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MPEL 1Q2011 CONF CALL NOTES

We expected a miss but hold had a much bigger impact than we thought.

 

 

“With the growth in our mass market operations, as well as our ability to capture the ongoing strong growth in the rolling chip segment, our outlook remains positive, particularly as we focus on various cost control initiatives, improving margins and bottom line results.”

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

 

HIGHLIGHTS FROM THE RELEASE

  • MPEL reported net revenues of $806.6MM and Adjusted EBITDA of $121.3MM, missing consensus estimates
  • “Our non-gaming entertainment amenities, including The House of Dancing Water and Cubic Nightclub, which opened on April 1, 2011, continue to generate incremental visitation, consistent with our objective of developing the highly profitable premium mass market operations at City of Dreams. We also continue to make headway in the development of our customer database, allowing us to strategically target profitable customers now and in the future."
  • CoD:
    • Net revenue of $500MM and Adj EBITDA $86MM
    • RC volume of $18.8BN and hold of 2.5%
    • We estimate that direct play as a % of RC volume fell to 13.7% from 18.9% in 4Q10 and 16.4% in 2010
  • Altira:
    • Net revenue of $265.5MM and Adj. EBITDA $22MM
    • RC volume of $12.7MM and hold of 2.8%


CONF CALL NOTES

  • Believe that the opening of Galaxy Macau will have a beneficial impact on the market and will continue to shift growth from the penninsula to Cotai
  • Assuming they held at 2.85% their EBITDA would have been $174MM this quarter
    • They also held well in revenue share agreements and poorly in their RC programs which exaggerated their hold impact
  • Their refinancing and RMB note issuiance
  • 2Q11 guidance:
    • D&A: $85MM
    • Corporate: $20-22MM
    • Interest expense: $30MM
    • No meaningful pre-opening or capitalized interest expense

Q&A

  • They are interested in expanding to other Asian markets
  • Their traffic has held up fine so far in the face of the Galaxy opening
  • Commission split between Revenue Share and RC: 50/50 at CoD.  At Altira is now 1/3 RevShare and 2/3 RC
  • They are still in discussions with the two shareholders at Macau Studio City... there is nothing to report yet
  • Have dusted off the plans on their excess land at CoD - ie the hotel tower.  Thinks its unlikely that the government will approve apartment hotel. They have looked at added more hotels.  They may also also add more gaming space subject to government approval
  • May is off to a good start, April was back end heavy. May is in line with the growth rate for the rest of the year so far
  • The bulk of the cost increase is around the show.
  • The 3 Cotai properties are sharing shuttles that go between the properties
  • Think that marketing expenses will remain rational
  • Why did Altira EBITDA decline QoQ despite topline growth?
    • Mix issues between hold at RC and RevShare segments. Normalized hold would have been about 9MM higher
  • CoD fixed cost ramp QoQ?
    • They were largely stable and other than a small increase from Cubic they are stable going into the 2nd quarter
  • Had high hold in the RevShare and low hold in the RC segments
    • $40MM of the EBITDA impact was from the just hold and then $12-13MM was a mix issue
  • CoD is much more contemporary and sophisticated than Galaxy - thinks that they will get a more high end customer than Galaxy Macau will attract. Thinks that Galaxy will compete more with Grand Lisboa
  • VIP vs. Mass market tables
    • 167 VIP 40 Mass at Altira
    • 227Mass at CoD. They will be hardpressed to move any more Mass tables to VIP at this point
  • Are they adding more junkets? Yes - they are planning on adding one more junket
  • Focus a lot more on the premium Mass segment. They comp about 400 rooms/day for the premium mass customers.  Almost all the VIP rooms are comped
  • Cotai now has the majority of the quality hotel rooms
  • Slot parlors rules in Macau have been in discussion for 2 years. They believe that if those rules go into effect than only one of their parlors with only 150 slots would have to close and they are exploring 2 additional sites.

