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RANDOM TIDBITS FROM MACAU

Just a few things we are hearing...

 

 

LVS

  • Launching a re-brand of the Four Seasons/Plaza - trying to regain some of the premium play they lost to WYNN
  • Announcement may come pretty soon post CNY from LVS about being able to sell the Cotai condos - this would be a positive catalyst for LVS
  • Labor may still be difficult for LVS to procure for Lots 5/6.  See below

MGM IPO

  • No surprise but hearing that MGM IPO will get announced post CNY – so that pushes it to March if they choose to do it at all
  • Given the recent strength, which looks sustainable, MGM may want to wait to get a higher price. 
  • Also, one of the biggest players from one of their biggest junkets went missing while owing MGM over $100 million.  It is our understanding that the junket has agreed to pay off MGM over time through offsetting commission advances.  Not sure if MGM needs to or will disclose this.

Galaxy Macau and other projects

  • Hearing that June 1st is the likely opening date
  • It's possible that 25-30% of Starworld's Rolling Chip volume could go over to Galaxy Macau
  • There will be an air-conditioned walkway between Galaxy and City of Dreams
  • As soon as they open, they will move into Phase 2 right away so there may not be as many free laborers for LVS - could be a negative for LVS
  • There will be 3,000 local workers that free up once the Galaxy project is done
  • Angela Ho’s theme park is another large development – all the residential units from Shun Tak are already under construction
  • University of Macau on Henguin.   
  • Light Rail Project is also going on 4- 5 year plan.

MACAU: DIFFERENT WEEK, SAME FORECAST

Our expectations for 36-40% revenue growth in January remain unchanged.

 

 

Another decent week in Macau as gross table gaming revenues came in at HK$14.0 billion through the 23rd.  Using this figure and what we expect will be a slightly slower last week in January heading into the Chinese New Year celebration, we continue to project full month gross gaming revenues (including slots) at HK$18.5-19.0 billion, up 36-40% YoY. 

 

In terms of market share, Wynn lost more share – we are hearing it's totally hold related – while LVS continues to track in-line with its 3 month depressed share of 16.5%.  MPEL experienced a huge jump from last week’s month-to-date share of 11.7%.  MGM gave up some of that share, dropping 140bps since our last update.

 

MACAU: DIFFERENT WEEK, SAME FORECAST - macau1


IGT POST DIGESTION

After what was looking like a day of indigestion for IGT bulls, the stock closed flat. The good in the quarter outweighed the bad and guidance looks conservative.

 

 

We don’t want to regurgitate the quarter, we will leave that to the sell side historians.  We’d rather focus on the future.  Hopefully, you’ll find our takeaways interesting and forward looking. 

 

While others are focused on the slow acceleration of replacement demand, we think the big negative issue for IGT is in the participation segment.  It’s going to be very difficult for the company to grow this business.  For IGT, we view participation similar to a casino.  The problem is unlike a casino with no growth that spends 6% of revenues on maintenance CapEx, IGT spends around 17%.  That eats into ROI big time.  At least for WMS and BYI, their participation segments are growing.

 

Potentially outweighing the participation drag, at least for the near and intermediate term, is the impressive margin gains.  IGT’s top line missed big due in small part to the participation segment but mostly due to international sales.  However, not only did the margins more than offset that, the improvement looks sustainable – enough so that guidance looks conservative for once.  We expect that better margins will carry IGT until replacements inevitably takes off and new markets begin to provide growth.  We will be focused on the declining ROI in the participation segment down the road.

 

Here are some of our specific forward-looking takeaways:

