Unfortunately, we are coming down for Q1. Low VIP hold will drag down margins disproportionately despite strong top line.



Our issue with MPEL’s Q1 can be considered cosmetic.  Not that we are suggesting a miss, but we are no longer predicting a big beat.  The ongoing takeaway is actually quite positive.  Volumes were strong in Q1 as were revenues and if sustainable, MPEL should blow away estimates going forward, assuming normal hold.  However, because VIP hold percentage was very low, it affects EBITDA disproportionately.  Essentially, MPEL primarily maintains rolling junket commission structures which are based on volumes not revenue share.  Hold risk stays with MPEL.  Of course, with strong hold, MPEL captures the upside.


Despite having better than expected volumes on the VIP side, luck was not on MPEL’s side this quarter.  While we knew that the hold percentage wasn’t great for the first two months of the quarter, March’s luck was simply terrible.  Therefore, what we believed would be a blow away quarter now just looks like consensus.  That said, luck comes and goes, but volumes are a much better predictor of a companies’ health and on that front, MPEL continues to exceed our expectations.  Unfortunately, given the recent run up in the stock and investor concerns about the impact of Galaxy Macau, a meet may not be good enough this quarter. 


We estimate that MPEL will report $788MM of net revenue and $125MM of EBITDA in 1Q2011.




We are projecting net revenue of $487MM and EBITDA of $89MM.  Our revenue estimate is 2% ahead of consensus, but our EBITDA estimate is 6% lower than the Street’s.

  • Net casino win of $466MM (gross win of $644MM)
  • Net VIP table win of $284MM
    • We assume 18.5% direct play, $19.9BN of RC volume (a massive 102% YoY increase), 2.33% hold and a 90bps rebate rate
    • We estimate that in March, CoD’s VIP hold plunged to just 1.9%.  Given that most of the CoD’s junkets get compensated based on RC volume vs. RevShare, flow through and EBITDA margins are very sensitive to win rates.
    • We estimate that low hold impacted CoD net revenues by $100MM and EBITDA by $40-50MM
  • Mass table win of $143MM
    • Mass drop of $680MM (up 42% YoY) and hold of 21%
  • Slot win of $38MM
    • $653MM handle and slot win of 5.85%
  • $21MM of net non-gaming revenue
  • Variable costs of $321MM ($251MM of gaming taxes and $60MM of incremental junket commissions)
  • $17MM of non-gaming expenses
  • $60MM of fixed expenses


We estimate that Altira will report net revenue of $268MM and EBITDA of $45MM, 3% and 2% ahead of Street estimates, respectively.

  • Net casino win of $268MM (gross win of $382.5MM)
  • Net VIP table win of $248MM
    • $12.7BN of RC volume (28% YoY increase), 2.85% hold and a 90bps rebate rate
  • We estimate that in March, Altira’s VIP hold dropped to 2.7%
  • Mass table win of $20.5MM
    • Mass drop of $117MM (up 65% YoY) and hold of 17.5%
  • Variable costs of $198MM ($149MM of gaming taxes and $45MM of incremental junket commissions)
  • $22MM of fixed expenses


Mocha slot revenue of $33MM and EBITDA of $9MM

Look Out To May


We have two months of sales noise until we see the extent to which the masters of our economy have pulled the goalie. Calendar shift provides some ground cover (i.e. excuse). Then the choice between growth, gross margin sustenance, both, or none of the above will become apparent for each retailer.


Not too many people will dispute that sales will take a hit when the 16 companies left that actually report same store sales print their numbers. The biggest factor is the Easter shift, which was very meaningful this year versus last (it was April 4 last year, and is April 24th this year).


By our math, last years’ spike accounted for roughly +11% growth in comps.  If we get aggregate numbers in the (-1%) range for March 2011, we’d be looking at a steady rate of about +5% in the 2-year trend, and +1% in the 3-year (which we find most relevant). Anything below that, we’re going to be looking at a deceleration a month or two before we’d otherwise expect to see it.


Look Out To May - PCE SSS GvtR 3 11


Putting on our Historical Macro Hat


Let’s put our Macro hats on for a minute and not worry about a couple months worth of timing, or whether jeggings are still ok to wear this Spring. Take a longer look at two key components of consumption: 1) Taxes, and 2) the Personal Savings Rate.


Let’s go back a few decades to 1947. As you see, for the better part of 40 years, they moved in tandem – for the most part.  Consumers felt good, they got a good return on their cash  (even if sitting idle in a bank account), so not only did they save a greater proportion of income, but did so while taxes went higher.   Then that relationship started to break down in 1985, and was completely polar by the 1990s.


