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More records broken



"StarWorld has consistently outperformed the market during this and previous years, and today we report its tenth straight quarter of EBITDA growth. The property is fully capitalizing on the surging demand in Macau and delivering one of the strongest returns of any major casino in the world.  We believe that Galaxy Macau will be the only major new property to open in Macau in 2011, in what continues to be surging market conditions.  This game-changing property officially opens on Sunday May 15th, and we are now preparing for an extraordinary grand opening ceremony.”


-Dr. Che-woo Lui, Chairman of Galaxy Entertainment Group




  • GEG 2010 record EBITDA HK$2.23BN (+92% YoY) and HK$625MM in Q4 (+76% YoY)
  • Starworld
    • Record EBITDA of HK$585MM in Q4
    • Q4 EBITDA margin: 23% (US GAAP)
    • Record VIP RC of HK$147BN in Q4
      • Q4 Hold: 2.8%
      • Net win: HK$4.1BN
    • Q4 Mass drop: HK$1.8BN
      • Q4 Hold: 17%
      • Net win: HK$320MM
    • Electronic Gaming: Q4 slot handle HK$ 869MM; Q4 Hold: 7.6% & win of HK$66MM
    • ROI of 61%
    • 2010 Occupancy: 97%; Q4 Occupancy: 99%
  • City Clubs: HK$158MM in EBITDA for 2010
    • 4Q EBITDA of HK$44MM
  • Construction Materials reported HK$348MM of EBITDA in 2010, a 38% YoY increase
    • 4Q EBITDA of HK$116MM
  • Galaxy Macau - Day one and eventual offereing
    • 450 tables and 1,100 slot machines (can expand to over 600 tables and 1,500 slot
      machines if needed)
    • 1,400 rooms and suites (of total 2,200 rooms and suites)
    • 50 F&B outlets
    • Grand Resort Deck with the world's largest skytop wave pool
    • As at 31 December 2010, the Group invested HK$9.0 BN (HK$14.9BN total investment estimates)
  • Galaxy Macau HK$600MM entertainment offering
    • Under construction; open by September 2011
    • 15k sqm
    • Macau's only modern Cineplex, a 9-screen, 3D-compatible, multifunction cinema theatre with a total
      capacity of 1,000 seats, as well as a 1,000 square metre multipurpose event plaza.
  • Cash: HK$ 4.4BN
  • Debt: HK$9.426BN
  • Closed 13x oversubscribed and upsized RMB1.38BN bond offering
    • 3-yr fixed unsecured notes at 4.625%
    • Cost of debt currently below 5% from 8%.
  • "Subsequent to year end 2010, all of the HK$1.3 billion/US$165 million convertible notes were converted into 173 million common shares, further strengthening the balance sheet and increasing the free-float of shares"



  • Starworld - what is the reason for the margin expansion?
    • Even though they held lower, the mix of RevShare and R/C VIP business helped them
  • Is the Q4 margin for construction materials sustainable?
    • They are shifting towards higher margin products for this business.  Also given the change in the way that they are reporting their results, you can't just look at topline and margins.  More business is in JVs.
  • HK$80-100MM/Q is a good run rate for corporate expense
  • Expect pre-opening expenses to increase significantly in 1H2011
  • Anticipate that they will be just about fully occupied in the hotel from the day that they open
  • Believe that the entertainment offering will be successful because it will be Macau's only cineplex. Adds value to being a fully integrating resort and also has a event plaza.
  • As the share price appreciates, there is a non-cash charge as a result of the convert
  • They have HK$5.5BN to spend plus the HK$600MM to spend on the entertainment offering - majority of which would be spent in 2011
  • Total staff they need to hire for Galaxy Macau?
    • 7600 upon opening
  • Starworld: Mix is 50.50 between Mass and VIP
  • Galaxy Macau table mix: 2/3 Mass 1/3 VIP

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Obama’s Foreign Policy . . . Bush Doctrine Take Two?

Conclusion:  Last night President Obama began to define his foreign policy in more detail following the U.S. military’s involvement in the Libyan no-fly zone.   Ironically, the Obama doctrine sounds a bit like the Bush doctrine, albeit a little less granular.  The fiscal risk is that we could be entering a phase whereby military spending ramps up with ambiguous goals, which is negative for the deficit and U.S. dollar.


“Well, this is a new Obama doctrine that you act on threats, remember that’s what George Bush did.”

- Dennis Kucinich (D-Ohio)


President Bush’s foreign policy wasn’t fully defined until certain events helped him define it.  Specifically, the events were the terrorist attacks on U.S. soil on September 11th, 2001.  Shortly thereafter, President Bush began to outline the Bush doctrine in a speech to a joint session of Congress on September 20th, 2001 with this statement:


“We will pursue nations that provide aid or safe haven to terrorism. Every nation, in every region, now has a decision to make. Either you are with us, or you are with the terrorists. From this day forward, any nation that continues to harbor or support terrorism will be regarded by the United States as a hostile regime.”


The Bush Doctrine was eventually codified in a document, the National Security Strategy of the United States, which was published on September 17, 2002 and stated:


“To forestall or prevent such hostile acts by our adversaries, the United States will, if necessary, act preemptively in exercising our inherent right of self-defense. The United States will not resort to force in all cases to preempt emerging threats. Our preference is that nonmilitary actions succeed. And no country should ever use preemption as a pretext for aggression.”


