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MPEL 2Q2011 CONF CALL NOTES

Great quarter and estimates need to go up considerably - $185m hold adjusted run rate and Q3 trends better than Q2. Street at $155m for Q3

 

 

"These results represent another strong quarter for our Company, driven by significantly improved operating  performance across all areas of the business. Our second quarter results reflect record consolidated EBITDA on record setting gaming volumes for our Company. Our overall profitability continues to reflect our various cost containment initiatives that help drive strong operating leverage."

 

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

 

 

HIGHLIGHTS FROM THE RELEASE

  • Net Revenue of $960MM and EBITDA of $216MM
    • CoD: Net revenue of $608MM and EBITDA of $151MM
    • Altira: Net revenue of $311.5MM and EBITDA of $73MM
    • Mocha Slots: Net revenue of $32MM and EBITDA of $10MM
  • Cash: $1.4BN (including $368MM of restricted cash); Debt: $2.4BN
  • Capex: $8.5MM
  • "The show has entertained over 700,000 guests with occupancy levels above 90% on average per show. The House of Dancing Water has significantly reinforced City of Dreams' entertainment proposition and has  generated meaningful positive ripple effects throughout the business, including higher property visitation, hotel occupancy rates, and gaming spend."
  • "We have successfully completed the acquisition of a 60% interest in the Studio City project on Cotai.  We continue to work on our design plans and are currently evaluating financing plans, including a bank loan and other debt financing, to fund this project."
  • "We are also excited about the recently announced dual listing proposal. Upon completion of our Hong Kong initial public offering, our dual listing will provide our existing shareholders with much enhanced liquidity and will also broaden the Company's investor universe."

 

CONF CALL NOTES

  • Committed to growing their mass market revenues, especially premium Mass. Non-gaming amenities continue to drive visitation and spending
    • Cubic and House of Dancing Water continue to drive brand recognition
    • HDW operates at a B/E level but helps drive traffic and gaming volumes
  • Continuing to work on hotel yield management and other cost control efficiencies to help drive margins
  • Believe that the MSC location will provide them with a competitive advantage
  • Continue to see strong GGR growth in Macau.
  • Growth in Chinese visitation continues to outstrip visitation growth from other regions
  • Their Mass GGR growth far exceeds the market growth rate, despite increased supply/competition
  • Hold Adjusted EBITDA with 2.85% hold across the junkets would have been $185MM 
  • Their new facility allows them more flexibility at a cost of a small increase in rate.  There were some charges related to the refinancing in the quarter.
  • Guidance for 3Q
    • D&A: $85MM
    • Corporate: $25MM
    • Net Interest expense: $30MM (including the impact of various corporate transactions)

 

Q&A

  • Pretty happy with Q3 so far
  • With the opening of GM, the center of gravity has moved more towards Cotai and they have benefited from that
  • MSC: 36 month process to open the facility from when they commence construction. Prior owners put in $100MM of capex into the project already.
  • The reason that they are so excited about MSC is their location right by the Lotus Bridge which should be open 24 hours. So they would have extremely high foot traffic at that property.
  • Really looking to keep their operating expenses in check and leverage their scale as they have 3 operating units in Macau.  Initiatives in premium mass should also help their mix.
  • PH3 of CoD is going on their back burner for now, but still think that they will need additional rooms there at some point in the future
  • In 1H11, they have been focusing more on the premium Mass business which has a little less promotional expense attached to it.  Hence, the better margins.
    • Promotional expenses were $11MM lower than we estimated and have been steadily declining as a % of casino revenue over the past 2 years
    • This year, within the mass segment, premium mass accounted for 50-60% (last year was 60%); hence, grind business accounted for 40-50% of the mass business.
  • CoD hold adjustment
    • The hold was pretty close to 2.85%, but they had favorable mix in the quarter between RC and Revshare - which had a $7MM benefit
  • Any change in commission rate or operating expenses?
    • No change in the commission rate, just mix shift in volumes
    • Players rebates were flat sequentially
    • Promotional expenses were tighter
  • Have higher utility expenses in 2Q over 1Q. They also have to book a higher bonus provision on higher volumes.  Going into 3Q, they intend to keep operating expenses flat QoQ.
  • Table cap will last until March 2013, and post March 2013, they would increase it 3-5% - so only new builds will get those tables.  Therefore, they are trying to yield up their tables as you can see from higher win per tables.
  • Deceleration in RC volumes?
    • Had to move the opening of some junket rooms until 3Q so that impacted their growth in 2Q
  • They have faith that the Macau government will grant them the necessary number of tables at MSC to make the project viable.  For them, it's really about getting the necessary approvals to restart construction vs getting gazetted. Their process is a much less complicated one.