  • In North America, IGT finally met our expectations.  For the first time in 6 years, IGT shipped more replacement units in its F1Q than its F4Q.  For most operators, December is a seasonally better replacement quarter than September, but since IGT’s fiscal year is in September (which is usually companies’ most promotional quarter) that hasn’t held true for them.  We suspect that this reversal of trend means that replacements in December were much stronger than our estimated 9,300 replacements shipped in September.
  • So much for annual price increases being a given.  For as many years as we've covered this space, annual price hikes were a given.  These last few quarters have demonstrated that this isn’t the case anymore… whether you blame it on mix or selling what would normally be ‘discontinued’ product lines or deeper discounts –the numbers don’t lie.  While we still don’t believe that price is the main determinant for operators when buying games, it’s clearly become a factor and with the heightened competition, suppliers need to play the price game.
  • Despite Patti’s assurances that international product sales were strong this quarter, the numbers tell a different story.  This is the lowest unit ship quarter for international in over a decade (excluding Japan).  The company still maintains that they expect international unit shipments to be up YoY with little rationale as to why aside from guidance from their customers that the second half of the year should be better and roughly 1,500 for sale units to Italy.
  • Margins were very good considering the low number of shipments.  Systems and software sales must have been good this quarter because they carry margins of north of 70% which coupled with the higher mix of non-box sales clearly helped this quarter.  The 1,000 Mexican units also had very high margins despite lower ASPs since they were fully depreciated.  Going forward, the company expects that game sale margins will be 200-300bps lower than F1Q11 – partly due to another promotion ala– Dynamix that they plan on introducing shortly.

Gaming Operations:

  • Well, at least IGT finally admits that “the installed base isn’t expected to grow meaningfully this year” or at all if we excludes the Italian units.  On the bright side, yields finally stopped declining – although one can say that the removal of the incremental Alabama units from Victoryland helped here.
  • Some of the increase in margin is also due to the consolidation and simplification of platforms which materially decreases the installation and refresh cost.  The company expects margins to be 150bps lower for the next few quarters – which is still above prior guidance of 58-60%.

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THE M3: HO TRANSFERS SJM SHARES; LAND AUCTIONS; S'PORE INFLATION; MGM JET

The Macau Metro Monitor, January 24, 2011

 

STANLEY HO GIVES UP SJM STAKES SJM, WSJ

Dr. Stanley Ho has transferred all but 100 shares of his 31.655% stake in SJM's parent company, Sociedade de Turismo e Diversoes de Macau, SA, to Lanceford Company Limited.  Lanceford Co. is controlled by Dr. Ho's 3rd wife, Chan Un-chan, who owns 50.55% of the company and by Dr. Ho's 2nd wife, Lucina Ho, who owns the remaining 49.45% of Lanceford.  Lucina Ho's children--Pansy Ho, Daisy Ho, Maisy Ho, Josie Ho and Lawrence Ho--each hold 20% of her stake.

 

The move may complicate the question of succession given the families of three of the tycoon's companions now each have significant stakes in SJM.  The Company states that there will be no change in management or strategic direction as a result of the share transfer.

 

GOV'T TO LAUNCH NEW LAND AUCTIONS Macau Daily TImes
Secretary for Transport and Public Works, Lau Si Io, said that one or two new land plots will be auctioned this year.  He stressed the Government is trying to make the land granting process more transparent.  The government had delayed the auction of the 3,400 square meters land parcel in Fai Chi Kei for the construction of no less than 500 small- and medium-sized residential units.

 

 

VISITOR ARRIVALS FOR DECEMBER 2010 DSEC

Total visitor arrivals rose by 11.6% YoY to 2,271,301.  Mainland China visitors increased by 18.8% YoY to 1,200,324 (52.8% of total), with 494,567 traveling under the Individual Visit Scheme.  Visitors from Hong Kong (667,595) and Republic of Korea (33,775) increased by 10.9% and 49.0% respectively; however, those from Taiwan (105,747), Malaysia (41,256), Japan (36,052), and Singapore (34,839) decreased by 7.4%, 10.2%, 5.8% and 11.9% respectively.  Total visitor arrivals reached 24,965,411 for the whole year of 2010, up by 14.8% YoY.

 

THE M3: HO TRANSFERS SJM SHARES; LAND AUCTIONS; S'PORE INFLATION; MGM JET - visitor


INFLATION IN S'PORE CONTINUED RISE IN DECEMBER Channel News Asia

Singapore CPI rose by 4.6% YoY in December.  For 2010, CPI rose by 2.8% YoY.

 

MGM MACAU LAUNCHES "GOLDEN LION JET" macaubusiness.com

MGM Macau has refurbished a TurboJet vessel as the “Golden Lion Jet”, which will sail between Hong Kong and Macau.  The refurbished jet made its debut on January 21.


