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Slightly below consensus quarter due to lower hold but VIP volumes were up 40% sequentially and Mass volumes grew as well.




  • Singapore IR contributed revenue of S$775.2 million and Adjusted EBITDA of S$389.8 million
  • "The improvement in the revenue is substantially contributed by the increase in the volume of premium players‟ business with significant contribution from USS (Universal Studio Singapore) and the hotels.
    • There was a daily average of around 8,300 visitors to USS with an average spend of S$85 per visitor.
    • RWS hotel occupancy for fourth quarter of 2010 was 79% with an average room rate of S$294."
  • "An improvement of the margin from the third quarter of 2010... is attributable to the increase in revenue. It is, however, diminished by a lower luck factor in the VIP business compared to the third quarter."


  • Awfully pleased with the way they wrapped up 2010
  • With the sale of the UK business, the management has been able to focus on RWS
  • Grew every part of the business in 4Q however, Lady luck showed less favor but was still in the range of 2.8-3.0%
  • VIP segment  - which has powered ahead with over 40% growth in volume.  Recently added 2 new aircrafts to the Group and are adding more amenities.  Their VIP GGR revenues were 60% of total.  RWS market share increased to 58% for VIP and 52% overall.
  • They are planning many exciting events - Janet Jackson concert kicked off the year
  • BattleStar Galacitica just opened. Journey to Madagascar is due to open soon and will be accompanied by the opening of 2 Robochun restaurants.  The new attractions should attract new visitors.
  • 1,400 slots on the floor including 360 ETGs and 580 tables
  • Beginning to see FIT business take shape with 50% of the USS visitors being FIT guests
  • 1,300 rooms now open
  • Hosting 460,000 guests and hosted 1500 events
  • Transportation to their resort got even better before CNY - Sentosa People Mover - moves 8,000/people per hour and stops in front of their Resort
  • 2011 will be a year where they continue to build on their results.  Chairman expects to keep pulling bunnies out of the hat.


