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. 



COMPANY NEWS               

WYNN -  72,851 shares were transferred at an average price of $98.78 btw WYNN's family trust through Form 4

  • The footnotes state that the transactions reflect "a substitution of cash for shares held by a trust previously established by Wynn" and the noted share values reflect the price "used for valuing the transferred shares for purposes of the asset substitution provisions". 


RCL - For the first time ever, Royal Caribbean will position two ships in its Cape Liberty, Bayonne cruise port. Both Anthem of the Seas and Rhapsody of the Seas will sail Caribbean itineraries during the summer of 2017.  Rhapsody of the Seas will sail seven-night Bahamas cruises and a five-night Canada and New England cruise in the summer. It also will sail a 12-night fall foliage cruise and 13-night Southern Caribbean cruise before repositioning to Tampa for the winter. Anthem of the Seas will continue to call at Bermuda, the Bahamas and Caribbean throughout the summer, in addition to sailing a offering of Canada and New England cruises.  

 Takeaway: Could see slightly higher exposure to the Caribbean in 2017.


RCL (TUI CRUISES) - Thomson Cruises has announced that its new addition will be named TUI Discovery as part of the re-brand which will see the whole of Thomson transition to TUI over the next eighteen months. The update on TUI Discovery comes as Thomson Cruises also announces its new program for summer 2017 which will see the fleet based in the western Mediterranean, eastern Mediterranean and the UK for the first time since 2014.  TUI Discovery and Thomson Majesty will both be based in Palma, Majorca whilst Thomson Dream will sail from Corfu.  Thomson Spirit will move to Dubrovnik, Croatia and offer adult-only cruising while the fifth ship in the fleet, Thomson Celebration, will split its summer between Malaga, Spain in May and October and ex UK sailings from Newcastle between June and September.  


CCL - Announced that it has declared a dividend of $0.35 per share, an increase of 17%.  "The increase in our quarterly dividend follows a 20% increase less than a year ago and reflects our sustained earnings improvement and growing net cash flow which is forecasted to reach $4.5 billion in 2016," said Arnold Donald, Carnival Corporation & plc President and Chief Executive Officer.  "The increased dividend, in combination with our current share re-purchase program, underscores our commitment to return value to our shareholders." The company's board of directors approved a record date for the quarterly dividend of May 27, 2016, and a payment date of June 17, 2016.

 Takeaway: CCL has enough cash for a div increase


NCLH - The luxury line Wednesday said it would become the first cruise operator to include business class flights to its ships in the fare for all customers.   The offer applies to all European, Asian and South American voyages where a customer would need to travel on an intercontinental flight in order to reach the ship or to return home.  Regent said the included business class flights would be available to and from 26 U.S. and Canadian gateway cities.  Even passengers in the lowest categories of cabins will be eligible for the included flights.  Regent bills itself as the most inclusive cruise line. It already includes shore excursions, fine wine and spirits, unlimited Internet access, prepaid gratuities, ground transfers and pre-cruise hotel stays in its fare.

Takeaway: One way Regent says competitive is to offer more freebies 


MSC CRUISES - MSC Cruises, as reported previously, will implement several new sales policies that make its terms less generous and more closely aligned with those offered by its competitors in North America.  Among the changes are its first policy restricting the practice of commission rebating, a rule in place for more than a decade at brands such as Royal Caribbean International and Carnival Cruise Line.  “We want travel agents to advertise us at the going rate,” said Ken Muskat, the executive vice president of sales, public relations and guest services at MSC Cruises USA. “We want it to be fair across the board.”  The other policy changes include raising deposit minimums, making it harder to cancel cruises without a penalty, and setting a two-month window for passengers to move a direct booking to their agent’s account.  


MACAU | NEW JUNKET CAPITAL REQUIREMENTS - Macau’s government is working with gaming promoters on a proposal that would see capital requirements for new operators increasing 100-fold, according to people familiar with the matter. If passed, the move could further squeeze revenue for Wynn Macau Ltd. and other casino companies.  One proposal under consideration includes raising capital requirements for new junket operators to 10 million patacas ($1.3 million) from 100,000 patacas, and the inclusion of at least one Macau resident as a shareholder, said one of the people, who asked not to be identified because the deliberations are private.   

Takeaway: Given the tough environment, the question is who is interested today in becoming a new junket operator? 


MACAU | TOURIST PRICE INDEX - DSEC indicated that the Tourist Price Index for the first quarter of 2016 decreased further by 6.67% YoY to 136.44, attributable to lower charges for hotel accommodation, and reduced prices of handbags and women’s clothing. Price index of Accommodation decreased most significantly by 23.80% YoY, followed by Entertainment & Cultural Activities (-2.35%) and Clothing & Footwear (-1.98%). On the contrary, price index of Food, Alcoholic Drinks & Tobacco increased by 3.77% and that of Transport & Communications rose by 2.31%. 