We’re not trying to give a history lesson. Everyone knows these numbers, as well as the political and economic forces that drove them.  But today, we’re looking at the personal savings rate of 5.6%. There has been only three times since 1991 where it was higher – and those were all over the past six months). 


As it relates to the Personal Tax Rate, it stands at 9.5%. There has been only five periods since 1949 where it’s been this low.


So from a Consumer analysts’ perspective, we’re stuck with a near 20-year (close to a generation) high savings rate even though Bernanke and Geithner give virtually zero percent interest on our cash. Other countries are unceremoniously unloading US Dollars. And our collective tax rate is sitting near all time low. The government probably can’t cut taxes any further, and mathematically they can’t take interest rates down enough to matter. What’s going to stimulate the Consumer???  


Look Out To May - PCE SS 3 11 2


Employment and wage growth is one of the answers, no doubt.   The chart below is particularly noteworthy, which shows the year/year change in real average weekly earnings.  At risk of stating the obvious, come May/June we’ll really geta  solid glimpse into the Consumers’ earnings power, and whether that is translating itself into enough Gross Margin dollars to offset cost inflation (keeping in mind that it is about the April/May timeframe that the higher costs begin to flow through financial statements).


Look Out To May - PCE SS 3 11 3



Aussie Dollar Getting Long In The Tooth?

Conclusion: We remain bearish on the Aussie dollar for the intermediate-term TREND and forsee a correction from its near all-time high (AUDUSD), primarily due to slowing economic growth down under in part aided by slowing growth in key export markets, which may lead to lower interest rates and more accommodative monetary policy.


Position: Bearish on the Australian Dollar over the intermediate-term TREND; Bullish over the long-term TAIL.


In screening for and analyzing foreign exchange opportunities, we focus primarily on a three-factor model, which incorporates real GDP growth, inflation, and the a combination of monetary and fiscal policy.  Using this framework, our objective is to absorb any/all relevant data points that could help point us to the correct slopes of these factors, especially versus the perceived slopes embedded in consensus expectations.


On the margin, the factors supporting the Aussie dollar’s +28% rise since when we first turned bullish on it in June of 2009 are deteriorating and look to worsen over the intermediate term. While we remain bullish on the AUD over the long term (especially against the USD and JPY), we do think we’re setup to see some near-term weakness in the currency and are inclined to short what we feel is the start of what may be a meaningful correction, a position we introduced in mid-March (email us if you need a copy of the report).


Below we analyze all three of the driving factors individually in support of our recent call for the AUD to correct over the immediate-to-intermediate term.



We think the near-term growth data points in Australia are setup to rollover in advance of what should be a sequential deceleration when 1Q11 Real GDP is reported. This may seem contrary to our current positioning, as we are currently long Chinese equities in the Hedgeye Virtual Portfolio, but we are keen to point out the duration mismatch between the Chinese equity market(s) signaling a bottoming in China’s growth rate and Australian economic data slowing as China bottoms.


Comparing 4Q10 vs. 1Q11 on various metrics of economic data do indeed support our view that 1Q11 GDP growth will slow sequentially from 4Q10 with upside/downside risk in 2Q11 is skewed to the downside (Japan is Australia’s second largest export market at 19.2%; China is first at 21.8%). Of course, Australia’s economic growth will eventually rebound alongside China and Japan’s but near term, growth looks to poised to slow.


With the notable exception of Retail Sales , Private Sector Credit growth, and Business Confidence, Australia’s economic data has largely being trending in the wrong direction, particularly when analyzed on a quarter vs. quarter basis:


Aussie Dollar Getting Long In The Tooth? - 1


Aussie Dollar Getting Long In The Tooth? - 2


Aussie Dollar Getting Long In The Tooth? - 3


Aussie Dollar Getting Long In The Tooth? - 4


Aussie Dollar Getting Long In The Tooth? - 5



Our forecast for the slope of inflation in Australia is largely a wash. Yesterday we saw the TD Securities Inflation Index accelerate to +3.8% YoY in March, driven in part by higher crude oil prices. Still, on a quarterly basis, official reported inflation looks to continue its deceleration in 1Q11 based on the trajectory of this unofficial gauge. The current strength of the currency is also a supporting factor for a deceleration in Australian CPI and as RBA Governor Glenn Stevens recently said, “The central bank’s goal is being assisted by the high level of the exchange rate.”


Aussie Dollar Getting Long In The Tooth? - 6


Aussie Dollar Getting Long In The Tooth? - 7


Where Australian inflation data heads in 2Q11 will be largely based on crude oil prices and the resiliency of the Australian consumer, which is currently growing less resilient on the margin, based on consumer confidence readings, and that trend looks to continue over the intermediate term as lagging 1Q growth data weighs on hiring. On the flip side, we maintain our bullish intermediate-term position on crude oil prices, so Australian inflation looks like a wash at this point/we need more data to confirm a view in either direction.


