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EVENT | Macau Operators & LVS

Tuesday, August 30th at 11:00AM ET

Watch the replay below.

CLICK HERE to access the associated slides.

CLICK HERE to access an audio-only replay.



Takeaway: With Galaxy finally reporting we can say that our inaugural Hedgeye Mass Tracker seems to be working

Just a quick update on the Hedgeye Mass Tracker. Galaxy Entertainment reported Q2 this morning and it was solid and in line. More importantly for us, mass revenues grew 29% YoY in Q2. Galaxy's mass performance brings the Macau market to a total of 4.6% YoY growth in Q2, slightly ahead of our bold (at the time) Tracker estimate of +2-4%. We can tell you that we were conservative with in our +2-4% Tracker estimate given that it was already a bold call to predict positive growth (sell side was projecting flat to slightly down) and it was the inaugural Tracker estimate.


Looking ahead, we've already published our July Tracker estimate of +4-6% mass revenue growth in Macau. August GGR may come in positive which would be the first positive GGR growth month since May of 2014. Positive GGR growth would imply further mass growth acceleration from July.


We'll be publishing a post mortem on Macau's Q2 today so stay tuned for more details and analysis.


Takeaway: We’re giving back 5% for a big reset in room-night estimates; means we can sleep on our long through 2016 given what we saw out of OWW/AWAY


  1. 2Q16 = SELF-INFLICTED NOISE: As we mentioned in our last note, most outside of the sell-side were already bracing for decelerating trends, but no one expected this.  Room nights growth decelerated to 20% from 37% in 1Q16.  Mgmt suggested that they were already expecting ~600bps of deceleration largely due to 1Q/2Q calendar shifts, but the incremental deceleration was due to a combination of the recent terrorist attacks and internal mishaps related to the OWW integration, which may have limited to flow of its inventory to meta-search channels due to technichal issues.  The company expects a mild reacceleration in organic room nights in 2H.  EXPE also raised its dividend by to $0.26 from $0.24 (thanks), announced that it is may try to IPO Trivago before year-end, announced that it may save up to 50% on the build-out of its +$1B corporate headquarters over the next few years.  All in, mgmt introduced a ton of noise into the story without adequately addressing the progress it's making with the core story; particularly with AWAY.
  2. BUT STILL IN CONTROL: Despite the sudden shock in room nights growth, EXPE still beat consensus EBITDA estimates by 12%; suggesting that its 2016 EBITDA target really is a just cost story.  EXPE’s inorganic expense trajectory declined in absolute dollars across each line item outside of G&A, which saw a notable decrease in the prior quarter.  However on a consolidated basis, total operating costs as a % of revenue did accelerate on a y/y basis due to a continued surge in Tech & Content costs.  But AWAY was the much bigger story, which went under the wire this quarter (see Point 1).  First, 1M bookable listing may be the biggest highlight/sigh-of-relief since the biggest risk to the AWAY model transition was the opt-in; we estimate that 1M bookable listing effectively translates to online bookability penetration of 70%-85% depending on its total listings.  AWAY is also making early progress on monetizing its new model, with 2Q revenue growth up 37% y/y vs. 17% in 1Q; note that AWAY was high-single/low-teens top-line grower as a stadalone company.  Collectively, the progress mentioned above is all about execution, and has nothing to do with the current travel environment.
  3. FAIR TRADE: We expect 3Q to fuel optimism in both the OWW & AWAY stories since the inorganic seasonality impact should optically amplify their results.  First, roughly 40% of OWW’s annual EBITDA is historically concentrated into 3Q.  The 3Q15 OWW purchase accounting headwind effectively means EXPE doesn’t really have an OWW comp from last year, and the early leverage we’ve seen on the cost side YTD will only amplify the y/y impact into 3Q16.  For AWAY, the transition into a transactional model introduces a seasonality component that didn’t really exist last year (subscription model).  Given the early progress we’ve seen in online-bookability opt-in, coupled with another quarter of +200% y/y growth in online bookings transactions in 2Q, AWAY revenue growth will likely accelerate again since most of those 2Q booking will be recognized as revenue on the 3Q stay, and AWAY will have a full quarter's worth of the user fee in effect.  Meanwhile, the risk of softening trends in room nights is already on the table after 2Q mishap, and we only had to give back 5% on the stock that had ripped through July to essentially hedge that risk away.  We should see a big reset in 2016 consensus room night estimates, which basically means we can sleep on the long through 2016 since EXPE is now just an execution story at this point.


EXPE | FAIR TRADE (2Q 2016) - EXPE   Inorganic Cost Trajectory 2Q16

EXPE | FAIR TRADE (2Q 2016) - EXPE   AWAY online bookability 2Q16


Let us know if you have any questions or would like to discuss in more detail.


