Are You Ready for Bandwagon for Slot-Makers Equities?

Show me a momentum player in the stock market and I’ll show you a guy who is late to the bandwagon. By the time everyone is on board, it’s too weighted down to move.

So with everyone looking at the huge rake in Macau being the driving force behind the eruption of stock prices for Wynn (WYNN) and Las Vegas Sands (LVS), no one seems to be looking at the customer behavior behind the boom. The Chinese do not generally see gambling as entertainment; they see it as business. They are starting to learn painfully that losing a year’s salary in a day is a bad business. Can binge players become moderate? Some addictions are tough habits to break without a total give-up, but not necessarily gambling. Players in Macau may find after a time that winning isn’t everything. Can the casino experience can be fun by itself and even more fun when you don’t blow the family bank account. I’m betting on it.

The Macau resorts will continue to grow and high rollers will still provide most of their profits but we need only look at a mature gaming market such as Las Vegas to know what will happen in Macau. Eventually, less well-heeled customers will enjoy the casino experience by playing slot machines. Machines are starting to gain traction there already.

Slot machine

Cultural diversity has caused the slots manufacturers to make a few mistakes as they try to adapt to this new, potentially huge market. Americans love of the number “7” comes from the good luck it can bring in the game of craps. They don’t play much craps in China and “7” is a number that sounds like the Cantonese word for “togetherness,” which is not necessarily lucky. The number “8” sounds like the Cantonese words for “prosper” or “wealth.” Slot machine makers quickly picked this up and now the winning reels there are straight “8”s not “7”s. The “Wheel of Fortune” machine, based on the popular TV show here, is huge in Las Vegas but a dud in Macau. English language game shows that use plays on words are never going to make it in China. When game-makers finally get into the psyche of their Chinese players and create game themes that are familiar to them, slots will take off there.

On the home front, Las Vegas resorts are recovering. Occupancy and gaming revenues are up after several years of famine. During the decline, casino operators tightened their capital investment budgets and kept old games on the floor well past their entertainment expiration dates. There is a lot of pent up demand to replace geezer three wheelers with the latest touch display, interactive video games.

So, how do we make money on slot machines? Well, not by playing them, as much fun as that may be. The bandwagon for slot-makers equities is still empty; it’s time to get on board. Aristocrat Leisure (ARLUF) is an Australian game maker that already has 55% of the Macau market. International Gaming Technology (IGT) has opened a sales office there and, as the largest and best producer of slots in the world, will do their homework and score big there. I also like Konami Corporation (KNM) for their exposure to the slot machines market, the sophistication of their overall video games product line and as a Japan rebound play. As a truly long odds proposition, I am buying more Ainsworth Game Technology (AINSF), a small Australian slot-maker run by the legendary Len Ainsworth who pioneered slot machines back in the 1930’s, invented the five-wheel “pokies” all the gamers have copied and is rich beyond reason, having founded multi-billion dollar Aristocrat Leisure. AINSF is a plaything for him but one he takes seriously even as he approaches his nineties. At some point, nature will not be denied and Ainsworth Game Technology may be a very attractive takeover target. I’ve played their games and they understand all the enticing Chinese themes (even if I don’t).

I should of course mention, all this is my opinion and I have acted on these ideas by buying these stocks. Do your own homework and good luck.