macroeconomic conditions, competition, and a shift in marketing strategy. The company has lost market share in gaming to competition, despite the company’s positioning with the World Series of Poker brand” (4) ^ this is about gaming competition

-Alpha research believes that revenue and profits have peaked and will be on the decline next year (2014), they were correct -Income form operations: $125.3 million in 2013, down $63.8 million compared to the prior year, 33.7% decline was driven by higher asset impairment charges (learn more on this) -“Adjusted EBITDA declined 8.2% to $470.5 million and property EBITDA declined 4.9% to $492.8 million compared with the year-earlier period” (4) -Investors should focus on the lower gaming revenue

-“Casino revenue in Las Vegas declined approximately 15.5% year-over-year, primarily due to loss of market share and visitors and weaker gaming volumes” (4) -The same trends are occurring in the Atlantic City region

-Gaming revenue was down due to lower visitation driven by primarily new competitive threats -CZR market volume in Atlantic city has declined, and market share has declined overall →my suggestion is that they should look more to online gaming, because technology and internet are booming, maybe consider joining with another casino industry- why is competition doing better -The company is facing increased competition in certain areas like Louisiana/Mississippi, Tunica, and Las Vegas and Atlantic City -Find specific competitors

-Problem: “The company’s investments in current properties and new construction may prove to be too little, too late, as the projects have become increasingly costly over the last two years”

The Debt Burden→ get more up to date information
-At the quarter end (Q2 2013) for Caesars Entertainment, Inc. was $23.7 billion. -Debt, net of $1.8 billion of cash, was $20.9 billion
-Total debt repurchased was only around $275 million during last quarter -Reports of a possible bankruptcy, have been increasing since Moody’s downgraded the company’s credit rating to one of its lowest levels in April 2013 -Cash flow growth is not expected to increase in 2013, “as a result of a demand drop fueled by customers spending less at casinos” (5) -Major concern because competitors gaming revenue are continuing to thrive -“The company has consistently poured money into new construction and the remodeling of existing structures, but significant measures need to be taken in order to improve the company’s current capital structure. If the company cannot spur major cash flow generation over the course of the next year, the company will be facing some major problems in early 2015 -Why is January 2015 important? Because that is when $4.4 billion of mortgage-backed securities are scheduled to mature for CZR (figure out more what this means) → opportunity, cash flow generation, how? Competitors are outbeating them -Recent report from July 2013, Caesars planned to beef up its product offering in Las Vegas and enter in the Maryland casino market, breaking group in Baltimore

Major Areas of Concern for the Future: (direct quotes)
-No unique value proposition built on approach, scale, geographic reach, brands and loyalty -Not positioned to drive value creation and significant revenue upside -Huge investments made in trying to expand core of business—declining revenues in many areas of business will lead to serious problems if the capital structure is not re-vamped by 2015 -Not executing on development pipeline, expanding domestic distribution and social/mobile gaming platform—the company claims that social gaming has a bright future, but the uncertain regulatory condition on a state and federal level pose a serious threat to the future of this revenue source -Failure to capitilze on pipeline while competitors continue to thrive on an international level (failure in Macau and Korea are significant) -Failed focus on managing costs and improving capital structure -Sustained economic recovery has not provided an additional tailwind to the efforts of the company

COMPETITORS: EPS Change (%), Sales growth %
CZR: -92.74, .16
WYNN: -1.34, -2.19
LVS: 18.29, 18.28
MGM: -165.10, 16.71
→large concern is the significant decline in EPS and sales growth over the recent history for CZR and at such a fast rate -“Considering the country has been seeing an economic recovery, consumer spending on gaming and entertainment in Las Vegas has not kept up. With no exposure to Macau, CZR will continue to underperform its peers in the future. The company’s current strategy is failing domestically and trying to transition to anything internationally is impossible. The EPS Change of -92.74% and 0.16% Sales Growth is just the beginning of a negative trend for Caesars. With massive amounts of debt and important maturity dates approaching, investors should look for a significant decline in shares as nervousness continues to build.” (5)

-Based on the cash flow and margins, the quality of the most recent CZR earnings quarter was very poor overall -Negative cash flow per share: company is borrowing a significant amount of money to keep operating, and at some point the banks will stop lending and want to be repaid –bad position -“Cash is king” and companies that don’t generate cash are not around for a long time Problem: no cash flow

-major debt obligations are due in 2015 and they have no cash, running out of time

USE ALL THE CHARTS FROM THIS PDF! Very good for 2013 competitors, etc

Potential Bankruptcy:
-Important to look to the Book Value/ Share of CZR
-this indicates the dollar value remaining for common shareholders after all assets are liquidated and all debtors are paid Financial Strength
-Look at PDF
-Use of leverage can be a double-edged sword for companies
-“In the case for CZR, it has tried to generate returns above its cost of capital, for investors benefits. However, with the added risk of the debt on tis books, CZR is a company that has been hurt by this leverage and is unable to generate returns above the cost of capital. The company’s losses have been and will continue to be magnified by the use of leverage in the company’s capital structure, while they continue to renovate existing properties and continue with new construction domestically. With $20.91 B of long-term debt and a large debt to equity ratio of 1.04, Caesars will need to significantly overhaul their capital structure if they want to compete and survive in this highly competitive industry” (6) →compute d/e current ratio for 2014, google their financial statements Problem: too much debt, no cash

-ROA: -4.44%, the company cannot operate efficiently based on the firm’s generated profits from total assets

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