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MPEL beats and provides a positive Q1 outlook.  The reasons they missed our Street high estimate are not exactly negative.



You wouldn’t know it by the stock price but this should’ve been a good day for MPEL’s stock.  They beat the Street for the second straight quarter (a big deal for the gang that couldn’t shoot straight since the IPO).  More importantly, Q1 is trending above Street estimates and direct play appears to be growing as a percent of VIP which should be good for margins.  Numbers look like they are going higher, again.  Unfortunately, the stock market, and particularly gaming stocks, are not cooperating.


MPEL reported net of $774MM and Adjusted EBITDA of $134MM. Net revenues were in-line with our estimate while Adjusted EBITDA was 6% light - but still above consensus.  The $9MM EBITDA underperformance vs. our estimate can be attributed to higher corporate expense and higher direct play (vs. our estimate) at CoD.  Corporate expense was $3MM higher than our estimate due to a higher bonus accrual; the run rate should be lower.  We overestimated the VIP win percentage which appeared higher per our monthly data but in reality wasn’t because direct play was higher.  Going forward, higher direct play should help margins as player rebates are on average 30bps lower than junket commission rates.


City of Dreams


CoD net revenues of $489MM and adjusted EBITDA of $98MM were 3% and 12% below our estimates, respectively.  Net casino revenues were $27MM below our estimate, primarily due to VIP revenues

  • Direct play at CoD was 19% in 4Q210 vs. our estimate of 15% (3Q10 was 13%) resulting in RC volume that was 5% higher than our estimate, or a 66% YoY increase. 
  • VIP net revenues were $447MM, $13MM lower than we estimated
  • The combination of lower reported net revenues and higher RC volumes resulted in us overestimating hold percentage by 20bps, resulted in a net revenue miss of $20MM vs. our original projection and an EBITDA impact of roughly $3.5MM
  • Mass revenue of $126MM was $1MM below our estimate.  Table volume was a bit light of our estimate while hold was better
  • Slot win of $30MM was 6MM below our estimate due to lower slot handle and lower win percentage

Net non-gaming revenues were $12MM above our estimate, driven by House of Dancing Water, better RevPAR and lower promotional expenses.  We believe that fixed expenses increased to $69MM at CoD compared to our estimate of $60MM and $55MM in 3Q2010.

  • The company says this is because of the incremental cost of the HODW show – but you would think this would be accounted for in non-gaming expenses.
  • However, the above statement doesn’t jive with the show being breakeven on its own- in which event you would have margins decrease in net non-gaming revenues, not an increase – so we assume that a lot of the costs did get captured in our fixed expense estimate.  Looks like the show added about $8MM of incremental fixed expenses



Altira net revenues of $245MM and adjusted EBITDA of $46MM were 1% and 17% above our estimates, respectively.

  • Gross VIP revenues were $8MM better than our estimate driven by hold that was 10bps above our estimate.  Direct VIP was negligible.
  • Mass table win was $3MM lower than our estimate due to weaker than estimated hold.  Drop increased 98% YoY.
  • We estimate that fixed costs were $18MM compared to our estimate of $21MM and our prior quarter estimate of $15MM

Other stuff:

  • Mocha slots revenues were $2MM above our estimate while EBITDA was $1MM better

Risk Monitor: European Bank Swaps Mixed

Position: Long Sweden (EWD); Short Euro (FXE)


Below we include a portion of a product offering from our Financials’ team, the Weekly Risk Monitor for Financials that tracks CDS across global banks. The table below covers major banks throughout Europe and the trend week-over-week was mixed, tightening for 23 of the 39 reference entities, widening for 15, and flat for 1.


Risk Monitor: European Bank Swaps Mixed - sw1

Risk Monitor: European Bank Swaps Mixed - sw2


Our attention remains acutely on the health of each of the PIIGS due to their volatility and contagion effect across the continent. We have particular focus on Spanish banks given their recent widening, and high foreign exposures (4x higher than to Greek banks, or $989.8 Billion), according to the latest data from the Bank of International Settlements.


