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A BIG MUFF

The Teflon Don of the gaming industry finally punted. I caught wind of this in Macau last week and wrote about WYNN’s VIP market share loss yesterday in “MACAU MARKET SHARE MANIA”. The magnitude of the sequential decline was a surprise, however, due in part to an increase in bad debt expense. It does appear that the company is being appropriately conservative with regards to increasing the uncollectible reserve. The performance of Wynn Las Vegas did not surprise me and investors should take note of how difficult the Las Vegas environment has become. While controlled by Beijing, at least Macau demand remains strong.



  • In the two charts, I’ve looked at some key metrics for Wynn Macau and Wynn Las Vegas. In addition to some seasonality, the sequential downturn at Wynn Macau is attributable to visa restrictions affecting mass market volume and higher junket commission rates at WYNN’s competitors. Not much to say on Wynn Las Vegas. A 12% decline in slot volume was probably the biggest negative surprise while RevPAR held up relatively well. I don’t see a turn here for awhile but WYNN should outperform, if that means anything.
  • So what now? If one is positive on Macau long term, which I am, one has to like WYNN. The visa situation will get better, in my opinion. Wynn Macau is a fantastic property and he really seems to have the market figured out. The service levels are unbelievable. The Encore addition will open next year and WYNN maintains a cheap option on Cotai as well. I think Wynn Macau is one of, if not the prime beneficiary of a potential junket commission cap. In my view, escalating junket commissions are the only reason he has lost VIP share.
  • Most important in today’s credit crisis world: WYNN is on the right side of the liquidity trade with PENN and BYD.
Uncompetitive junket commission rates, seasonality, and the visa restrictions drove the sequential downturn
Slot handle decline most indicative of the tough environment

Stability Amidst Volatility: Charting China's Trade Balance ...

Chinese Trade Surplus data came in at a historic high as rising exports suggested that rate cuts have indeed provided the desired stimulus to the economy as manufactures swung back into full production post Olympics and imports began to realize declines in the relative cost of raw commodities.

Export data showed growth continuing in high margin heavy manufactured products and electronics while exports of lower margin consumer products decline.

The narrative that the market is buying into continues to be the relative resilience of the Chinese economy as expanding domestic demand partially offsets global weakness.

Andrew Barber
Director

Eye on Trust...

One of our head correspondents in Asia wrote me a note this morning saying Keith "if they protest in Singapore..."

For those of you who have never been, they don't strike or protest much at all in Singapore. If they do, they take care of business in a park allocated for protests called "Speakers' Corner" - it's basically the only outdoor space where the government of Singapore signs off on public criticism.

If Wall Street thinks they are free and clear of all of the compromises that are associated with lying to and/or misleading Asian investors, they better think long and hard about that again...

  • This, I fear, is only the beginning. It can take a lifetime to earn people's trust, and a few stupid decisions to lose it.
    KM
Reuters Picture by Vivek Prakash

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MACAU MARKET SHARE MANIA!

As you can see my last few posts, I’m getting positive on Macau. Look, the near term is challenging, no doubt, and the Q3 earnings releases won’t look pretty. However, the intermediate and long term fundamentals are unmatched anywhere else in gaming. There is significant excess demand and Beijing controls the spigot through visa restrictions. If you believe, like I do, that Beijing will be supportive of controlled, moderate growth than you have to be positive on Macau and the Macau stocks. My top down industry perspective is buffeted by Keith McCullough’s macro analysis. Research Edge is positive on China!

Timing and how to invest are the issues. The timing of Beijing’s next move is not clear but I’m fairly certain it will be a positive one. In the meantime, the monthly numbers will not look great. To me, that is not important. The other tricky part is how to play Macau from a public equity perspective. Each company has its issues: WYNN is losing market share, LVS has liquidity issues, MGM Macau is less than 5% of MGM’s EBITDA, and all three have Las Vegas exposure. MPEL will likely report a disastrous Q3 but is a Macau pure play and may be interesting after the quarter.


