History shows that new Macau properties cannibalize a company’s existing core property. The sell side doesn’t appear to be reflecting that in their WYNN price targets.



On its Q3 conference call, WYNN pushed back the opening of its Cotai development to 2015.  That should’ve resulted in lower price targets given the time value of money.  It didn’t.  More importantly, we don’t think analysts are incorporating the likely cannibalization of Wynn Macau/Encore from Wynn Cotai.  The argument against cannibalization is that Wynn Cotai will be more of a Mass property and its location on the Cotai Strip will attract a different customer than that of the existing Wynn Peninsula properties.


Really?  Circumstances were very similar when LVS opened Venetian in 2007 and MPEL opened City of Dreams (CoD) last year.  As the following chart shows, 70% of Venetian’s 15% market share came from Sands and Altira donated more than 60% of CoD’s 8% share. 




On a year over year basis, revenues at Sands (post-Venetian for 12 months) declined 27% while revenues at Altira (post-CoD for 12 months) fell 20%, versus the same store revenues for the market gaining 24% and 34%, respectively, over those same time periods. 




So how much cannibalization would this mean to WYNN?  Assuming, the market grows to $30 billion in 2015 and consensus gross gaming revenues for Wynn Cotai of $3 billion are accurate, the property will capture a 10% share.  If history holds, Wynn Macau/Encore will suffer a share loss of 600-700 bps.  Given the maturity of the market that seems excessive.  However, even if we assume 325bp share loss (half of of the midpoint), that translates into almost $1 billion in lost gross gaming revenues which we estimate would cost Wynn Macau/Encore about $250 million in EBITDA.  Think that sounds extreme?  Sands Macau EBITDA declined $216 million (from $457m) in the 12 months following the opening of Venetian which, incidentally, generated $504 million in EBITDA.


Consensus EBITDA estimates for Wynn Cotai are in a $550-650 million range.  The analysts seem to be applying a 13-14x multiple on that cash flow and discounting it back at a 10-15% rate.  This analysis produces $15-25 of incremental target price value after subtracting out the $2.5 billion investment cost and the minority interest.  Indeed, all of the price target derivations we reviewed were in the $15-25 range.


However, we don’t think these analysts are factoring in the potential $300 million loss of EBITDA at Wynn Macau/Encore as a result of Wynn Cotai cannibalization.  Using the same multiples and discount rates on the cannibalization yields offsetting negative value of $10-14 per share.  Wynn Cotai looks a lot less valuable under this more realistic lens.


Disappointing Q3 results were not only softer than 2Q but also missed the S$400 whisper 




NOTE: All dollar figures are in Singapore Dollars unless otherwise stated

  • Group revenue was S$744MM and EBITDA was S$347.6MM
  • RWS revenue was S$731.8MM and EBITDA was S$346.5MM
  • Hotel occupancy was 71% and ADR was S$250
  • Universal Studio Singapore ("USS") continued to operated at a daily maximum capacity of 8,000 with an average visitor spend of S$81
  • The Group's UK operations, which are in discontinued operations, delivered revenue of S$93.8MM and EBITDA of S$8.7MM. The reduction in YoY results was mainly due to poor hold and the weakening of the Sterling vs. the Singapore dollar
  • "RWS goes into the last quarter of 2010 with four hotels fully operational and with an enhanced line-up of food and beverage and retail offerings. The resident circus-spectacular show Voyage De La Vie opened in July to good response."
  • "Battlestar Galactica and the much-anticipated Journey to Madagascar rides are expected to expand the attractions in the first half of 2011. This, together with the world debut of Transformers in the second half...The capacity is expected to increase substantially from 8,000 to 18,000."
  • "We are still in the initial year of operations as we continue to improve operational efficiency, integrate overall resort management and methodically implement marketing plans."
  • "Construction of the West Zone has commenced. We are expecting to start operations progressively from year 2011, beginning with the Maritime Xperiential Museum in the first half of 2011, followed by the world‟s largest aquarium, the Marine Life Park, the destination spa and a variety of luxurious accommodation at its Equarius Hotel and Spa Villas."