  • What was the increase in RC Volume sequentially?
    • 40%.  Q3 VIP hold was on the high side while the Q4 was on the bottom end of the expected range
  • Seasonality trends across Q4?  
    • They are still continuing to learn about their seasonality.  They just started operations on Feb 14th so they have yet to experience a full year of apples to apples operations (with a competitor in the market).
  • Mass market grew sequentially as well
  • There will continue to be a lot of pre-opening costs in the business as they continue to build out Phase 2.  There will be a substantial amount of pre-opening expenses in 2011 as they look to open more of USS and the Marine Park.  These costs will be significant.
  • Was the commission rate higher in the quarter - ie why was the net revenue only up 6%?
    • No, it was all because of lower hold
  • Almost all the slots are outright purchase, only a few are on a lease basis
  • Cost of the machines ranges from US$22k to $35k US. So far, they have changed out very few machines.
  • Seems like the poor hold had a significant drag on the quarter, what would be the normalized EBITDA?
    • Hold rate is not as good as they want it to be.  MBS held at 3.11%; they held below that.
    • EBITDA would have been 10-15% higher if they held more normally....Hope that they will see better luck for 2011. There is good evidence of that occurring.
  • Jan trends?
    • Comfortable achieving internal budgets for the year
  • VIP contribution of 60% based on GGR - how about on a net revenue basis?
    • 51% on a net revenue basis
  • VIP and Mass tables.  Going forward? 
    • Still have capacity to add some more tables. They have 580 tables but on average, they are only averaging 460 tables in operation
  • Good evidence in January that they picked up on their luck factor. Seasonality issue is difficult to answer given the immature nature of the business.
  • Junket approvals and how do they see the RC business pick up further
    • Some junkets should be licensed this year.  They have no visibility on when that will happen.  When and if it does, it will help them with the business
  • For the year, their VIP win rate has been within the acceptable range of the normal win %
  • Employees at the RWS - 13,000  of which 10,000 are permanent
    • Tracking at 7-15% turnover in the employee base
  • Receivables are up 40% as well. Has credit been a direct driver of performance?
    • They need to give credit directly to the customers - so they will continue to do that until junkets come in. They are pretty comfortable with the level of receivables given the level of revenues generated
  • Any impact from the tightening in China?
    • So far they have not seen any material deterioration and repayment rates have been good
  • Some talk about CRA regulating shadow junkets in the market?
    • No comment
  • Breakdown of gaming and non-revenue?
    • 80-85% was gaming (on a net basis)
  • Have not seen any direct government action to try to prevent locals from visiting the IRs
  • Margins have been more or less the same in the 4Q so far
  • No change in rebate rates
  • What % of employees are foreigners?
    • Just under 30%
    • New levy comes in Sept 2011, and another increase in 2012. It will have some impact on their payroll but not too heavy.
  • Malaysian bus program continues to be strong. Not sure if it was higher quarter over quarter - maybe only slightly.  Malaysian school holidays impact them.
  • Excluding pre-opening expenses, what have costs been doing?
    • They changed their way of reporting Adj EBITDA to match the way their competitors do it - so pre-opening expenses are not in EBITDA
  • Player rebates are relatively flat sequentially at 1.2%.
    • It's exactly the same QoQ
  • Why was the financing cost so high this quarter?
    • In December they recognized early interest cost of new debt - so there was also some accelerated amortization cost of the new financing... all of that is included in the financing costs.  2011 run rate will be lower.
    • Just refinanced their loan last week.  S$3.5BN.
  • New construction will cost them S$700MM
  • Their actual tax rate was higher than the Singapore tax rate due to the refinancing
  • Competitive environment regarding market share?
    • Will compete sensibly to maintain market share. Comfortable with their market share and will try to make as much money as possible
  • They cannot pay a dividend in 2011 - since they need to show a profit on the balance before doing so. But they will be CF positive this year.
  • Appetite for growing the VIP business?
    • Will grow only as far as they feel comfortable extending credit. 
  • 1/3 VIP tables, 2/3 Mass
  • USS is EBITDA positive
  • How did they manage to outperform their competitor by such a margin on VIP RC? Bulk of their earnings should be coming from overseas.  They are working very hard to grow that business.
  • Since they are already open, they can not capitalize any pre-opening expenses but they wont impact adjusted EBITDA
  • 40% was non-VIP this quarter. This suggests that Mass declined QoQ.
    • which is a function of the win %
  • Impact of their aircraft on their margins?
    • Just started flying the first one so will give an update next quarter

Excessive Storytelling

This note was originally published at 8am on February 16, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Epidemics are sensitive to the conditions and circumstances of the times and places in which they occur.”

-Malcolm Gladwell


Epidemic might be the right word to describe the environment in the USA that has ensued since Bernanke’s speech in Jackson Hole and the 96.3% move in the S&P 500 since March 2009.  There are many corners of the world that are looking at the USA and the policies of the Federal Reserve and clearly believe that we are pouring gasoline on a blazing hot fire.


The past month’s protests in North Africa and the Middle East were partly linked to surging agriculture costs and according to the UN, countries in Latin America are most at risk of food riots as prices continue to head higher.  According to the World Bank, rising global food prices have pushed 44 million more people into “extreme” poverty in developing countries since June.  Yet the USA and the S&P 500 continue to power forward like they are impervious to these issues. 


Not so fast….  The question is when, not if, Chariman Bernanke will pull the punch bowl on the current liquidity binge.  The increased civil unrest that ensues around the world will continue to put incremental pressure on him to alter the current policy.  The scary part is he needs to do it sooner rather than later and chances are it’s going to happen at exactly the wrong time.


Just by chance, what if we get a hint of a FED exit strategy today at 2 pm just as the “storytelling” is reaching a feverish pitch?  I’m hearing people talk about stocks, saying, “This time it’s different!”  Or how about this one, “margins don’t matter!” Or better yet, “consumer companies are impervious to rising input costs!” Over the next 12-months we are going to be able to produce some serious You-Tube moments that will last a lifetime. 


Of course margins don’t matter – until they do.  Consumer companies are impervious to rising input costs – until they are not.  And we are at the tipping point! 