  • In terms of market share, the charts to the right analyze the sequential change in market share for the major properties/players by total baccarat revenue and VIP turnover. We are looking at VIP turnover separately because small changes in hold percentage can swing revenue dramatically. Turnover is a better indicator of underlying demand. Additionally, with escalating junket commissions as of late, it is instructive to examine the impact.
  • The notable Q3 deviants from Q2 on the positive side are the LVS properties; Sands and Venetian. Junket commissions at these properties are now among the highest in the market which will show up negatively in the margins. MGM also raised junket commissions and gained share sequentially. On the downside, MPEL’s Crown and Wynn lost meaningful share. Crown’s junket partner, AMAX, pulled back on credit relative to Q2. Wynn has been stubborn on its commission rates, rightly or wrongly, and lost share in Q3. Q3 revenues could disappoint when WYNN announces Q3 earnings in a few weeks.
  • Looking at total baccarat revenue market share, including VIP and mass market revenues, the sequential trends were similar to VIP turnover, with a few, subtle differences. Wynn Macau’s revenue share did decline but less than its share of VIP turnover. Wynn held at about its average VIP percentage but Crown and Galaxy’s hold percentage was much lower than average in Q3 which drove the market hold percentage below average. Wynn’s mass market revenue share was roughly flat Q2 to Q3. LVS held close to average so VIP turnover drove its sequential increase in market share.

Casual Dining – Some Positive News…

According to the Lundberg Survey, the national average price for self-serve, regular unleaded gas fell $0.35 to $3.30 a gallon on October 10 from $3.65 two weeks earlier. This marks the largest recorded decline in the average price of a gallon of gasoline in the U.S. as consumer demand continued to wane and oil prices slide. October 10th’s $3.30 a gallon was the lowest national average price since March 21, 2008. Prices peaked on July 11 at $4.11 and have since fallen by $0.80. Diesel fuel fell $0.21 to $3.95 a gallon, which is the first time since March that it has been below $4.00 a gallon. According to Trilby Lundberg, “Plummeting oil prices and caving gasoline demand have combined to bring the biggest retail gasoline price cut in the history of the market. We've been doing this 58 years. This is truly the biggest price drop."

This drop in gas prices should offer some relief to casual dining operators who experienced a significant decline in same-store traffic growth in July (down 6.2% year-over-year) at the same time gas prices climbed off of their recent lows in March. Although increased gas prices is just one of the many challenges facing the casual dining industry today, lower gas prices should give consumers one more incentive to go out to eat, which is an incremental positive for the group.

Adidas: Don’t These Guys Learn?

Adidas is buying Ashworth, a maker of mid-priced golf apparel, for $72.8mm or a 10% premium to Friday’s close. The market loves the deal. I simply don’t get it. Does ROIC matter to this company?
First off, Ashworth has no EBITDA, and is burning cash every day that it remains in business. EBIT margins peaked in ’04 at 10%, but has steadily crept to -8% as it grew its moderate brands into expensive company-owned retail stores (note SG&A ratio went from 31% to 42%). That’s a component of retail 101 this company ignored (and cannot easily fix).

Cash flow valuation here is useless (bc there is no cash flow), so I think that the best thing to do is to look at book equity, which is where this deal looks cheap at 88%. My only reservation is that most of this value is finished goods, and my confidence in the quality of inventory is not high. In addition, we need to consider the forward lease obligations of $75mm (which most people fail to do).

I guess what shocked me the most is that Adidas does not do well when it buys assets that 1) it needs to fix, and 2) overlap with existing businesses (like Taylor Made). Remember Reebok? $3bn invested in another brand that went away. If Adidas had invested that in its own brand, it would not be getting crushed in the US market today.

So why did they do this? My sense is that it is to leverage the fact that Ashworth has the license to make Callaway apparel. To say that Ashworth has done a poor job there is an understatement. Can Adidas make this work and leverage its TMaG infrastructure? Probably. But as a shareholder I’d rather see the company invest half that amount in its own brand and drive higher EBIT, better brand awareness, and better ROIC.

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