Todd Jordan
Managing Director



Hesham Shaaban, CFA
Managing Director



Takeaway: Our RevPAR tracker suggests 2Q RevPAR at the low end of guidance for most lodgers


Lodging companies (C-Corps) are set to report earnings this week, starting with HOT on Tuesday (press release only).  We think this earnings season will illustrate a deceleration trend. Post-Brexit, hotel stocks have come roaring back, and in our opinion the move is well overdone and largely a function of sector rotation and negative sentiment washout. However, our company RevPAR trackers suggest that most of the hoteliers/REITs will post 2Q RevPAR around the low end of their guidance range and likely lower full year RevPAR expectations. The operators will probably escape with intact 2Q EBITDA and full year EBITDA guidance. However, we think the hotel REITs may be forced to cut EBITDA guidance as well. Stay tuned to management commentary regarding the battle shaping up between the brands and the OTAs – a price war that likely weighs heaviest on the REITs.




Takeaway: Headline Q2 GGR disappointed but the mix likely more favorable than expected. HE Mass Tracker suggests mass revs up 2-4%. LVS is the play


The Hedgeye Macau Mass Tracker suggests mass gaming revenue increased in the range of 2-4% YoY in Q2. Given the headline GGR disappointment of -9%, positive mass growth may come as a surprise to most. If the Tracker is right – the high R Square suggests it probably is – this would imply better margins in general for the Macau operators’ Q2. With a growing mass segment, LVS is the obvious play and it is our favorite, particularly over the long-term. Our only reservations pertain to the very near term – for whatever reason, the sell side has not reduced Q2 expectations despite the softer monthly GGR figures.


Positive mass revenue growth in Q2 would represent the first growth quarter since Q3 2014. Extrapolating estimated Q2 mass revenues portends consistent YoY growth for at least the next 3 quarters, and likely more assuming just some market growth from new properties. This is a very important inflection point for the market and particularly LVS. Importantly, within the mass segment, higher margin bass mass is likely outperforming. Not only is LVS the largest mass player in Macau, it maintains the most exposure to base mass.




Takeaway: Caribbean tailwinds abate somewhat for the rest of 2016 - soft guidance stemming from Europe & China matters

Here are our takeaways from today's release and conf call:

  • Thanks to close-in North America business the Q1 yield beat was huge. However, Q2 guidance is much weaker. A simple calculation would suggest 1H yield growth average 4% (it's actually a little less than 4% since Q2 has a higher weighting in terms of revenue contribution than Q1) which is slightly ahead of our expectations and the Street's. This is why only the low end of FY yield guidance was raised by 50bps despite the huge Q1 beat.
  • But the Q2 weakness is more concerning
    • Additional promotional discounting is needed in the Mediterranean for the close-in bookings to fill the ships. RCL has had to source more guests from Europe than usual (69-70% of European business (usually 2/3)) since North America guests are more hesitant to booking into Europe, a point we emphasized in our recent cruise presentation. As a result, RCL is lowering their yield expectations for Europe. This sourcing shift is also a negative for NCLH's European business which is mostly US-sourced. In addition, European guests spend lower on board the ships than North American guests do. 
    • The company continues to blame capacity increases in China, particularly in Shanghai. Management's tone has shifted from high optimism to caution regarding China. Capacity in China is 9% this year vs 6% last year.
    • Low end of expectations in Shanghai (50-60% of total China business) i.e. Quantum of the Seas and Mariner of the Seas. Everyone knows China is a close-in market. In its release, RCL implicitly suggested that visibility on China's bookings environment is getting murky. RCL certainly feels tenuous about China currently. In our recent cruise presentation, we stressed pricing pressures in China.  
    • The Easter shift accounts for 20-30bps, shifting from Q1 to Q2 2016. 
    • Introducing 2 new ships (Harmony of the Seas/Ovation of the Seas) ramps up occupancy but at lower yields - Harmony's inaugural sailings is in a tough European environment and Ovation is in China, which has seen lower yields YoY in 2016. 
  • Fuel/FX - Midpoint FY 2016 EPS guidance was raised by 25 cents with 15 cents contributing from a FX/fuel tailwind. FX/fuel benefited Q1 by 8 cents, which implies a 7 cent tailwind for the rest of 2016. 
    • But bunker fuel prices have risen on average ~15% since Q1 which leads us to believe that mgmt's fuel expense guidance could be too low
    • Meanwhile, the US dollar has weakened ~5% for RCL's blended currency basket since Q1.
    • Hence, so far in Q2, the tremendous rise in oil prices has outpaced that of the US$ weakness which suggests the 7 cent tailwind for the rest of 2016 may come in a little bit lower if current prices persist.
  • NCC ex fuel growth guidance was raised slightly for the full year to 1%. It's not that big of a hike but any hike isn't great as China costs have increased.
  • Caribbean is less important going forward. For some perspective, Caribbean deployment in Q1 was 63%; it's averaging ~39% for the rest of 2016. For Europe, itineraries accounted for almost 0%; for 2Q and 3Q, Europe accounts for 28% and 40% of RCL's capacity, respectively. China deployment overall, as mentioned above, is also higher YoY due to Ovation's entry into Tianjian into late June 2016.