Terrific across the board but Vegas the real standout again.
HIGHLIGHTS FROM THE RELEASE
- Net revenues of $1.37BN and Adj EBITDA of $447MM
- Macau: Net revenue of $977MM and EBITDA of $314MM
- Las Vegas: Net revenue of $391MM and EBITDA of $133MM
- "Board of Directors has approved a cash dividend for the quarter of $0.50 per common share... payable on August 11, 2011, to stockholders of record on July 28, 2011."
- "Charitable contribution made by Wynn Macau to the University of Macau Development Foundation... consists of a $25 million contribution made in May 2011, and a commitment for additional donations of $10 million each year for the calendar years 2012 through 2022 inclusive, for a total of $135 million."
CONF CALL NOTES
- Volume increases in baccarat and other table games. Had amazing hold in baccarat.
- In non-casino, they had a 15.7% increase - hotel cash revenue was their highest in history.
- Hold impact in Las Vegas- Normalized EBITDA was in the neighborhood of $115MM
- We calculate the hold impact on revenue was $30MM and roughly $25MM on EBITDA, much more than management indicated
- They are still 50% reserved on their receivables bucket
- Segment margins in Macau?
- They don't give segment margins but margins are increasing as volumes increase. Competition hasn't dented them yet.
- Vegas trends:
- July is usually a black hole for them... August picks up for them and then September is good and October sells out for them
- July occupancy is actually better than they thought - all of that is last minute bookings - 48 to 72 hours in advance. They have not lowered rates.
- The fourth quarter looks great and now that they are getting through July they are doing well. They're tracking around $1MM/day in July. Convention business is totally sold out in July.
- The land granting process in Macau is continuing. They are proceeding with their soil research until then.
- The latest Gazette just came out and there was no mention of new concessions.
- Cotai: 1500 rooms - with room to expand, 500 tables. They are thinking about building a separate hotel with 200 rooms with no casino so government officials can stay there.
- Thinks that Galaxy Macau did a good job but they aren't affected by it.
- He is naturally interested in Singapore but there is a moratorium on new licenses until 2017. If they had the chance to be in business in Singapore, they would be thrilled but that decision is not theirs to make now
- They don't know how their competitors in Vegas are doing. They recently spent $200MM on renovations in Vegas. Their guess is that everyone is doing better this year than last year.
- For 2012, they are tracking on pace for convention rooms in-line with this year, with any upside from price. There are some big conferences that benefited 2011 that won't benefit 2012. Chinese NY and Superbowl fell on 2 weekends vs. one.
- There are a host of opportunities to expand in Las Vegas, but is afraid of the political environment in Las Vegas from this administration which he thinks is the biggest wet blanket on the economy
- The government was very specific in stating that they do not want apartments on Cotai
- Their LV properties are benefiting from international travelers
- They are keeping a close eye on MA gaming legalization. They would be interested depending on the legislation.
- Wynn Resorts has zero debt, which gives them lots of flexibility to fund new projects. Will stay under leveraged.
June airport data was a positive but a lot of the YoY GGR gain will come from an easy table hold comp.
While there are a lot of wild cards, baccarat hold percentage among the most important, we think the June Strip gaming revenue growth was significantly positive. Our best guess is +9 to 13%. The number of enplaned/deplaned passengers at McCarran Airport increased 5.6% in June of this year over last June. Given higher gas prices, we expect that drive in traffic was down.
The comparison is easy on the table side as hold percentage was only 9% versus a normal 12%. Holding table hold constant with last year, June gaming revenues would only be slightly higher. However, slot hold % was very high last year. Overall, we expect gaming volumes to be up around 3%. Net/net, not a bad follow up to a very strong May.
Here are our projections:
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Moving Beyond EBA Conclusions That All is Well
Our view of the European bank stress tests released last Friday is rather dim. We criticized the leniency of the "adverse scenario" assumptions, noting in particular that the actual deterioration since year-end 2010 is already worse than the "adverse" assumptions in some cases. (Contact us if you want to see our full note.)