  • Describes LVS as a very aggressive competitor
  • Revenue only decreased 15% despite the entry of a new player
  • EBITDA margin decreased to 48% due to the expiration of warranties on gaming equipment and the ramp of their show.  Hold has also normalized from a very high win rate in the 2nd quarter.
  • The market is still in the infant stages. Over the next few years, they expect that the better IR - ie RWS - will have a majority of the share.
  • Had over 3MM visitors in Q3
  • In 3Q they stepped up their marketing programs overseas
  • Many of the visitors to USS were repeat guests
  • The theme park was cash generating
  • VIP win was 55% of total gaming receipts, down from 60% in 2Q
  • Operated more than 100 tables in VIP and 370 tables, 1200 slots



  • Margins should be between 45-60% going forward
  • When USS ramps up, it will be margin accretive
  • Provision of bad debt? Increased in the quarter?
    • Level was the same as in Q2 and don't expect any increase in that level
  • Rebate rates?
    • Still at similar level as 2Q
  • Market share - 53% right now, where will it be headed in VIP and Mass?
    • Over time they expect the market to skew to towards the better product and management, which they believe they have. 
    • In terms of their marketing plan, they are still in the process of rolling it out. So they still view the market as virgin territory.
    • Expect growth to be quite healthy
  • Theme park was cash positive in the quarter
  • October - it was possibly more robust than September
  • % of total revenue from non gaming: 10-20%
  • Slot revenue %: no comment
  • Regulatory risk - Singaporeans are generating a significant percentage of their revenues and perhaps the government would like to reduce that over time?
    • Doesn't think that that is a regulatory risk as long as they continue to operate under the rules
    • Local contribution will shift over time as marketing programs roll out
  • What is the table and slot limit at their facility?
    • Depends on whether they are in the main or VIP area
    • Theoretically they can increase to 560 tables with no problem
  • Market share based on RC share?
    • They are higher than 53% - "much higher" than LVS's
  • Trade receiveables increase to S$423 - all applicable to RWS but not all is casino related.  70-80% is casino related, same as last quarter. Quarter on casino receivables have increased substantially
    • Believe that they are doing a good job between balancing revenue growth and credit extension
  • Opportunity in Japan and other jurisdictions in Asia
    • They will look at Japan very seriously
    • They will look at "developed" Asia opps
  • Time frame of Japan
    • Legislators are still doing the research
    • If everything goes well, they expect a bill passage by end of 2011/early 2012
  • It will take some time for the junkets to be licensed. Looking at early next year.
  • Sense of seasonality - difficult to quantify, but they did say that August is a "ghost" month. Expect the 4th quarter to have a stronger showing because they have a lot of school holidays. Their results were in-line with their expectations.
  • Level of demand for junket oriented play that they are currently unable to serve
    • "There is very huge demand"
    • It's a very virgin market so pinning the number down is very difficult
  • S$300MM operating expenses per day excluding taxes.  As the theme park continues to ramp, the margins will get better. There will be an one-off operating expense related to the park opening in 4Q2011. There were some, but not very significant, start up costs related to show and attraction openings.
  • Busing program - they are very happy with it. 
  • Should we think about the current level of EBITDA as the new base vs what they saw last quarter?
    • Think it's a good base to look at and grow off of
  • Which segment has low hanging fruit?
    • Mid level and high end of the market
  • What kind of junkets would the Singapore government consider licensing?
    • Government is cautious but also pragmatic. Similar to the Australian junkets.
    • The process of licensing is just very lengthy, still hopeful to see licenses by 1Q2011
  • What kind of market growth is possible for next year?
    • Size of the market is really anyone's guess. They still see lots of potential.
    • Not sure how much junkets can grow the market
  • No view on Australia.  There is a possibility of dividend of payments. Lots of variables - like when and if the junkets come online.
  • Month before Chinese New Year is usually a very slow month so depending on how good Chinese NY's is determines whether the 4th Q is the strongest
  • Sheldon's thoughts on S$8BN in 2011?
    • Won't comment
  • Revenues from the Sinaporeans is very low.  Most of their high rollers are from other regions.
  • Non-gaming revenues margins are lower than 47% - much lower
  • Bad Debt - impairment loss on trade receiveble - related to Singapore ($23.5MM). Ratios are similar Q to Q
  • Goal for the Group is to build out the Resorts World brand
  • VIP RC volume was about the same as last quarter
  • Therefore casino receivables increased as a % of RC. Analyst calculated a 40% growth in receivables
    • Market mix is different from Q2 to Q3 so you can't look at it this way
  • Rough estimate of Chinese customers
    • At least 10-20% on the main gaming floor is acheiveable, but significantly higher in VIP


This note was originally published at 8am this morning, November 10, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“We're all copycats in this league, ... There's nothing new in the NFL.”

