Galaxy delivers another record quarter and exceeds expectations.




  • Group Adjusted EBITDA of HK$1.1BN in 2Q11, up 93% YoY
  • Starworld Adjusted EBITDA of HK$685MM in 2Q11
    • VIP RC HK$158BN
    • LTM ROI: 74%
    • Occupancy 98% in 2Q
    • 24% US GAAP EBITDA Margins
  • Galaxy Macau Adjusted EBITDA of HK$376MM and revenues of HK$2.4BN for the first 47 days of operation
    • Property is continuing to ramp with the opening of new product openings
    • Occupancy of 88% and finished the month of June with 92% occupancy
    • US GAAP EBITDA margins of 22%
    • VIP RC: HK$50BN, Net win HK$1.78BN, win % of 3.5%
    • Mass drop: HK$2.4BN, Net win: HK$410MM, hold %: 17.5%
    • Slot Handle: HK$1.8BN, Net win: HK$114MM, hokd %: 6.3%
  • Construction materials Adjusted EBITDA of HK$178MM for H11
  • Cash: HK$6.7BN (including HK$1.6BN of restricted cash)



  •  Demand for construction materials increased due to the increase of infrastructure projects in the China
  • Galaxy Macau is exceeding the targeted daily visitation of 30,000
    • Opened 3 additional VIP in 3Q11 for a total of 10 rooms
  • Starworld continues to focus on cost control and improvement of operating efficiencies
  • City Clubs: $49MM of EBITDA in 2Q


  • Mass business at GM is ramping up. They are tweaking the offering at the property.  Have 72 shuttle programs. Have an aggressive database sign up program. See growth in their Mass revenue each and every week and are confident that they will get their fair share.
  • Slowdown of VIP in Macau? Not seeing any - July was off to a great start and August is going to be just as strong and are confident that market growth will exceed 30% for the 2011
  • Non-gaming revenue mix at GM is similar to other properties in the market
  • Galaxy Macau premium direct is a growing segment for them but they are much more weighted towards junkets
  • Mass hold should increase at GM as volumes ramp and dealers become more efficient
  • Timing of the additional 800 rooms at GM - right now they are just under 2,000 rooms in operation and hope to have all the rooms open by Golden Week in Oct / no later than 4Q
  • Pre-opening expenses were all GM related
  • Capacity for 600 tables at GM - opened with about 450 and that's where they are now - they will try to optimize the mix. 1/3 VIP  and 2/3 Mass mix.
  • City Clubs and Construction Materials are core holdings for them
  • Thoughts on their market share once Sands Cotai opens?
    • They are more focused on ROI than market share - return expectations are mid teens to low 20's
  • Hold Adjusted EBITDA - benefited EBITDA by HK70-80MM at GM.  Even though their hold at Starworld was good the mix was poor so they didn't benefit from decent hold at all.
  • Phase 2-4 of Galaxy Macau
    • PH2: Master planning for the project as a whole is ongoing and will move forward with PH2 when they think that the market is ready for new supply
  • They are well ahead of the curve in terms of margins are concerned at GM compared to other openings
  • Profit sharing vs. Revenue sharing is in the same direction as Starworld. Will not compete on commissions.
  • Capex - $12.8BN was spent through June 30th and leaves about HK$3.7BN. New Capex is HK$16.5BN for GM
  • Pre-opening should be less than HK$100MM in 2H 2011.  They believe that they have accrued for all of their opening expenses. Anything else will not be material.
  • Pursing a very aggressive expansion strategy with their construction business, have no intent to dispose of it.  At some point in time, they will dispose of the business but not at this point. 
  • Starworld is about 50/50 Mass/ VIP table mix
  • They are now 100% top line driven at the City Clubs - they had some hold challenges this quarter.  The change in the deal structure impacted results.  Thinks that they can do HK$50-60MM/ Q in EBITDA.
  • They are significantly north of 30,000 visitors per day at GM
  • Actually direct VIP is about 6% of the market in this past quarter. Wynn is only at 8% last quarter, not in the mid teens. 
  • They will dip their toes into the direct VIP business at GM
  • Any slowing in Visa approval?
    • In August, they had the first visit official visit from the central government- they are confident that they will have government support for Macau growth.
  • ADR for GM is in the HK$1,500 range. 

Noda Wins!: Bullish on Japan?