THE M3: SITES 5 &6 TIMELINE; NON-RESIDENT WORKERS; S'PORE GDP/INFLATION

The Macau Metro Monitor, May 19, 2011


 

SANDS MAY PUSH BACK COTAI SITE 5 TO 2012 Macau Daily Times

LVS COO Michael Leven said Sands China is considering opening the entire site 5 all at once, which would be in the middle of 1Q 2012.  “There are 300 workers coming out of Galaxy. They are going to the Labour Affairs Bureau and we hope to pick them up and get closer to our goal,” said Leven.  Sands China has 5,500 workers on site but will need 1,600 more.  Leven acknowledged that opening the new resort later would be “an advantage”. “It’s better to have graduated growth and at the same time it allows for the market to grow....When we finish site 6, some time in late 2012 or early 2013, there will be a two-year respite before any other resort is ready to open," Leven stressed.  “I think in the next few weeks we will be able to determine exactly when and what will open," Leven said. “By the middle of June we will make that decision.”

 

Sands China also decided to manage the hotel tower on site 5 that was supposed to be operated by Shangri-La. “We will be licensing names from two major international brands but we will manage those facilities ourselves,” he said.  “We’re in final negotiations now and we hope to announce those brands, hopefully in two weeks,” Leven disclosed.

 

Sands China is still awaiting a decision from the Court of Second Instance over an appeal of the government’s decision to reject its application for Sites 7 & 8.  Leven commented, “We are now beginning to work seriously on site 3 and our plan is to continue that work and then we will see what happens with sites 7 & 8.”


NON-RESIDENT WORKERS SOAR BY 5,600 IN 2011 Macau Daily Times

The number of non-resident workers with a work permit (blue card) has increased by 5,603 in 1Q 2011.  In March, Sands China was the biggest employer of non-resident staff with 3,075 workers at its hotel management subsidiary Venetian Cotai and 2,395 at Venetian Macau.  Galaxy came in second with 2,739 imported labour in March.  In March, the GRH received 2,688 requests for the issuance of 9,572 blue cards. Only a little over half, 5,019, were authorized.


SINGAPORE'S ECONOMY EXPECTED TO GROW BY 5-7% FOR 2011 Channel News Asia

Ministry of Trade and Industry (MTI) has revised upward the growth of the  Singapore economy from 4-6% to 5-7% for 2011. MTI attributes this to the advanced economies remaining on a path of modest recovery, particularly the US, EU, and emerging Asia.  MTI added that a tight labour market will add to business cost pressures.


MAS: INFLATION SET TO EASE FOR THE REST OF 2011 Strait Times

Inflation has probably peaked and will average between 3%-4% this year, according to Monetary Authority of Singapore (MAS) managing director Ravi Menon.  "Allowing the Singapore dollar to strengthen has had a dampening effect on inflation in Singapore, which would otherwise have been much higher," noted Mr Menon.


REPORTED INITIAL JOBLESS CLAIMS DROP BUT ROLLING CLAIMS RISE TO NEW YTD HIGH

Initial Claims Drop 25k

The headline initial claims number fell 25k WoW to 409k (29k after a 4k upward revision to last week’s data).  Rolling claims rose 1.25k to 439k. On a non-seasonally-adjusted basis, reported claims fell 37k WoW, an atypical seasonal move. 

 

Despite the strong print in reported claims, rolling jobless claims are now up for the past 11 weeks, and even more importantly we remain at the YTD high in rolling claims. We use claims as our primary frequency determinant in thinking about losses for the consumer book of balance sheet dependent financials. The last time we saw such an inflection in the trend in jobless claims was summer 2010, a period in which the XLF lost roughly 20% of its value. To this end, take a look at our fifth chart showing the overlay of jobless claims with S&P 500. The current divergence is among the widest we've seen in the last few years suggesting that either the market is due for a significant correction in the near-term or claims should fall precipitously in the next few weeks.