While we consider the loss assumptions to be balderdash, the stress tests were valuable in that they disclose a wealth of bank-specific data around sovereign and commercial exposures by country. Clearly, the greatest default risk is currently in Greece, Portugal and Ireland. Italy and Spain, while on slightly more stable ground, are rapidly deteriorating as well.
In the tables below, we show the exposure to sovereign debt and commercial loans by bank to each PIIGS country. Specifically, we show the top 40 most exposed European banks (among the 91 stress-tested), ranked by gross loans and sovereign debt holdings as a percentage of their Core Tier 1 Capital. Bear in mind that this data is as of December 31, 2010. In addition to showing which banks hold the greatest exposure on a country by country basis, we also show which banks hold the greatest exposure to Greece, Portugal and Ireland collectively, as we view those countries as being at greatest risk for default. Further, we show total exposure to all five PIIGS countries.
We highlight in red those banks with 100% or more of their Core Tier 1 Capital in the form of sovereign debt holdings and/or commercial loans to a given country or group of countries. The total exposure groups (all PIIGS) are presented two ways. First, we show exposure sorted by RWA. In other words we show the PIIGS exposure by bank for the 40 largest European banks. Second, we show exposure sorted by % of Core Tier 1 Capital at risk regardless of the size of RWA.
Summary Conclusions: 13 of the Top 40 EU Banks Hold Over 200% of their Capital in PIIGS Exposure
We find that there are numerous European banks with over 100% of their Core Tier 1 Capital committed to either PIIGS commercial loans or PIIGS sovereign debt holdings. For example, we found that 18 of the 40 largest European banks held 100% or more of their Core Tier 1 Capital in PIIGS sovereign debt or commercial loans. In 13 of these cases, the banks held more than 200% of their Core Tier 1 Capital in PIIGS sovereign debt or commercial loans.
As a general rule we found that the Nordic banks are the least exposed to PIIGS debt, typically holding less than 20% of their Core Tier 1 Capital, putting them at considerably less risk than the group as a whole.
Joshua Steiner, CFA
Positions in Europe: Long Germany (EWG); Short Italy (EWI); Short EUR-USD (FXE)
Bearish Enough? We’re getting incrementally more bearish on European sovereign debt contagion, which we’ve expressed by being short Italy and the EUR-USD in the Hedgeye Virtual Portfolio, as the focus turns closer to the heart of Europe: Italy and Spain. Here are our updated risk factors weighing on our outlook for Italy and the broader Eurozone over the last week:
1. Yields and CDS Spreads—The Italian 10YR government bond yield is now flirting with the 6% level, having crossed it early last week (before coming in slightly into week-end) and again jumping around the line today. As we show in the government yield and cds charts below, the 6% level or ~ 525bps CDS line have proven critical breakout lines for Greece, Portugal, and Ireland that shortly after violation necessitated bailout packages. An Italian breach of this 6% yield line could prove particularly damaging for not only the yield demanded at future sovereign bond auctions, but given Italy’s elevated debt exposures the Eurozone’s current temporary EFSF bailout facility of €250 Billion is far underfunded to handle an Italian rescue package. We’d expect headline risk to continue to power both yields and CDS spreads higher over the near and intermediate term, especially as the European community is undecided on how to handle contagion (more below).
2. “Sizing” Market Sentiment – With Italy’s economy 3X the size of the combined economies of Greece, Portugal, and Ireland, and with some €1.9 Trillion of debt, or 120% of GDP, which ranks Italy second behind Greece with the largest debt as a % of GDP in the Eurozone [Greece = 144%], market sentiment could turn violently, especially as we learn more about the country’s banking exposures across the region.