-Wade Phillips (recently fired Coach of the Dallas Cowboys)


Speak for yourself Wade. That’s not how Bill Belichick thinks about coaching against you. Good luck with your job search.


In the New Reality of Google, You Tube, and Twitter, it’s a lot easier to hold professional politicians, athletes, and investors accountable to what comes out of their mouths and when. Amidst the leadership crisis we have in this country, this is critical progress.


I wrote a book about this last year (Diary of A Hedge Fund Manager) and my overall conclusion about modern day finance remains. The days of financiers, central bankers, and “economists” being protected by their old boy networks are ending. Opacity is dying on the vine of time and space. The question players in this game will have to answer for the next leg of this industry’s evolution is: what exactly is it that you do?


On Monday, rather than have some fan in the cheap seats make up an edited version of the game tape, I showed everyone my short book. Every position; every time stamp; and every gain/loss versus cost basis. Being accountable isn’t rocket science. There’s a reason why a lot of players in this game think like Wade Phillips – they should. Last week was not good for us. This week has been very good. This is the game. It’s constantly changing.


Yesterday, one of the fund managers that franchises the Hedgeye strategy sent me an email after the market closed. He was happy. Apparently he was up +0.45% (gross) on the day (the SP500 was down -0.81%). And that made me smile. One of my professional ambitions is to prove that, over time, not everyone loses money on market down days.


For transparency purposes, look at a snapshot of the Hedgeye Portfolio today versus Monday. Better than bad, and thank God we stuck to our guns. That’s the only way to outperform in this business, over time.


Wade Phillips may not see anything new in the NFL, but that certainly doesn’t mean that new strategies cease to exist. One man’s dogma is another man’s opportunity. That’s what has to get your feet on the floor early every morning to play this game. You have to search for the next big market move with passion.


Today, we’re looking at a much different global game of global macro than we were last Thursday. Both the US Dollar and US interest rates are breaking out to the upside.



  1. The Republicans swept the House
  2. The Quantitative Guessing (QG) experiment was squeezing my shorts
  3. The Burning Buck was getting debauched to fresh lows (down -15% since June)


  1. The Republicans are in the House (yes, they are also professional politicians)
  2. The Quantitative Guessing (QG) experiment = global inflation and the Chinese are raising interest rates
  3. The Burning Buck has found a bid, trading up a full +2.6% off its lows

That makes Hedgeye 17 for 17 on our US Dollar (UUP) calls since we started the firm in 2008. No, that’s not arrogance. That’s just the score. And, unless Hedgeye highlights it, I can assure you that our competition won’t.


The last time we were long the US Dollar was in Q1 of this year (our Macro Theme was called “Buck Breakout”) when we made a very bearish call on European sovereign debt called the “Sovereign Debt Dichotomy” (which outlines the theme that sovereign debt issues will exist for the next 3-5 years, but you’ll need to manage risk around positions in a Duration Agnostic way).


Yes, sometimes it’s that simple. After all, finding the deep simplicity of the macro matter is the definition of Chaos Theory. Being bullish on the US Dollar simply requires getting Bearish Enough on the Euro at the right time. One is a basket of the other and this morning you are seeing the Euro (which we are short via the FXE), break down through what we call out immediate term TRADE line of support at $1.39.


My opponents don’t like this morning’s reminders. But that’s cool. I wasn’t the most likable player on the ice either. Without consensus what would I do during the day? No matter where “they” go, or who “they” are, I’m not going anywhere anytime soon. Neither is the massive correlation risk associated with the following breakouts we are seeing in US interest rates this morning:

  1. 2-year US Treasury yields breaking out above my immediate term TRADE line of resistance = 0.37%
  2. 10-year US Treasury yields breaking out above my immediate term TRADE line of resistance = 2.54%
  3. 30-year US Treasury yields holding above what’s been an obvious breakout since mid-October (support = 3.86%)

Then and now… different durations… multiple countries … multiple factors… it’s all part of this giant game of Chaos Theory that ultimately results in interconnected global macro market risk. I don’t suspect Wade Phillips could see this coming until it was too late either.