THE M3: JULY VISITOR ARRIVALS; S'PORE CPI; BUSES

The Macau Metro Monitor, August 23, 2011

 

 

VISITOR ARRIVALS FOR JULY 2011 DSEC

Visitor arrivals totaled 2,550,867 in July 2011, up by 18.0% YoY.  Visitors from Mainland China increased by 27.9% YoY to 1,460,473 in July 2011, and the majority came from Guangdong Province, Fujian Province and Zhejiang Province.  Visitors from Hong Kong (720,000), Taiwan (126,000), South Korea (35,000) and Malaysia (21,000) increased by 7.3%, 4.1%, 23.6% and 16.4% respectively.  

 

Mainland visitors travelling to Macao under the Individual Visit Scheme totaled 617,591, up by 29.4% YoY.

 

THE M3: JULY VISITOR ARRIVALS; S'PORE CPI; BUSES - visitors

 

SINGAPORE CPI UP 5.4% ON-YEAR IN JULY Channel News Asia

S'pore CPI rose by 5.4% YoY and 1.5% MoM in July, due largely to higher costs of accommodation, private road transport and food. 

 

LEGISLATION PROPOSES TO REGULATE CASINO SHUTTLE BUSES Seng Pou

According to the Statistics and Census Service, the number of tourist coaches, including casino shuttle buses, is three times above the number of buses in Macau.  Authorities are advised to limit the number of shuttle buses depending on different sizes of casino hotels. Grant Bowie, executive director of MGM China, says that the company is willing to discuss with the government and will cooperate for plans to improve the bus system in Macau.


THE HBM: CHUX, DNKN, PFCB, GMCR

THE HEDGEYE BREAKFAST MENU

 

Notable macro data points, news items, and price action pertaining to the restaurant space.

 

MACRO


The ICSC sales index posted its 4th straight decline, falling 1% last week. Year-over-year growth slowed to 3%, the slowest pace in eight weeks.  It appears that the stock market volatility is impacting consumer behavior.

 

It’s unlikely that the consumers will lead us out of the recent economic malaise and continued unfavorable moves in equity, gasoline or house prices are significant threats to future spending.

 

Corn rose to a 10-week high in and soybeans gained as worsening crop conditions in the U.S. may be smaller than estimated.  Corn traded at $7.412, the highest for the most-active contract since June 9.

 

SUB-SECTOR PERFORMANCE

 

On the better than expected Knapp track data the Full Service sector turned in a strong performance yesterday (it should be noted that the move was not confirmed by volume studies).    The Food processors held in despite the performance of SAFM down 3.5% (as the daily volume study spiked 167%) and the upside move in corn. 

 

THE HBM: CHUX, DNKN, PFCB, GMCR - hfbrd

 

QUICK SERVICE

 

GMCR under fire for its aggressive accounting announced the appointment of Stephen L. Gibbs as its Vice President and Chief Accounting Officer effective immediately.

 

Yesterday, I highlighted DNKN’s egregious valuation…  don’t see much upside from here.

 

FULL SERVICE

 

CHUX announced that Wilson L. Craft, O’Charley’s Concept President, has resigned to pursue other opportunities.  Maybe because the opportunities at O’Charley’s are limited!!!

 

Put this in the aggressive promotion category and let’s hope this is limited to just Hawaii - For a limited time, P.F. Chang's Hawaii is offering a Buy One, Get One Free coupon! Download one and bring it in….

 

THE HBM: CHUX, DNKN, PFCB, GMCR - pgcbbogo

 

Pei Wei Asian Diner is offering new menu pricing under the combo banner of “Diner Select,” as parent company P.F. Chang’s China Bistro Inc. works to stem sliding sales.  The new “Diner Select” option lets customers choose from five popular Pei Wei meals, starting at $6.25 for a reduced-portion entrée and a choice of a spring roll, soup or Asian slaw as sides. Pricier proteins, such as beef or shrimp, cost more, as do substitutions such as fried rice for white or brown rice - NRN

 

THE HBM: CHUX, DNKN, PFCB, GMCR - qsr

THE HBM: CHUX, DNKN, PFCB, GMCR - fsr

 

Howard Penney

Managing Director

            

 

Rory Green

Analyst


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Are We Human?