The European credit markets continue to be an important indicator of risk for us. As the chart of 10YR government bond yields below presents (and in sharp contrast to the outperformance of the equity market of the PIIGS year-to-date) yields continue to trend higher, a reflection of the risk premium to own the debt and deficit imbalances of these nations.


Risk Monitor: European Bank Swaps Mixed - sw55


We remain long Sweden (EWD) and short the Euro (FXE) in the Hedgeye Portfolio with the EUR-USD trading in a range of $1.34-$1.37. From a fundamental standpoint, we continue to like countries like Sweden and Germany that demonstrate fiscal discipline, political stability, and a healthy growth profile for this year and next.


Matthew Hedrick




Conclusion: Knapp Track comparable restaurant sales in January indicate that the casual dining recovery has resumed.  Importantly, Knapp underlines value as a factor that will continue to be important.  As commodity pressure flows through to the P&L, concepts that lack pricing power will likely suffer as the 2011 scenario plays out.


Knapp Track preliminary results for January suggest that the casual dining recovery seen in the third quarter has recommenced in January.  January comparable restaurant sales of +0.6% signifies a sequential uptick in two-year average trends of 115 basis points.  Adjusting for bad weather, January’s number would have been +2.3%, which would imply a 150 basis point increase in two-year average trends (also adjusting December per the adjustment provided in last month’s Knapp Track report), excluding weather.  Q410 saw a sequential slowdown in comparable restaurant sales to +0.6% from +0.8% in 3Q10.  On a two-year average basis, however, quarterly comparable restaurant sales trends accelerated by more than 90 basis points sequentially.


Comparable guest counts in the casual dining space saw a sequential gain from a revised -1.8% result in December, according to the most recent Knapp Track report.  January’s preliminary decline of -1.5% shows that the “recovery” is far from secure, especially as companies look to pare back their use of discounting as a driver of traffic as commodity inflation accelerates.  On a two-year basis, January’s result implies a sequential acceleration of 100 basis points.


In this month’s report, Malcolm Knapp highlighted several interesting factors that he believes are critical to consumer behavior.  Firstly, the effects of the financial crisis persist with mortgage defaults and high levels of unemployment burdening attitudes.  Another interesting point he makes is that value (quality of the value proposition and the efficacy of the messaging) remains a key driver of traffic.  Value is relative.  The casual dining brands that can “take the pain” and absorb commodity cost increases, either by further margin gains in other areas of the P&L or by prudent hedging, will likely outperform those that have to implement price gains that make their service less affordable.



Howard Penney

Managing Director

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The Macau Metro Monitor, February 22, 2011



A group of Macau casinos, excluding Sands China, have sent a fax to the Legislative Assembly requesting a meeting with the standing committee discussing the government’s law proposal on a ban on smoking.  The operators are "deeply concerned" with the “contradictory” statements made by the government after the second draft law was released and believe one year is too short to create a non-smoking zone for up to 50% of the total area.


Sands China was left out of the discussion because it was still discussing the issue internally and had not been informed the fax would be sent to the Legislative Assembly.


According to the S'pore Ministry of Manpower (MOM), building firms can expect to pay an average of $320 more a month for every Work Permit holder between now and July 2013.  Companies in service sector will pay an average increase of $260 monthly for each Work Permit holder, while those in manufacturing will fork out $130 more.  However, all employers of S-Pass holders can expect to pay an average of $240 more per month for each of these workers over the same period.


Firms in services and construction where 'the scope for productivity improvements is greatest' will see higher levy rate hikes and tighter levy tiers, Finance Minister Tharman Shanmugaratnam had noted in his Budget speech.