Given this mixed outlook for inflation, we can be reasonably assured that the RBA will continue their hold on interest rates over the intermediate term, as the proactive Glenn Stevens has a history of being data dependent. And with growth data expected to look sour in the near-to-intermediate term, we wouldn’t be surprised if Stevens elects to cut rates. Australia is one of the few developed economies in the world that has headroom in this direction, so Australia remains home to one of our favorite equity markets, particularly in a softer policy setting. The current quantitative setup in the All Ordinaries Index supports this view.


Aussie Dollar Getting Long In The Tooth? - 8


Monetary & Fiscal Policy

As mentioned before, Glenn Stevens and the RBA have been incredibly proactive in addressing the current global surge in inflation – perhaps more so than any other central bank in recent years. As a result of their prudence, they’ve been able to wait and watch economic trends develop since their last hike in early November, rather than playing a dangerous game of “policy catch-up” like we’ve seen in India, for example.


As it relates to the slope of future monetary policy, we continue to believe that the RBA will minimally remain on pause over the intermediate-term and could potentially cut rates if 1H11 Real GDP growth comes in where we expected it to back in early December (email us for a copy of the report). In fact, Stevens called the 4.75% target cash rate “mildly restrictive” and “appropriate given the economy’s outlook”; we contend “mildly restrictive” could turn into “very restrictive” in a heartbeat – particularly if you use Hedgeye estimates for the slope of Australian growth.


While both the buy-side and sell-side are starting to sniff this out, the major risk to the Aussie dollar is that, potentially, neither side is bearish enough on Australian interest rates.


Aussie Dollar Getting Long In The Tooth? - 9


The Australian bond market, however, does appear to be bearish enough on Australian interest rates. Since rallying from putting on an impressive rally from the August 2010 lows, Australian 2Y and 10Y sovereign yields appear to have hit an invisible ceiling, falling (-27bps) and (-4bps) YTD, respectively. For normalization purposes, that equates to declines of (-5.3%) and (-0.8%), respectively.


Aussie Dollar Getting Long In The Tooth? - 10


This bullish bid for Aussie bonds is weighing on Australian swap rates – particularly at the short end of the curve. As such, the compressing interest rate differentials relative to the USD, JPY, and EUR are setup to weigh on the currency going forward.


Aussie Dollar Getting Long In The Tooth? - 11


Aussie Dollar Getting Long In The Tooth? - 12


Aussie Dollar Getting Long In The Tooth? - 13


Shifting gears to fiscal policy, we continue to favor the hawkish direction of Australian fiscal policy (a key reason we are bullish on the AUD for the long term), as it continues to distance itself from the egregious laxity showcased here in America.


Rather than use the recent flooding and cyclone as an excuse to allow government finances to deteriorate, Prime Minister Julia Gillard maintained her pledge to return the government budget to a surplus by 2013. To fund the rebuilding, her government announced spending cuts and a one-time levy designed to collect at least A$5.6B, though that tax may have to be revised upward in the coming weeks as official estimates for the damage have been revised up recently to A$9.4B.


All told, we remain bearish on the Aussie dollar for the intermediate-term TREND and expect a correction from its near all-time high (AUDUSD), primarily due to slowing domestic growth in part aided by slowing growth in key export markets, which is likely to continue to weigh on Aussie interest rates.


Longer term, however, we remain bullish on the currency due to its sober and proactive monetary and fiscal policy, in addition to its positive exposure to China and commodity prices – which are likely to remain elevated much longer than consensus thinks, based on the findings of empirical studies which suggest commodity inflation is a leading indicator for the sovereign debt default cycle.


Darius Dale


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.


Corn is the big standout week over week, trading at $7.66 per bushel yesterday.


Corn has been trading softly over the past few weeks but moved up 14.1% in the last week to bring the item to +122% YoY.  Regarding proteins, this is certainly a meaningful move that will likely support meat prices going forward.  For a number of weeks now the commodities we monitor have been mixed in terms of the direction of the weekly price action.  While corn and wheat have gained strongly (14% and 7%) on the last week, dairy costs have decreased by similar respective magnitudes. 


In this note, I'm raising the red flag on the chicken producers, SAFM, TSN and PPC due to the surge in corn prices.  As you can see from the table below the surge in corn is happening at the same time chicken prices are getting weaker.  




As the chart below shows, corn prices have bounced sharply following a brief decline in the second half of March.  An increase in global demand is expected to provide sustained support for corn prices.  For restaurant companies with a high level of exposure to protein costs, increasing corn prices are a concern.  Below is some commentary from management teams on corn prices.