My immediate term support and resistance lines for the SP500 are now 1202 and 1236, respectively. We continue to hold an 18% position in the Chinese Yuan (CYB) in the Hedgeye Asset Allocation Model and it’s hitting its highest levels since 1993 this morning as the Chinese tighten the screws on what was Bernanke’s Burning Buck.


We’ll be hosting a conference call with Peter Orszag, former Director of the Office of Management and Budget (OMB), today at 1PM EST. For qualified institutional investors, please email


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Copycats - yields

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Drinking the Krugman Kool-Aid

Conclusion: In attending a Paul Krugman lecture yesterday, we came away with two main takeaways: 1) the Perceived Wisdoms of academic dogma run rampant throughout U.S. monetary policy; and 2) Keynesians really don’t get it.


Yesterday, I had the “pleasure” of attending a Paul Krugman lecture in one of my old classrooms at Yale and came away with a very different experience than the one I would have had as a wide-eyed undergraduate immersed in the dogma that is Yale econ theory. Also, I was really taken back by the fact that only Yale undergraduates were able to ask him questions; the older, more-informed members of the audience (roughly 50% of total attendees) were not allowed to partake in the discussion and ask challenging questions. Below, I’ve posted my “lecture notes” for your education/entertainment purposes:


My takeaways on Professor Krugman are below: 

  • Like any good charlatan, Krugman does a great job of defecting attention away from what others perceive as the real issues towards his Keynesian musings. Of course, it didn’t help that he was surrounded by the academic dogma that is his self-proclaimed “Yale-MIT axis” [of economic leadership].
  • He was very smug towards Fed critics and essentially laughed off the Sovereign Debt Dichotomy – suggesting that advanced economies could issue much more debt and stimulus than perceived by the markets. 

Krugman’s key quotes and conclusions from the Q&A session:

  • Austerity is depressing European economies
  • He wrote off the bond market’s views on the sovereign debt/deficits, using the U.K. (1920’s-1950’s) and 1990’s Belgium and Italy as examples of high debt/GDP ratios that didn’t matter to markets
  • Our capitalist, free-market economy is a real disaster now and Europe’s social safety nets mean that there is less “misery” there
  • The U.S. can pile on more debt and gov’t spending b/c they can issue debt at low yields
  • He uses the recent -0.55% TIPS auction as an example of the U.S.’s low cost of borrowing (completely ignores the inflation expectations embedded in a negative TIPS yield)
  • “The problem in the U.S. is that we’ve run out of room for monetary policy and we don’t have enough government spending to prop up demand long enough for the private sector to get healthy”
  • The Federal stimulus was not big enough, rather $1.2 Trillion would have been a more appropriate sum
  • 40% of the stimulus was just tax cuts that were mostly saved, not spent
  • The stimulus didn’t even have a net increase in total government (federal, State, local) spending growth when you factor in the cuts made on the State and local level
  • China sucks demand away from the rest of the world and their currency manipulation shaves 1% of global GDP
  • China is largest example of currency manipulation in history
  • Also one of the largest examples of protectionism in history and we need to punish China for the sake of “playing by the rules”
  • China is doing its best to push global growth in the wrong direction
  • Imports/exports are more about exchange rates than they are about saving/consumption
  • Should the Fed take into account the global impact of QE?: “Yes… some.”
  • “The U.S. can’t bear the world’s weight on its own”
  • “Yes, QE tends to reduce the U.S. dollar’s exchange rate, but that is offset by the growth QE provides to the U.S. economy”
  • “The U.S. has to look out for itself regarding its decision to move forward with QE” [I find his rationale here very interesting, given that he’s publically lambasting China for acting it its own self-interest re: yuan]
  • QE is designed to help housing, corporate borrowing, encourage consumer spending (via driving up asset values)
  • The U.S. should have more academics in policy-making roles and we would have been better off over the last few years had more academics been in key policy-making roles over the last decade 

In short, we continue to stand counter to the academic dogma that is associated with Quantitative Guessing being positive for the U.S. economy and the bullish hope that it will end well. We have expressed this conviction by being short U.S. equities (SPY) in our Virtual Portfolio. Further, we will continue to hold the U.S.’s economic and political leadership (or lack thereof) accountable each day.