Jan CPI rose by 4.92% YoY and 0.93% MoM.  Among the different sections, notable increase  was observed in the price index of Miscellaneous Goods & Services (+9.21%), Clothing & Footwear (+6.86%), Transport (+6.71%), Food & Non-Alcoholic Beverages (+6.13%) and Health (+5.75%), which was caused by higher charges for meals bought away from home, hairdressing and grooming services, and outbound package tours, dearer prices of clothing and footwear, airfare and general food items near the Lunar New year, as well as rising prices of gasoline and LP-gas.


Total labor force was 331,000 in 4Q, comprising 322,000 employed and 8,900 unemployed. Compared with 3Q, total labor force and number of the employed increased by 1,300 and 1,700 respectively, while number of the unemployed decreased by 500.  The majority of the employed were engaging in Recreational, Cultural, Gaming & Other Services (24.1%)



A real estate company has purchased a 100,000 square meter land parcel in Henguin's new area, the city’s biggest land parcel designated exclusively for a $3 billion yuan, 5‐start hotel apart from Ocean Spring Resort.


Another consensus beating quarter from MPEL and Q1 looks like it is off to a very good start.


"We are pleased to report another solid quarter of operating results, driven by continued improvements in the fundamentals of our business. Our fourth quarter results demonstrate our success in driving operating leverage and in improving the profitability of our portfolio of asset. Our mass market table games business continues to grow and has set a new company record for table drop and gross gaming revenue... Similarly, our rolling chip segment remains strong with gaming volume in the fourth quarter of 2010 setting a new company record. We look forward to the continued success of this ground-breaking show, as well as the opening of additional guest amenities in 2011."

- Mr. Lawrence Ho, Co-Chairman and Chief Executive Officer of Melco Crown Entertainment



  • City of Dreams:
    • Net Revenue of $489MM and Adjusted EBITDA of $98MM (vs. our estimate of $111MM)
  • Altira:
    • Net Revenue of $245MM and Adjusted EBITDA of $46MM (vs. our estimate of $39MM)
  • Mocha Slots:
    • Net Revenue of $31MM and Adjusted EBITDA of $9MM (vs. our estimate of $8MM)


  • Cost control and operating efficiencies are the key focuses for 2011 as they transition from a development to an operating company. They did raise their labor rates though.
  • First quarter results are off to a strong start - with volumes and visitations well ahead of last year. 5 biggest days of the company's history were recorded this year.
  • House of Dancing Water continues to sell out and draw visitation - which had a positive impact on occupancy, play levels, and F&B
  • Grand Hyatt is now reaching higher occupancies - with 85% and December surpassing 93%
  • Continue to have a favorable outlook from additional supply on Cotai. 
  • Consolidated EBITDA would have been $125MM if hold was 2.85%. 
  • They are comfortably in compliance with their 4.5x leverage test
  • Interest coverage: 2.5x
  • Expect to continue to reduce their debt balances from amortization and cash flow
  • 1Q2011 guidance:
    • D&A: $85MM
    • Corporate: $17-18MM
    • Net interest expense: $28-29MM
    • No meaningful capitalized interest or pre-opening expenses