It seems like yesterday that Malcolm Gladwell published The Tipping Point: How Little Things Can Make a Big Difference.  Gladwell describes a tipping point as “the moment of critical mass, the threshold and the boiling point.”  In nearly every situation there is that moment in time when the world is ready to follow the leader or “the trend.”  Right now, that leader is Chairman of the Federal Reserve, Ben Bernanke and the trend is excess liquidity that is leading to higher inflation and higher stock prices.   


The critical element of the U.S. economy that is not benefitting from the Federal Reserve’s actions, in real terms, is the consumer.  I believe that the consumer is reaching a tipping point.  Accelerating demand is critical to maintaining profitability in an accelerating cost environment.  What we saw yesterday from the retail sales data was perhaps an indication that the consumer is beginning to slow down. 


In the face of non-confirming data, observers with a conflicted or biased view often look for any other metric, or any other narrative, to justify a prior perspective.  Revisionist versions of the truth are offered with adroit semantic maneuvering and frantic searching for the comfort of a confirming thesis. 


One narrative being promoted at the moment is that consumers are willing to pay above market for “green” products from “socially responsible” companies. This may be true to a degree, but deflecting the clear truth behind the data, be it Retail Sales or otherwise, with qualitative narratives that are entirely subjective, is not a practice I subscribe to.  If consumers see raising prices in the absence of a corresponding growth in personal disposable income, there is likely going to be a change in consumer behavior. 


As Gladwell wrote, "Ideas and products and messages and behaviors spread like viruses do.”  At present, it is clear that many ideas and messages have spread rapidly around investor circles.  Sectors of the market are trading at premium multiples largely because of the free-money policy of the Federal Reserve.  The confidence that this instills in investors seems to trump any concern about companies’ ability to control their input costs from now on.


For many companies, the cost of raw materials is rising at a faster pace than revenue and we have only just begun to see the impact on margins.  Rising costs take time to flow through to the bottom line.  Rhetoric from management teams, against all of their incentives, has been decidedly cautious with respect to their commodity cost outlook.   As we move through the balance of 2011, the squeeze on profit margins will be more pronounced than most analysts expect. 


The Empire Index' Prices Paid index, which climbed to a two-and-a-half-year high of 45.8, was supportive of my theory yesterday.  Quoting directly from the press release, "The prices paid index climbed to a two and-a-half-year high in February, but the measure for prices received was little changed, suggesting some pressure on profit margins."  That’s right – margins are contracting, not expanding. 


How the consumer reacts to increased inflation pressures will be the tipping point for the market.  Across a wide spectrum of the S&P 500, companies are seeing margins contract, and some are more confident than others in their ability to pass on price to customers.  A growing percentage of companies will be unable to increase price at all, or fast enough to offset margin contraction, without hurting top line trends.  The economic recovery is in its embryonic stages, unemployment remains high, and consumers are keeping a tight rein on spending.  How much inflation can they take before spending begins to suffer?


I heard some supposed experts on CNBC say that $5.00 gas will not affect consumer spending.  It’s this kind of storytelling that is sign of pure excess.


Perhaps yesterday’s Retail Sales was the first glimpse of this trend.  Retail Sales growth missed Street expectations.  The trajectory of 4Q10 sales trends cannot continue with inflation accelerating and job growth proving to be highly inadequate as an offset. 


Over the next two days we will be getting more inflation readings from the PPI and CPI.  While these two numbers are conflicted calculations, they will both point to accelerating inflation.  For proof of this trend, last night in an interview on Bloomberg, Richmond Fed President Lacker (non-voting FOMC member in 2011) said that US inflation may accelerate in H2 of 2011 as firms seek to recoup higher commodities and health care costs. 


And Joe six pack is going to roll over and say thank you very much!




Function in Disaster; finish in style


Howard Penney


Excessive Storytelling - howard11


Excessive Storytelling - howard22


In preparation for MPEL's Q4 earnings release Tuesday morning, we’ve put together the pertinent forward looking commentary from MPEL’s Q3 earnings call.