 

 

REPORTED INITIAL JOBLESS CLAIMS DROP BUT ROLLING CLAIMS RISE TO NEW YTD HIGH - rolling

 

REPORTED INITIAL JOBLESS CLAIMS DROP BUT ROLLING CLAIMS RISE TO NEW YTD HIGH - raw

 

REPORTED INITIAL JOBLESS CLAIMS DROP BUT ROLLING CLAIMS RISE TO NEW YTD HIGH - nsa

 

Two relationships that we are watching closely are the tight correlation between the S&P and claims and between Fed purchases (Treasuries & MBS) and claims.  With the end of QE2 looming, to the extent that this relationship is causal, it is quite concerning. 

 

REPORTED INITIAL JOBLESS CLAIMS DROP BUT ROLLING CLAIMS RISE TO NEW YTD HIGH - s p

 

REPORTED INITIAL JOBLESS CLAIMS DROP BUT ROLLING CLAIMS RISE TO NEW YTD HIGH - fed and

 

Yield Curve Remains Wide

We chart the 2-10 spread as a proxy for NIM. Thus far the spread in 2Q is tracking 8 bps tighter than 1Q.  The current level of 263 bps is 1 bps wider than last week.

 

REPORTED INITIAL JOBLESS CLAIMS DROP BUT ROLLING CLAIMS RISE TO NEW YTD HIGH - spreads

 

REPORTED INITIAL JOBLESS CLAIMS DROP BUT ROLLING CLAIMS RISE TO NEW YTD HIGH - spreads QoQ

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 

 

REPORTED INITIAL JOBLESS CLAIMS DROP BUT ROLLING CLAIMS RISE TO NEW YTD HIGH - perf

 

Joshua Steiner, CFA

 

Allison Kaptur


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.

TALES OF THE TAPE: JACK, SBUX, MCD, PZZA, GMCR, DPZ, CBOU, YUM, BJRI, BWLD, KONA, DRI, EAT

Notable news items and price action from the past twenty-four hours, as well as our fundamental view on select names.

  • JACK reported 2QFY11 earnings last night, missing EPS expectations of $0.20 with a print of $0.12.  Revenues were ahead of expectations but commodity cost guidance was raised for the year.  Jack in the Box comp guidance range midpoint was raised 200 bps and Qdoba system comp guidance was raised 100 bps.   
  • MCD this morning announced a quarterly cash dividend of $0.61 per share of common stock, payable on June 15, 2011, to shareholders of record at the close of business on June 1, 2011.
  • MCD is being called upon by a campaign group called Corporate Accountability International to bad Ronald McDonald and Happy Meals because they attract children to junk food too much.
  • SBUX is being sued by the US government for firing a barista because she is a dwarf.  The US Equal Employment Opportunity Commission said that Starbucks violated federal law by denying a reasonable accommodation to the employee.
  • JACK, SBUX, PZZA, GMCR, DPZ, CBOU and YUM all saw their stock prices gain significantly on accelerating volume yesterday.
  • BJRI, BWLD, KONA, DRI, and EAT gained on accelerating volume also.  CHUX was the only restaurant stock to decline on accelerating volume.

TALES OF THE TAPE: JACK, SBUX, MCD, PZZA, GMCR, DPZ, CBOU, YUM, BJRI, BWLD, KONA, DRI, EAT - stocks 519

 

 

Howard Penney

Managing Director


Insecurity's Correlation

This note was originally published at 8am on May 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.

“The more we try to provide full security by interfering with the market system, the greater the insecurity becomes.”

-F.A. Hayek

 

I have been focusing my quotes for the last few weeks on the most pertinent parts of Hayek’s “The Road To Serfdom” in hopes of someone in Washington finding it within themselves to stop doing more of what got us into this mess.

 

The Audacity of Hope, unfortunately, is not a Global Macro risk management process. Neither is John Boehner telling Barack Obama, “let’s lock arms and jump out of the boat together”…

 

Boehner was talking about raising the US Debt Ceiling limit (which the US is technically in violation of today). All US Constitutional “technicalities” aside, this country hasn’t had much of a memory when it comes to the original provision to let the US Treasury print debt in 1917 (in order to finance war). When in doubt, fear monger the citizenry into believing centrally planned security is the only way out.