3. Austerity’s Timing – While both houses of the Italian Parliament approved a €47 Billion austerity package late last week, essentially €40 Billion in tax hikes and public sector spending and wage cuts are back loaded to 2013/14. In our opinion, this back loading is at odds with a market that is looking for clear-cut signals that Italy has a firm grip on reducing its debt and deficit loads over the near term. The continued erosion in PM Berlusconi’s credibility, including a recent scandal with his Finance Minister, adds only further downside risk. While the case can be made that Italy is in a “better” fiscal spot than a Greece or Portugal with a 4.5% budget deficit (compared to 10.5% and 9.1%, respectively), Italy is heading up against some significant debt maturity repayments in the coming months.
4. Looming Debt Schedule—As the chart below shows, Italy must make debt maturity payments (principal + interest) of ~ €201Billion into year-end, with payments in the months of August and September particularly steep. For reference, Greece, Portugal, and Ireland have combined debt payments of €62 Billion for the remainder of the year. Weaker demand for future debt issuance and higher interest rates could well snowball and further roil investors.
5. EU Stress Tests, Part II Disappoint- As Josh Steiner and our Financials Team noted in a post on 7/14 titled “Lunacy: Previewing Tomorrow’s EU Stress Tests”, the tests revealed nothing about the current state of banking exposures as both the balance sheet data and risk assumptions reflected data as of December 31st, 2010. Critically, the tests did not consider assumptions on sovereign defaults, change in ratings, and valuation haircuts were only applied to held-for-trading bonds for each bank, that is, those that are already marked-to-market. We see more downside to Italian bank stocks as more layers of the onion are pulled back.
Broader Notes on from the Eurozone:
In short, we continue to see gargantuan politicking efforts by Eurocrats to deflect the pressing risks across the region. Over the weekend Trichet told the FT Deutschland that again he’s not working under the assumption that a Eurozone country defaults, a stance that prevents him from having to address the real (and possibly near) concern that a ratings agency rates a peripheral country’s credit in default. A rating of default throws a wrench in ECB collateral requirement rules and debated bank restructuring of peripheral debt.
The next calendar catalyst of note is this Thursday’s emergency EU summit to address a new rescue plan for Greece, pegged around €115 Billion. Over the weekend Germany Chancellor Angela Merkel told the FT that she will only attend “if there is going to be an agreement on a new rescue plan for Greece”, while recent discourse suggested a plan would come in mid-September. Merkel said “she wished to avoid any Greek debt rescheduling, but underlined that the key to a deal would be substantial voluntary involvement of private creditors in easing the Greek debt burden.”
We’re sticking to our bearish outlook on the EUR-USD. Our immediate term TRADE levels are $1.39 to 1.42, with the intermediate term TREND line clearly broken at $1.43.
European Financials CDS Monitor
Not surprisingly, bank swaps in Europe were mostly wider last week. 37 of the 38 swaps were wider and 1 tightened. ISDA ruled that the Bank of Ireland experienced a credit event (restructuring), triggering a settlement on the credit default swaps. Accordingly, swaps are not trading this week for Bank of Ireland.
Stay tuned as this volatile soap opera charges on.
POSITION: No Position SPY
Both the TRADE and TREND lines for the SP500 are currently broken. That’s not good.
Across durations, here’s the SP500 setup (it’s a Bearish Formation – bearish TRADE, TREND, and TAIL):
- TAIL = 1377
- TREND = 1319
- TRADE = 1301
At the same time, the VIX has broken out into what we call a Bullish Formation (bullish TRADE, TREND, and TAIL):
- TRADE = 18.98
- TREND = 17.59
- TAIL = 19.39
So what do you do with that? I usually start with what you don’t do – don’t start playing the “valuation” game. Valuation isn’t a catalyst in a Bearish Formation. In many cases, it sucks you in early. Being early can be painful.
In the immediate-term, I have a loose TRADE line of support for the SP500 at 1291 and a VIX level of resistance of 22.93. Stay hedged.
Keith R. McCullough
Chief Executive Officer
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