CMG, 4Q10 Earnings Transcript, 2/10/11:

“Though we have contracted for most of our corn for our salsa for the year, reports of continuing or even worsening supply shortages of corn will only add to inflationary pressure on the meats that we serve.”


JACK, 1Q11 Earnings Transcript, 2/24/11:

“There are some Act of God provisions that will get us north of our contract bands, but at a reduced rate from what the current market pricing is ... And then also grain, corn, wheat and soybean impact, and there are input costs for a number of the proteins. And that's really what's driving up beef at this point.”


SAFM, J.P. Morgan Insurance Conference, 3/30/11:

“Corn and soybean mill prices remain significantly higher than historical average and we think there are going to be instances and times up from now through the growing season that they could spike higher.”


“The year 2006 was the year of avian influenza and 2008 was $8 corn and the collapse of our export market in the fall. That – 2010 – 2011 will be another year like 2008 right now.”




Wheat prices are also rising with corn and this is, as with corn, largely attributable to global demand.  Corn and wheat prices in Asia are likely to continue to rise for the next number of weeks due to tight supplies in exporting countries.  Wheat crop conditions in the U.S. are also a concern.  Interestingly, the surge in corn prices is also pushing wheat higher as the corn surge spurs a livestock-feed swap.




Chicken wing prices continue to decline.  While this is helpful for BWLD margins, the NFL lockout hearing today is even more important.  Today, NFL players are asking a federal judge to grant an injunction preventing the NFL lockout and forcing the league to resume operations.  It seems more likely that the injunction will be granted with a stay than without but a denial of the injunction would put the NFL in the driver’s seat and the prospect of a NFL-less fall could become more real.  We know which side BWLD is cheering for!




Dairy costs have declined significantly over the past week and this is providing some relief for CAKE (which is not hedged on their dairy costs), DPZ and PZZA.  On a year-over-year basis, dairy prices are up but the step down over the past few weeks has been meaningful.






Howard Penney

Managing Director


The Macau Metro Monitor, April 6, 2011



 Taiwan's Ministry of Transportation and Communcations (MTC) unveiled its gaming bill recently.  Here are some details:

  • 2 gaming licenses with concession period of 30 yrs
  • Gaming tax: 12-15%
  • Residents subject to NT$2,000 entrance fee.
  • Additional NT$8 BN tax revenue / year

The bill will be discussed in many public hearings in Kinmen, Matsu, and Penghu during April and May.  It will undergo revisions before being submitted to Congress.  The media believes legislative review may happen by year-end.



MGM Hospitality, a subsidiary of MGM Resorts International, and Asian Coast Development (Canada) Limited, have named John Shigley as MGM Grand Ho Tram's President and COO.  Shigley has recently been supporting MGM Resorts International’s Asian gaming interests, primarily in Macau, while also serving as executive vice president of operations for MGM Grand Las Vegas.


According to a poll taken by the Association of Singapore Attractions (ASA), 45% of Singapore's attractions had seen a decline in visitation in 2010, despite a 20% rise in visitors to Singapore.  “Our inaugural survey revealed that while national tourist arrivals grew by one-fifth in 2010, its influence wasn’t evenly felt across Singapore attractions. We’ve also discovered that the IRs tend to benefit the attractions on Sentosa Island more so than any other location," said Kevin Cheong, Chairman of ASA.


Notable news items and price action from the last twenty-four hours.

  • YUM down 1.8% on accelerating volume; China raising rates and rumors today that KFC in Japan to reduce outlet opening hours in response to shortages in chicken supplies.
  • RT to report AMC current guidance for fiscal 2011 (May) guidance is EPS $0.76-0.86 and company-owned same-restaurant flat to +2%.
  • LNY CEO and MSSR suitor Tilman Fertitta said in an interview with CNBC that McCormick & Schmick’s “is not a good public company” and Landry’s will make its official tender offer on April 7.  On the broader restaurant space, Mr. Fertitta discussed inflation as being a present factor for operators.
  • MSSR gained 4.8% on accelerating volume yesterday.  Tilman will end up paying $10.50-$11.00 for MSSR.
  • CMG CEO Steve Ells received $14.1M in compensation for fiscal 2010 versus $6.41M the year prior.
  • COSI gained 3.2% on accelerating volume during yesterday’s trading.
  • MCD may be facing another Happy Meal ban, this time in New York as politicians move to ban toy giveaways from fast-food restaurants.  City Council Deputy Majority Leader Leroy Comrie, who plans to introduce the bill on Wednesday, said banning toy giveaways would reduce the allure of fast-food restaurants for children and encourage the industry to provide healthier options.
  • Volume in restaurant stocks broadly fell yesterday, versus the thirty-day average.




Howard Penney

Managing Director

get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.