“Are we human, or are we dancer?”

-The Killers

 

As many of you likely know, “Human” is a song by American Indie rock band The Killers.  Keith referenced it in Hedgeye’s last company meeting to note the infallibility of us all.  Sometimes we are right, sometimes we are wrong, but we are always human.  As well, sometimes things just aren’t as complicated as humans like to make them.

 

While I am prone to typos, the typo, or rather grammatical error, is not my doing in this instance.  The Killers actually wrote the song with dancer, and not dancers.  In fact, the song was motivated by a derogatory comment by Hunter S. Thompson, when he stated that America was raising a “generation of dancers”.  According to Wikipedia, in an interview in Rolling Stone, the lead singer of The Killers, Brandon Flowers, was asked about confusion over the lyric and responded:

 

“It’s supposed to be a dance song, the beat goes with the chorus . . . if you can’t put that together, you’re an idiot.  I just don’t get why there’s confusion.”

 

Certainly, Brandon Flowers and his band mates are human, but grammatical error and all, their song, “Human”, was voted the top song of 2008 by Rolling Stone Magazine.

 

The investment business is perhaps one of the most humbling of all professions and reminds its participants every day that they are human.  In the Chart of the Day, we show the SP500 versus 10-year Treasuries over the last six months.  Certainly, there were very few investors on the right side of both trades six months ago.

 

This morning I went back to our Early Look strategy note from exactly six months ago and on February 23rd, Keith wrote:

 

“And this is really where I can look myself in the mirror and say, despite the fierce lobbying for me to chase US stock market fund “flows” into their mid-February crescendo, I stayed true to the best top-down risk management process I know – when Global Inflation Is Accelerating, and Global Growth Is Slowing, it’s time to build up a large asset allocation to Cash.”

 

At that point, the SP500 had been chugging upwards since the start of the year and was up roughly 4% year-to-date and on trajectory for a more than 25% annualized return.  Back then, it was hard to be bearish, now it is pretty easy.

 

Akin to The Killers song, we aren’t bears, we aren’t bulls, we are only human.  While Keith, myself, and our team are happy that our research process helped us alert our clients early to the confluence of global economic issues that has led to the dramatic decline in global equities year-to-date, the next challenge is to have the correct view of the next major move in global equity markets. 

 

For us to turn more positive on U.S. economic growth we would likely need to see a positive change on the margin in three key areas: housing, employment, and debt.  It is really that simple.  The first two relate to the largest portion of the U.S. economy, which is consumer spending.  Stable house prices provide consumers the confidence to spend, and fuller employment broadens U.S. consumption.  The third factor, debt, relates to the U.S. government balance sheet.  Just like any corporate or individual balance sheet, the federal balance sheet has become constrained by debt, which will impede future organic growth.

 

Underscoring all of this, as it relates to securities prices, is, of course, the perspective of expectations.  That is, what is priced in?  With the SP500 now down more than 10% in the year-to-date, there is certainly a reasonable amount of bad news priced in.   Often, though, securities prices tend to be a leading indicator versus a lagging indicator and a key question to consider now is what the dramatic decline in equity prices we have seen in the last month means for confidence and economic growth over the coming quarters.

 

A couple of days ago, President Obama stated that he doesn’t expect a recession in the next twelve months.  This was supported this morning by a survey from the Associated Press that indicated that a majority of economists believe that another recession is unlikely in the next twelve months.  This is, of course, the same group of economists whose group GDP growth estimate for 2011 was +3.2% on February 23rd. . .

 

Flagging our competitors on their errors in groupthink only gets us so far, but looking at the consensus view does provide us some insight into what is priced into the market.  That said, we certainly understand, as former Yale President and Commissioner of Major League Baseball Bartlett Giamatti famously said:

 

“No one man is superior to the game.”

 

Isn’t that the truth . . .

 

Keep your head up and stick on the ice,

 

 

Daryl G. Jones

Director of Research

 

Are We Human? - Chart of the Day

 

Are We Human? - Virtual Portfolio


Bullish Babble

This note was originally published at 8am on August 18, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“I can forecast confidently that it will vary.”