 

For the week, with the US Dollar Index closing up +1.1% at $75.78:

  1. The US Dollar Index has been up for 2 consecutive weeks for a cumulative recovery of +3.8% from its YTD lows.
  2. The US Dollar Index has been down for 14 of the last 20 weeks and remains bearish on an intermediate-term TREND basis.
  3. The US Dollar Index is down -14.4% since Obama and Geithner took over in early 2009.

From a Correlation Risk perspective, here’s the 2-week cumulative declines in stocks and commodities priced in US Dollars:

  1. US Stocks (SP500) = DOWN -1.9%
  2. US Energy Stocks (XLE) = DOWN -8.3%
  3. US Financial Stocks (XLF) = DOWN -3.7%
  4. CRB Commodities Index = DOWN -8.6%
  5. West Texas Crude Oil = DOWN -12.5%
  6. Copper = DOWN -4.6%

So, if you didn’t know that the Globally Interconnected Marketplace is highly correlated to a US Dollar UP move, now you know…

 

Those who interfere with the free-market system, experimenting with Fiat Fool policies that take the US Dollar to all-time lows, didn’t get The Correlation Risk they were imposing on stocks and commodities in Q208 - and they most certainly don’t get it now. The game within the hedge fund game is now called Gaming Policy – and it’s volatile.

 

If you disagree with me that The Bernank perpetuates The Price Volatility by promising the world to remain “Indefinitely Dovish” (Q2 Hedgeye Macro Theme), the market disagrees with you. Since pandering to the political wind at the latest FOMC presser, the VIX (volatility index) is up +15.8%.

 

Global Growth Slows As Inflation Accelerates – I think the world gets that now… but do the world’s Risk Managers know how to deal with the most levered long trade in hedge fund history as it unwinds?

 

We call this “Deflating The Inflation” (Q2 Hedgeye Macro Theme) – US Dollar UP is the only way out of creating the highest levels of US-style Stagflation since the 1970s.

 

Two important points on stagflation:

  1. Real-time inflation (commodities, rents, education, etc) is reported real-time…
  2. US Government reported “inflation” is reported on a lag

Last week’s US Consumer Price Index (CPI) was +3.2% for the month of April – whereas Deflating The Inflation has occurred in May. This is where it gets tricky for the stagflation bulls who don’t think they’ll ever see a 600 basis point drop in the SP500’s PE multiple (like we saw in the 1970s when reported inflation broke out above reported (lagging) US GDP growth). Sound familiar? US GDP for Q1 was +1.8%.

 

Two points on US Growth and Inflation:

  1. Growth Slowing (joblessness) is going to remain throughout the summer months (the 4-week rolling average of weekly jobless claims just hit a new YTD high last week of 437,000).
  2. Reported Inflation is going to remain elevated because rents continue to climb (as US Housing double dips) and The Inflation “compares” get a lot easier through August (putting an upward bias on reported y/y CPI).

So what do you do with that?

 

Last week I moved as aggressively to Cash in the Hedgeye Asset Allocation Model as I have since mid-February. Here’s where our allocations stand as of this morning:

  1. Cash = 52% (up from 43% last week and 34% two weeks ago)
  2. International Currencies = 18% (Chinese Yuan – CYB)
  3. Fixed Income = 15% (US Treasury Flattener and Long Term Treasuries – FLAT and TLT)
  4. Commodities = 6% (Gold – GLD)
  5. US Equities = 6% (Tech – XLK)
  6. International Equities = 3% (Germany – EWG)

Mr. Macro Market does not owe any of us a return. When The Correlation Risk hinges on insecure policy like it does today, sometimes the most secure move for my own money is to simply get out of the way.

 

The problem right here and now is that everyone is still long The Inflation because The Dare was to chase The Yield – so we’ll need to wait and watch for entry points (capitulation maybe closer to $93 oil) before we take up our invested position again.

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1472-1498, $93.18-100.58, and $1331-1345, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Insecurity's Correlation - Chart of the Day

 

Insecurity's Correlation - Virtual Portfolio



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