MACAU | MASTER CARD ASIAPAC DESTINATION INDEX - The first MasterCard Asia Pacific Destinations Index tracking the growth of the region’s tourism doesn’t include Macau in its top 20 for overnight tourist arrivals and tourists’ expenditures.  The study is the first MasterCard Asia Pacific Destinations Index - an offshoot of the annual Global Destination Cities Index - to take a more in-depth focused look at these tourism trends, taking data from the national tourism boards of 22 countries and ranking 167 destinations, including island resorts as well as towns and cities across the region, in terms of the total number of international overnight arrivals; cross-border spending; and the total number of nights spent in each destination.  According to MasterCard Asia Pacific Destinations Index, Hong Kong ranked 7th with 8.3 million international overnight visitors, Shangai ranked 12th with 5.5 million overnight visitors, Beijing was 18th with 4 million, and Guangdong Province (excluding Guangzhou, Shenzhen & Zhuhai) ranked 19th with 3.9 million visitors.  Macau's dependence on Chinese visitation is the main reason they didn't break the top 20 on the index.   


SINGAPORE | INTEREST RATE CUT - Singapore's central bank unexpectedly eased policy on Thursday after growth stalled in the first quarter and as slackening global demand darkened the outlook for the trade-dependent economy, sending the local dollar tumbling to its worst loss in eight months.  In its third policy easing in 15 months, the Monetary Authority of Singapore (MAS) said it will set the rate of appreciation of the Singapore dollar NEER policy band at zero percent - starting on Thursday - and shift to a neutral policy stance.  It marked the first time the MAS has moved to 'neutral' since the global financial crisis, and compares with its previous policy stance of a "modest and gradual" appreciation of the Singapore dollar.

Takeaway: Despite the easing of policy, the USD/SGD has moved lower YTD by 4%. 


GAMING | BATON ROUGE SMOKING BAN -  The Baton Rouge Metro Council narrowly rejects smoking ban for bars, casinos; long debate touches on health, morality, business climate.  Casino executives from L’Auberge Casino and Hotel, Hollywood Casino and the Belle of Baton Rouge showed up in full force and tried to quell concerns about their employees’ well-being.  Mickey Parenton, the senior vice president of operations and general manager of L’Auberge, insisted his No. 1 priority is his employees. He said if an employee complains about smoke, he would move the employee to a smoke-free part of L’Auberge without a change in pay.  Casino executives said they would expect about a 20% drop in revenue if the ordinance passed. New Orleans banned smoking in casinos and bars a year ago, and council members and people attending Wednesday’s meeting squabbled over how much that smoking ban is to blame for declining revenues at Harrah’s New Orleans Hotel and Casino. 


NEVADA | UNEMPLOYMENT/EMPLOYMENT DATA - The state’s jobless rate came in at 5.8%, down from 5.9% in February and 6.9% in March 2015, the state Employment, Training and Rehabilitation Department reported Wednesday.  Much of the improvement came from job growth. Employers expanded payrolls by 2.8% YoY, for the nation’s third-best job-formation rate.  Nevada’s employers added 35,500 jobs year to year, for the 63rd straight month of gains. March was also the 44th consecutive month in which the state’s annual job growth outpaced the nation’s, said Bill Anderson, the employment department’s chief economist.


LODGING | AFRICAN HOTEL DEVELOPMENT - Despite slowed growth across the continent, Africa remains a major hospitality destination for tourists and business so investors are planning 30% more hotels this year than they did in 2015, says a new report.  The spike in hotel development on the continent is mostly driven by sub-Saharan Africa where growth more than doubles the rate in North Africa, according to W Hospitality Group which tracks the growth rate of expansion for regional and international hotel chains in Africa. The slowing hotel development growth rates in Northern Africa, asides from the sociopolitical crises in Egypt and Libya, is due to the market being “more mature” says Trevor Ward, managing director of W Hospitality Group.  In contrast, sub-Saharan Africa remains still holds gaps of opportunities which investors are clearly keen to explore. Nigeria tops the list of countries with the most planned hotels while Angola, buoyed by AccorHotels’ deal to build 50 hotels in the country, has risen to second place. While the report covers the hotel deals agreed for the year, the timeline for the construction and opening of these hotels is entirely different. Access to finance, among other reasons, have slowed down the execution of building plans. But the new deals signal long-term trust in the African hospitality industry despite the current economic outlook for leading economies on the continent.





Iowa SS GGR: +1.0% YoY 

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Atlantic City SS GGR: -1.7% YoY

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