While Bush’s speech to the joint session more broadly defined enemies and threats to the United States, the National Security Strategy of the United States took the Bush Doctrine to the next level and emphasized the concept of preemptive action against threats.


Based on his speech yesterday, President Obama appears to be maintaining the concept of preemptive activity, though he frames the preemptive actions in Libya with a humanitarian justification, rather than a specific threat to the United States. Specifically, the “refusing to wait” language in his speech from last night, which is quoted below, is a preemptive doctrine by another name.  As President Obama said last night:


"To brush aside America's responsibility as a leader and — more profoundly — our responsibilities to our fellow human beings under such circumstances would have been a betrayal of who we are.  Some nations may be able to turn a blind eye to atrocities in other countries. The United States of America is different. And as President, I refused to wait for the images of slaughter and mass graves before taking action."


This is an about-face from the views of Senator Obama, while a candidate for the Presidency, when he stated on the campaign trail in 2007:


“The President does not have power under the Constitution to unilaterally authorize a military attack in a situation that does not involve stopping an actual or imminent threat to the nation.”


Of course it is somewhat trite to “YouTube” candidate Obama.  Obviously, being President has different rules and responsibilities versus being a candidate.  In a campaign, the objective is to get elected, while as a President, in theory, the objective is to make the best decision for your nation.


While no doubt President Obama and his cabinet will further clarify the Obama Doctrine and their collective foreign policy actions in the coming weeks and months, a key risk, both with our allies and for that matter with our enemies, is that the Obama Doctrine remains ambiguous.  In aggregate, the key questions of:  when, where, and why the United States will intervene in foreign conflicts still need to be clarified.


(In fact, the name of the operation in Libya is itself ambiguous:  Operation Odyssey Dawn.  Whether you disagreed or agreed with President Bush’s foreign policy, the objectives of Operation Iraqi Freedom were, at least, obvious.)


While the speech last night was certainly a step towards clarity on the Obama administration’s foreign policy objectives, Romesh Ratnesar probably summed up the last couple of months of Obama’s foreign policy best when he wrote on March 21st in Time Magazine:


“He supported pro-democracy forces in Egypt and nudged out a regime the U.S. had backed for decades, but has been unwilling to do the same in Bahrain or Yemen. In Libya, his Administration was against armed intervention to stop Muammar Gaddafi before Obama was for it. American warplanes carried out the initial wave of strikes on Tripoli, but Obama's aides insist that Washington is merely following the Europeans' lead. U.S. officials were reticent for days as the nuclear crisis in Japan worsened, then declared the situation to be even direr than the Japanese government had let on.”


To be fair to President Obama, the popular unrest and regime change in the Middle East, as we’ve written, has accelerated at a pace no one could have anticipated.  Over the coming weeks and months, President Obama and his cabinet will have the opportunity to refine and clarify their foreign policies, but if the Obama administration is indeed adopting the preemptive philosophy of the Bush doctrine, it will come at a cost.


In the chart below, we’ve outlined defense spending as percentage of GDP and as a percentage of the federal budget going back to the early 1970s.  The Clinton presidency was relatively peaceful with limited overseas conflict and therefore defense spending dropped dramatically during that era.  Coincident with this drop in spending, although obviously not the only factor, the federal deficit dropped from -$290BN in 1992 to a surplus of +$125BN in 1999.  In that same period, defense spending dropped in real dollars from $319BN to $276BN.


With the advent of the wars in Iraq and Afghanistan, defense spending accelerated dramatically under President Bush and by his last year in office was $612BN.  In Obama’s first year in office, 2009, defense spending accelerated again to $655BN.


The risk of an ambiguous and increasingly proactive foreign policy, as evidenced by adding troops to Afghanistan, leading the no-fly zone in Libya, and announcing a foreign policy that is predicated on “refusing to wait”, is that President Obama will continue to grow defense spending during his Presidency.  Increasing defense spending, will only lead to an accelerating deficit and with a growing deficit come associated implications.


Daryl G. Jones

Managing Director


Obama’s Foreign Policy . . . Bush Doctrine Take Two? - 1


Some consternation surrounding relatively weak visitation rates but GDP has mattered most.



Macau visitation grew 5.2% in February and only 1.4% in January.  Yet, Mass revenue increased 19% and 36%, respectively.  Should we even care about visitation?  Probably, but not necessarily over the near term.


We’ve run the regressions and at first blush, it appears that visitation is highly correlated with Mass gaming revenues.  Makes sense.  However, when China GDP is thrown into the equation, visitation loses its significance.  GDP and visitation are auto-correlated but GDP is by far the dominant variable.  The R Square with just GDP is 0.71 versus only 0.50 with just visitation.  With a multi-variable regression including both variables, the R Square rises to 0.77.  Moreover, the visitation coefficient is only 0.29 so a 1% increase in visitation drives only a 0.29% increase in Mass revenues – barely worth mentioning.




We do question if this relationship will hold over the long term.  It’s hard to imagine that spend per visitor can continue to grow at the current pace.  We believe long-term Mass growth will be sizable but not at current levels.  The long term pace we see is China GDP plus visitation:  7-10% GDP plus 5-10% visitation.  That would alter the current equation considerably but seems reasonable since Macau has barely tapped the provinces outside of Guangdong.  At some point, the fine people of Guangdong won’t be able to increase their gaming spend at a multiple of their wealth growth as they appear to be doing currently.


For now, however, Mass looks like it is on track for another 20% plus growth month in March, despite a 32% comparison last March.  The GDP multiplier should hold over the near term.



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