Las Vegas Sands Can Now Hire A Chinese Auditor
A filing dated today, April 29, reported that PwC's Hong Kong member firm has also resigned the audit of Sands China Limited. Las Vegas Sands used PwC Hong Kong for the Chinese portion of the audit, the majority portion, related to its holdings in Macau. The U.S. casino companies list their Chinese operations separately on the Hong Kong Stock Exchange while retaining a majority interest in the operations. The China-based subsidiaries of the U.S. casino companies are required to have a China-based auditor for their Hong Kong stock exchange listing and to prepare a report that the primary U.S. audit firm can depend on for the consolidated report. Wynn uses Ernst & Young Hong Kong, and MGM China uses Deloitte Touche Tomahtsu in Hong Kong. Melco Crown Entertainment, the big Macau-based casino operator with ADRs listed on NASDAQ, uses Deloitte Touche Tomahtsu. None of the Big Four audit firms in Hong Kong used by the casinos to audit their Chinese operations have ever been inspected by the PCAOB.
Since the majority of its revenue and assets are in China, Las Vegas Sands could now choose a smaller Hong Kong firm like BDO's member firm to be the primary auditor. (BDO inherited Skechers recently after the KPMG inside trader scandal caused that firm to resign and likes doing gaming audits.) The U.S. BDO firm would audit the minority U.S. portion and then send it over to Hong Kong for final review. The SEC and Department of Justice wouldn't be able to touch the Chinese workpapers or force the Chinese auditor to testify in any of their investigations.
Eoin Treacy's view The casino sector is not exactly lauded for the transparency of operations but there is no doubting that they tend to be high cash flow businesses. As Las Vegas companies continue to expand their presence in China, where demand for gaming is on a secular upward trajectory, there is no avoiding engaging in practices that are seen as part of doing business in that part of the world. Ensuring that such operations remain off US regulators' radar will remain a challenge as will maintaining the favour of local government officials.
US, European and Asian gambling shares retain a high degree of commonality regardless of whether they are casino or online oriented. Generally speaking European companies have tended to rely on online gaming for growth while US companies have been aggressively expanding in Asia. As demand for gaming increases, I thought it might be instructive to highlight some of the manufacturers of gaming equipment since they should be experiencing demand growth.
US listed International Gaming Technology collapsed from a high near $50 to $7 in 2008 before experiencing a short sharp rally in 2009. It held a progression of lower rally highs from August 2009 until February when it broke successfully back above the 200-day MA. The share has been consolidating mostly above $15.30 and a sustained move below that level would be required to question medium-term recovery potential.
Aristocrat Leisure bottomed in 2011 near $2 and has held a progression of higher major reaction lows since. The share has been consolidating below $4 since February in a steady reversion towards the mean and a sustained move below the 200-day MA, currently near $3.30 would be required to question potential for a successful upward break.
Bally Technologies rebounded particularly impressively from the 2009 lows and spent much of the last three years ranging. It broke upwards to new all-time highs three weeks ago and while some consolidation of this move may be underway, a sustained move below the 200-day MA would be required to question medium-term upside potential.
Japanese listed pachinko machine manufacturers are also demonstrating a return to medium-term demand dominance. Heiwa Corp has perhaps the most attractive valuations with an Estimated P/E of 7.16 and dividend yield of 2.97%. The share has held a progression of higher reaction lows since 2008 and while currently somewhat overbought relative to the 200-day MA, a sustained move below ¥1750 would be required to begin to question medium-term upside potential.
Sankyo Co/Gunma hit an 8-year low in December and has since rallied to break a two-year progression of lower rally highs. A sustained move below ¥4000 would be required to question medium-term scope for additional upside.
Sega Sammy Holdings spent two years ranging below ¥2000 and broke emphatically out of its range in April. While prices are becoming increasingly overbought in the short term a clear downward dynamic would be required to check momentum beyond a brief pause.