  • Likelihood of a partial smoking ban passing in Macau?
    • It would have an impact on revenues but they believe that the government will be receptive to hear their thoughts on implementation of a smoking ban
  • Have been surprised how strong volumes have held up post CNY.
  • Credit levels are quite healthy at current levels
  • House of Dancing Water has been performing very well on a stand alone basis - breakeven on a stand alone basis but with positive ripple effects on the rest of the business
  • No major developments on Taiwan gaming since the last call
  • Maintenance Capex for 2011? $60MM of total capex - the majority of which is growth rather than maintenance though
  • Ramp of direct play in 4Q vs. 3Q?
    • Direct play grew the business by 50% in the quarter at CoD
      • was between 15-20%
    • We saw 19% direct play in the quarter at CoD compared to 13% in the 3Q2010 and our estimate of 15%, which was part of the reason why EBITDA was lower than our projection. Hold percentage was therefore lower than we thought.
  • VIP/ Mass table splits:
    • Altira: 180 VIP tables, 30 Mass
    • CoD: 170 VIP tables, 240 Mass
  • Continuing to find more operating leverage throughout the organization.  Have ramped up amenities nicely at CoD. Continue to ramp up the Mass and Direct play business.
  • Didn't see any changes in rebate rates over the last few months
  • Haven't seen any need to change their bad debt provisioning policy, feel adequately reserved given their volumes
  • Thinks that the Chinese government measures are meant to cool the economy to prevent overheating.  Government wants to increase tourism. They are not concerned about the tightening measures which they believe will ensure steady growth.
  • Is the $115MM shareholder loan still outstanding? Any plans to repay it this quarter?
    • if they pay back the loan, it will be part of optimizing their capital structure - which they are looking at doing this year
  • Are they capital constrained currently?
    • Depends on new opportunities that present themselves - their current bank facility is more of a heavily amortizing project loan
  • Had about $35MM of scheduled amortization payments in the quarter and another $70MM of prepayments from cash flow generations. 
  • Future prospects in Japan?
    • Japan and Taiwan are two jurisdictions that they have done a lot of work on and have an interest in.  There is more consensus between the two leading parties in Japan than there has been in the past but sees it as more of a 2012 event.
  • Cotai Pact re: commissions with Galaxy. 
    • Started discussions a few months ago which have been positive. Think that the new neighbor will be happy to join the pact.
  • Altira - What is driving the growth in Mass revenues at the property?
    • Increasing membership in their database and visitation.  They did a lot of direct marketing and customer realignment between premium mass and regular mass play.
    • Corporate reorganization last summer also helped results in terms of marketing to their player base
  • Costs at CoD for 2011 - is 4Q a good run rate?
    • Plan is to be as efficient as possible but they will be impacted by labor rate increases and new amenity costs. Net net they think that costs will be controlled
  • Third tower at CoD? Are they gearing towards serviced apartments of more hotel rooms?  Is there future growth beyond CoD and Altira?
    • With hotel occupancy hitting north of 80% levels, they are in preliminary stages of dusting off those plans. That additional tower is a 1.5MM sq ft development  - which would  be a large addition to the property.  It would also likely involve additional gaming and retail capacity.
    • More likely than not it would be a hotel, not that enthusiastic about apartment hotels at the moment but will monitor the situation
    • As far as new properties - they still have a management contract on Macau Studio City and hope to eventually start that project
  • Cubic opening? They are in the final stages of government approval. Still looking at an end of 1Q early 2Q opening. Should be the best nightclub in Macau.
  • Opened 2 new junket rooms at CoD 
  • Hard Rock Cafe should open in Sept or 4Q2011


Notable news items from the past few days and price action from Friday’s session.

  • Malcolm Knapp reported casual dining comparable restaurant sales of +0.6%, which implies a gain of 115 bps in two-year average trends.  Comparable guest counts declined -1.5%, which signifies a two-year average gain of 100 bps.
  • GMCR and Dunkin Donuts announced a promotion, manufacturing, and distribution agreement that will make Dunkin’ Donuts coffee available in single-serve K-Cup portion packs for use with the Single-Cup Brewers.  This is yet another data point that affirms my conviction that a GMCR/SBUX deal is not likely.  Starbucks is looking for more control and more distinction, not less.
  • CBRL reported 2Q EPS of $1.20 versus consensus $1.21.  Management reaffirmed guidance for the year of $3.95-$4.10 versus consensus of $4.12.
  • DPZ, PZZA EPS estimates cut at Janney, citing price of cheese
  • RRGB gained 12.5% on Friday following strong earnings on Thursday.  RRGB reported $0.14 ($0.12 excluding tax and one-time items) versus expectations of $0.05.  Management indicated that the company will take a 1.5% price increase in April.
  • The coffee stocks outperformed QSR on Friday. 
  • CMG declined on solid volume; I see inflation as a significant headwind for CMG and see copious downside in the stock price.
  • RUTH declined on earnings that were in line with expectations.  Management cited price gains as a remedy to beef inflation.



Howard Penney

Managing Director

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