WEEKLY RISK MONITOR FOR FINANCIALS: STILL POSITIVE SHORT & INTERMEDIATE TERM OUTLOOK

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Positive / 4 of 10 improved / 2 out of 10 worsened / 5 of 10 unchanged
  • Intermediate-term (MoM): Positive / 7 of 10 improved / 2 of 10 worsened / 2 of 10 unchanged
  • Long-term (150 DMA): Positive / 4 of 10 improved / 3 of 10 worsened / 3 of 10 unchanged / 1 of 10 n/a

WEEKLY RISK MONITOR FOR FINANCIALS: STILL POSITIVE SHORT & INTERMEDIATE TERM OUTLOOK - summary

 

1. US Financials CDS Monitor – Swaps were mixed across domestic financials, tightening for 15 of the 28 reference entities and widening for 13.  The moneycenters saw the greatest tightening of the group, while widening was concentrated in mortgage insurers. 

Widened the most vs last week: PMI, MTG, RDN

Tightened the most vs last week: BAC, C, WFC

Widened the most vs last month: MTG, ACE, CB

Tightened the most vs last month: LNC, MET, MBI

 

WEEKLY RISK MONITOR FOR FINANCIALS: STILL POSITIVE SHORT & INTERMEDIATE TERM OUTLOOK - us cds

 

2. European Financials CDS Monitor – Banks swaps in Europe tightened across the board last week.  Swaps tightened for 38 of the 39 reference entities.

 

WEEKLY RISK MONITOR FOR FINANCIALS: STILL POSITIVE SHORT & INTERMEDIATE TERM OUTLOOK - euro cds

 

3. Sovereign CDS – Sovereign CDS continued to fall last week, retracing to their levels of late November. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: STILL POSITIVE SHORT & INTERMEDIATE TERM OUTLOOK - sov cds

 

4. High Yield (YTM) Monitor – High Yield rates rose 7 bps last week, closing at 7.98 on Friday.  

 

WEEKLY RISK MONITOR FOR FINANCIALS: STILL POSITIVE SHORT & INTERMEDIATE TERM OUTLOOK - high yield

 

5. Leveraged Loan Index Monitor – The Leveraged Loan Index continued to rise, closing at 1605, 6.5 points higher than the previous week.   

 

WEEKLY RISK MONITOR FOR FINANCIALS: STILL POSITIVE SHORT & INTERMEDIATE TERM OUTLOOK - LLI

 

6. TED Spread Monitor – The TED spread held nearly flat, ending the week at 15.3 versus 15.8 the prior week.

 

WEEKLY RISK MONITOR FOR FINANCIALS: STILL POSITIVE SHORT & INTERMEDIATE TERM OUTLOOK - ted

 

7. Journal of Commerce Commodity Price Index – Last week, the index fell 3 points, closing at 32.6 on Friday.

 

WEEKLY RISK MONITOR FOR FINANCIALS: STILL POSITIVE SHORT & INTERMEDIATE TERM OUTLOOK - JOC

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields rose 19 bps.

 

WEEKLY RISK MONITOR FOR FINANCIALS: STILL POSITIVE SHORT & INTERMEDIATE TERM OUTLOOK - greek bonds

 

9. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps.  We believe this index is a useful indicator of pressure in state and local governments.  Markit publishes index values daily on four 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. Our index is the average of their four indices.  Spreads fell last week, dropping 21 bps to 198.  

 

WEEKLY RISK MONITOR FOR FINANCIALS: STILL POSITIVE SHORT & INTERMEDIATE TERM OUTLOOK - markit

 

10. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production.  Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion.  The index fell to a new low of 1370 as flooded coal mines in Australia continued to pressure demand. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: STILL POSITIVE SHORT & INTERMEDIATE TERM OUTLOOK - BDI

 

11. 2-10 Spread – We track the 2-10 spread as a proxy for bank margins.  Last week the 2-10 spread widened slightly to 278 bps. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: STILL POSITIVE SHORT & INTERMEDIATE TERM OUTLOOK - 2 10 spread

 

12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows: 1.9% upside to TRADE resistance, 2.3% downside to TRADE support. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: STILL POSITIVE SHORT & INTERMEDIATE TERM OUTLOOK - xlf

 

 

Joshua Steiner, CFA

 

Allison Kaptur


Governing The Government

This note was originally published at 8am on January 19, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The Constitution was designed to govern the government, not the people.”