Yours in Risk Management,


Darius Dale



Drinking the Krugman Kool-Aid - Charlatan Tricks


It’s still a long term story is the answer. We were hoping for a bigger stock price decline on the lower guidance but hope isn’t an investment process.



The quarter was decent and in-line but the mix was different.  International was very strong and management, both on and off-line, appears particularly bullish on this segment.  Replacements were pretty much where we thought they would be and IGT seems to have reclaimed the pole position in terms of market share.  2011 guidance was weak but our $0.83 estimate is in the wide range of $0.77-0.87.


While the long-term story remains compelling, near-term catalysts remain elusive.  We do believe there are buyers in the name and the fact that the stock is only down 3% following lower guidance and a 15% up move into the print is indicative of the demand.  Rebounding market share due to mean reversal and better content will likely emerge as the next positive catalyst unless they take out the darn convert.  Of course, the biggie is improving replacement demand.  We are taking the under on current expectations of 18 months before replacements accelerate.


Quarterly thoughts:

  • Domestic machine sale revenues were $4.6MM below our estimate
    • Units recognized in the quarter were 250 below our estimate and pricing was $300 lower
  • There were roughly 1,300 Dynamix packages included in IGT’s game sales this quarter (they sold approx 5,300 in total, compared to 4,017 as of the June quarter).  We think the math works as follows:
    • MLD= 21,000 list price *90% = retail price (~19k)
    • Less 2 free conversion kits ~ 2,750/ each = $13,400
    • So 1,300 of the 3,330 units in NA were priced at $13,400, which implies a price of $14,700 for the other units sold.  Without Dynamix, the price would have been even higher since the MLDs sold in the quarter would not have been discounted.
  • Domestic non-machine sales were $10MM better than our estimate due to better systems and conversion sales. It would be really helpful if IGT provided any information to model this bucket, like conversion kit sales, used games, or systems data.
  • Margins on Domestic product sales were weak.  Partly driven by very low unit sales and therefore the impact of fixed costs.  We also think that non-machine margins were impacted by higher mix of systems products which carry lower margins than conversion kits.  Therefore, despite beating our revenue estimate by $5MM, gross margins were in-line with our estimate.
  • International box sales blew away our number
    • FX was a large part of this – ASP was $1,700 higher than our estimate and $2k higher on units ex. Barcrest.  There was also a $18MM FX benefit to cash flow this quarter… a lot of which came from Australia.
    • International units recognized were 1,475 higher than our estimate with the outperformance coming from Latin America, Asia and Australia.  The international unit breakdown was as follows:
      • Asia: 400
      • Australia: 1,900
      • Europe: 400
      • UK: 2,800
      • S. Africa: 200
      • Mexico: 0
      • Latin America: 1,900
    • Gross margins were also a lot stronger at 55% vs. our estimate of 47%. We think that some of this is due to lower mix of low margin Baccarat & elimination of Japan.  We also suspect that non-box sales were mostly conversions.
    • The remaining Alabama units came out of game operations this quarter – so going forward there are no Alabama units in the numbers. 
    • Guidance of hoping to get better yields and flat install base isn’t exactly inspiring… nor do they have a track record of being able to grow yields – especially given the mix shift away from WAP games of late. 
    • On the positive side, D&A per game ops device is decreasing meaning that the average game life is increasing
    • SG&A was high.  They actually had a $1.9MM credit for bad debt expense so clean SG&A was almost $93MM.  Claims that there is a lot of G2E expense in there as well as bonuses etc.  The good news is that SG&A should be flat next year.
    • They are looking at taking out the convert – which would be nicely accretive to next’s year’s EPS

Industry stuff

  • While we won’t know exact market shares until ALL reports, IGT did garner the highest share this quarter.  Based on our estimates it looks like they stayed at 26% followed by WMS at 18%, Konami at 16% and BYI at 16%.  That is based on recognized shipments.  For actual shipments, IGT’s market share was even higher.
  • It looks like total shipments this quarter were roughly 12,750, with just over 9,000 coming from replacements compared with 11,000 in 3Q2009

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