-Lord John Browne

 

That was a quote from the former CEO of British Petroleum on forecasting the price of oil. It’s the opening line in Chapter 2 of a must-read book that’s in my summer pile titled “BabbleWhy Expert Predictions Fail and Why We Believe Them Anyway.” Good thing our Keynesian overlords in Washington and the manic media that fawns on them don’t consider me an “expert”…

 

I was on what we affectionately refer to as a Hedgeye Client Roady in New York City with our all-star European analyst Matt Hedrick yesterday. It was hot. We were sweaty. And, oh, were we all beared up (to be “beared up” means to be Bearish Enough).

 

Is the Sell-Side Bearish Enough?

 

Given that most of the Bullish Babble I have been reading from Wall Street’s “Sell-Side” (investment banks and brokers who market the Perma-Bull) in 2011 has not yet turned bearish (never mind Bearish Enough), the answer to that question is unequivocally no.

 

Is the Buy Side Bearish Enough?

 

The “Buy-Side” (asset managers) is definitely not bullish like the Sell-Side. But I don’t think they are Bearish Enough yet either. There’s certainly a qualitative element to that conclusion (my gut), but there’s also quantitative evidence (S&P Futures down -23 handles this morning and yesterday’s Institutional Investor Sentiment survey showed only 23.7% of people admitting they are bearish.

 

Back to the Global Macro Grind

 

Wall Street/Washington “blue chip” forecasts on US GDP Growth continue to be so far away from the area code of reality that S&P actually looks accurate (S&P cut its Q4 US GDP estimate to 1.8% yesterday – Hedgeye’s Q4 GDP range is 0.6%-1.3% for Q4).

 

From a risk management modeling process perspective, we use a range because we aren’t yet dumb enough to take the government’s word for it when they can revise the GDP number down by 81% in 3 months (Q1 2011).

 

In terms of Global GDP Growth, Morgan Stanley is snagging the #1 “Most Read” headline on Bloomberg Economic News this morning by “Lowering Global Growth Forecast” by a whole 30 basis points to 3.9%. Oooh, lah, lah… the bearishness of it all.

 

Meanwhile, the Global Macro Economic Data continues to confirm our baseline case for Global Equities – that stocks will be assigned a lower multiple because A) the Street is using the wrong GDP and earnings numbers and B) The Stagflation earns a much lower multiple.

 

Around the world this morning, Gentlemen and Ladies of Hedgeye, here are your real-time economic taps:

  1. SINGAPORE (ASIA) EXPORT SLOWDOWN – exports down -2.8% in July (that’s a year-over-year number!) and if you didn’t know that the Singaporeans A) advise the Chinese and B) were dead serious about what they said on growth when I signaled it last week… now you know.
  2. BRITISH STAGFLATION – after reporting a whopper of a Consumer Price Inflation (CPI) number for July on Tuesday (+4.4% y/y), the Brits printed a 0.00% Retail Sales growth number for July this morning. ZERO growth + inflation = The Stagflation.
  3. AMERICAN STAGFLATION – yesterday’s Producer Price Index (PPI) for July came in at +7.2% year-over-year growth and this morning’s Consumer Price Inflation (CPI) print should be close to +3.5% y/y. ZERO point 36 percent Q1 GDP Growth + 1.3% Q2 GDP Growth + Inflation readings that are orders of magnitude higher than real-growth = Le Stagflation, Monsieur Bernank.

So what do you do with that this morning? Hopefully the answer to that question resides in what you’ve already done to preserve and protect your family’s capital. We’ve already made the “call” to go to ZERO percent asset allocation to both US and European Equities and on Monday we cut our asset allocation to Chinese Equities in half (from 6% to 3%) in the Hedgeye Asset Allocation Model.

 

Q (on yesterday’s Client Roady): “what would change your mind?”

 

A:

  1. Global Macro Economic Data
  2. Sentiment/Expectations
  3. Market Prices

While plenty of Fed Heads have changed their tunes to a more passive-aggressive Rick Perry sounding country song in the last 24 hours (Bullard, Fisher, Plosser, etc), I have not changed mine.

 

I am forecasting, confidently, that market prices will vary – and that managing risk starts with accepting uncertainty.

 

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1755-1834, $80.07-89.87, and 1172-1207, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bullish Babble - Chart of the Day

 

Bullish Babble - Virtual Portfolio


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