-Steve Hanke

 

In a concisely written piece of Complex Simplicity, Steve Hanke penned this quote in a paper I was reading yesterday titled “Reagonomics Goes Global.” Hanke is a professor of applied economics at Johns Hopkins University and a Senior Fellow at the Cato Institute. I interviewed him while I was running a radio show for Bloomberg Radio last year and have been reading his work ever since. He gets government math.

 

The white paper featured different opinions from different authors and I think Hanke’s chapter, titled “Lessons from America’s Founding Fathers and US Experience” is well worth taking the time to read. Hanke takes a crack at differentiating the definitions of American style democracy and liberty. He also highlights Alexander Hamilton’s original US fiscal convictions:

 

“The United States was born in a sea of debt. A majority of the public favored a debt default . Alexander Hamilton, acting as Washington’s Secretary of the Treasury, was firmly against default. As a matter of principle, he argued that the sanctity of contracts was the foundation of all morality. And as a practical matter, Hamilton argued that good government depended on its ability to fulfill its promises.” (Reagonomics Goes Global, page 8)

 

I call this to your attention this morning because it draws a historical bridge between THE most important US Economic question that’s on my mind right now (can the US Dollar Index hold its newfound intermediate term TREND line of support at $78.66?) and what I am going to talk about on our Q1 Macro Theme call this morning under the umbrella of a theme called American Sacrifice (email sales@hedgeye.com if you’d like access to the call and/or the slide presentation).

 

Duration matters. That’s why I try my best to make sure my team is Duration Agnostic when considering risk, probability, and uncertainty. That’s why we have developed our TRADE, TREND, and TAIL model. It’s not perfect, but at least it’s an evolution of legacy Wall Street research and risk management processes gone bad. What the US stock market is doing in the immediate-term is not the most important long-term US Economic factor that’s on my mind.

 

Seeing the stock market going up every day isn’t the solution to this structural mess (stock market fans should remember that 1/3 of this country (102 MILLION Americans) have ZERO moneys in a retirement account and 1/2 of Americans have $2,000 or less). Neither is inflation – that’s a policy. What I think we ultimately need is a strong currency, balance sheet, and handshake that the world can trust again. If we have those, the jobs will come.

 

We can hope and pray that the new Republican leadership can be depended upon to “fulfill its promises” of spending cuts, but we must remember that hope is not an investment process and trusting a conflicted and compromised politician better have some serious prayer attached to the exercise. The foundations of morality matter (repaying your debts) to a lot of people in this country. So does protecting whatever integrity remains of her currency.

 

It’s time.

 

So, let’s roll with that this morning and figure out whether the intermediate-term strengthening of America’s currency (US Dollar Index is up for 8 out of the last 11 weeks since the midterms) is a leading indicator to a long-term TREND of American Sacrifice and fiscal sobriety.

 

Governing the Government on Global Macroeconomic risk management matters sounds like both a painful and herculean task – but I think it’s achievable.

 

Here’s what we need to execute:

  1. A Real-Time Accountability Mechanism (Twitter – check)
  2. An Analytically Competent and Independent Research Firm With Real American Clients Who Care (Hedgeye and The Buy Side – check)
  3. Freedom of Speech and email forwarding (iPhones, Crackberries, etc – check)

The messaging is out there folks. The People have already voted. Americans want spending, deficit, and debt cuts – and this is our last chance to Govern the Government so that we get all three of those things no matter what the intermediate-term American Sacrifice.

 

By “last chance”, I’m not trying to be dramatic either. With the upcoming debt ceiling and deficit/debt commission debates, this is it - for the US Dollar, America’s balance sheet, and her handshake with the world as its fiduciary of the world’s reserve currency that is…

 

I am a Canadian-American, so I have no allegiances to any person, politician, or party on this matter. If the US Dollar starts to break down again, sustainably, below my $78.66 TREND line, I will sell it faster than you can say Thunder Bay Bear.

 

Another debauchery of the US Dollar will equate to $120 oil, global food inflation riots, and plenty of other unintended consequences that I, for one, have no patience seeing my firm and family endure under the willfully blind veil of no one could have seen this coming.

 

My immediate-term support and resistance lines for the SP500 are now 1280 and 1298, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Governing The Government - 7


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