  • “As we’ve said in the past, the improvement in our mass market whole percentage is intangible, sustainable, and reflects operational improvements in our business. The improvement indicates that we are providing a better experience for our customers, and they are staying longer at our tables as a result. We believe our mass market hold percentage at City of Dreams will remain between 20% and 22% going forward, with the bulk of our mass market gains coming mainly from increased volumes.”
  • “Looking forward, we expect our growth at City of Dreams to come from a combination of the introduction of new amenities over the next few quarters, and from tactical initiatives designed and implemented by the new management team. These include leveraging The House of Dancing Water in our marketing campaign and broadening our geographic reach into China, as well as into the Asia-Pacific region. We’re also improving our relationships with tour group operators and asking companies in China to help us to drive more traffic through the property at attractive customer acquisition cost.”
  • “Looking forward, we expect to continue to participate in the growth of the growing chip market in Macau, while maintaining our disciplined approach to junket pricing and avoiding unsustainable commissions.”
  • “More specifically, fourth quarter got off to a good start, with the business generating record monthly levels of consolidated rolling chip volume, mass table drop and mass win in the month of October. Standalone, City of Dreams is also hitting new records on each of these operating metrics. From a balance sheet perspective, our first financial covenant test commences with our 4Q results and we remain comfortable with our ability to meet these tests.”
  • [4Q] “Depreciation and amortization cost is expected to be approximately 84 million, which reflects a full quarter of depreciation from The House of Dancing Water. Net interest expense in the fourth quarter is expected to be approximately 29 million. We do not expect any pre-opening expense or capitalized interest for the fourth quarter.”
  • [Singapore impact] “And as we predicted, I think Singapore took some of the Southeast Asian VIP business, because from a geographical and traveling standpoint it’s just a lot easier and a lot closer to go there. But I think with the amount of quality resorts and hotel in Macau right now, Macau has its own appeal. So, I think at 60% year-on-year growth, there’s been very little impact.”
  • “Over the medium to longer term and beyond Macau in some of the major jurisdictions like Japan and Taiwan, we have quietly done some study trips and some lobbying work. So, we will continue to keep an eye on those markets as well.”
  • “And the expansion area will be around 20 tables. Hopefully, we will be bringing two to three junket operators before Chinese New Year, that’s the plan.”
  • [Unused land adjacent to CoD] “I think more likely than not it is probably going to be a hotel tower.”
  • “So, I think when sites five and six and Galaxy opens up, that will certainly appeal to their visitors, and will certainly draw some traffic into our property.”
  • [Junket market] “So, we’ve stuck very firm on our pricing since over a year ago, and also, on credit support as well. So, I think if you look at some of our receivable is actually going down.”
  • “In terms of Altira, the majority of junkets on the turnover basis.”
  • “In COD, the revenue share and turnover basis ratio is 50-50.”

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The Week Ahead

The Economic Data calendar for the week of the 21st of February through the 25th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - jj1

The Week Ahead - jj2

CNBC VIDEO: Cash-Strapped States Could Face Downgrades

Exhausted? SP500 Levels, Refreshed

POSITION: no position in SPY


Exhausted yet? I know the US stock market bears are exhausted with the bulls who sold at the exhausted March 2009 lows. As you can see in the chart below, that was 98% lower. The “flows” argument notwithstanding, US Equity market volume, breadth, and volatility readings finally look exhausted too.


Here’s another way to look at the exhaustion of immediate-term TRADE and intermediate-term TREND price momentum:

  1. Immediate term TRADE’s 3 standard deviation overbought line = 1340
  2. Intermediate term TREND’s 3 standard deviation overbought line = 1346

Interestingly, these lines are converging around the same price level. That multi-duration price momentum factor combined with an immediate-term TRADE breakout this week in volatility (VIX) and continued deterioration in our TREND duration volume studies has me exhausted looking at this.


What could go wrong from here to inspire a garden variety mean reversion correction of -7.7% to 1242 over the intermediate-term? Away from a potential crisis in US bond and currency market prices, probably nothing …


I guess the positive news for the bears who had it in them to short today’s highs in the SP500 (I haven’t yet), is that next week doesn’t have a merger Monday. Feels like a February in 2008.


Enjoy your weekend,



Keith R. McCullough
Chief Executive Officer


Exhausted? SP500 Levels, Refreshed - S P 021810

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