Conclusion: Yoshihiko Noda’s ascent to prime minister of Japan may be just what Japan needs to reverse the deterioration of its sovereign balance sheet. Though purely speculation at this point, it does create a major TAIL risk that needs to be managed by the long-term Japan bear community – us included.



Position: Bullish on JGBs (TREND); Bullish on the Japanese yen (TREND).


First thing’s first: The Japanese economy remains a slow-motion train wreck. As we have thoroughly outlined in our Japan’s Jugular slide deck, Japan’s fiscal laxity, ageing population and Indefinitely Dovish monetary policy are all preventing the country from experiencing sustained healthy levels of economic growth. In fact, without deflation providing an illusory boost to real GDP growth, the Japanese economy has literally gone nowhere over the last 20 years, with the most recent nominal GDP report (2Q) back at 1991 levels of ~460 trillion yen.


Noda Wins!: Bullish on Japan? - 1


Along with a couple of notable names in the hedge fund community, we remain long-term bears on Japan’s economy. What separates our process from theirs, however, is a distinct emphasis on timing. And from a timing perspective, we see catalysts lining up for being long of long-maturity JGBs and the Japanese yen, as well as removing Japanese equities from our list of top short ideas. No we are not getting outright bullish on Japanese equities, but we are affirmatively signaling that the conditions for shorting them are eroding on the margin.


Noda Wins!: Bullish on Japan? - 2


This marginal shift in our intermediate-term outlook for Japanese asset classes comes amid a noteworthy shift in Japan’s political situation. Yesterday, it was confirmed that Finance Minister Yoshihiko Noda will succeed the now-departed Naoto Kan as Japan’s next prime minister – the country’s sixth in five years and the third since the ruling DPJ party took control of the lower house in 2009.


Noda, who is among Japan’s most fiscally conservative officials, has upheld rhetoric suggesting that he won’t back away from Kan’s desire to rein in Japan’s fiscal deficit (currently at 8.1% of GDP) and produce a balanced budget in ten years. In fact, he flat out said that the DPJ had let the country down in this regard and called for raising the 5% consumption tax by “the middle of the decade” in order to secure funding for accelerating social security expenditures and a third reconstruction stimulus package totaling around ¥10 trillion.


It remains to be seen whether or not he can galvanize the fractured Japanese leadership and rally the Keynesian bureaucracy around the idea of deficit cutting any better than his predecessor. If history has taught us anything, it pays to take a wait-and-see approach with regards to Japanese policy, given the astonishing turnover in leadership we’ve seen in recent years. That said, however, Noda appears to have enough internal support to at least begin to have a healthy debate about balancing Japan’s budget without letting politics get in the way of progress.


In this light of this development, we maintain our favorable view of the Japanese yen and are now outright bullish on long-term JGBs as Noda’s agenda proves bond market friendly: higher taxes should beget slower growth and more cash flow for the sovereign to begin paying down its massive debt burden (~220% of GDP). Regarding the yen specifically, Noda appears to be backing off his interventionist tilt (three record interventions in the last year alone) with the latest $100 billion FX reserve scheme; additionally, Japan’s Cabinet Office is currently embarking on a campaign to educate the public on the “merits of a strong yen” – suggesting policymakers are perhaps coming to grips with the futility of their interventionist efforts.


Time will ultimately tell whether or not these TREND-duration ideas become TAIL-duration turnaround stories. That conversation is much better served for a later time and date, however. For now, we remain long-term bears of the Japanese economy and we need to see a great deal more fiscal and monetary policy adjustment before changing our view here. On the margin, however, Noda’s victory should ultimately prove positive for Japan’s balance sheet and we’d be remiss to present it as otherwise.


Darius Dale



Noda Wins!: Bullish on Japan? - 3


The policy of inflation, and the stagflation that results, is weighing on confidence in the United States. 


As the August 12th edition of the Early Look stated, “If the similarities between 2011 and 2008 are bad, the differences are almost worse.”  The University of Michigan Confidence number for August was the worst reading for that metric since 1980.   Today’s Conference Board number is the lowest level for more than two years and its seventh lowest level on record.


Today’s Conference Board Consumer Sentiment Index print confirmed what we already knew: inflation as a policy, and the stagflation that has resulted, is weighing on confidence.  Confidence in August came in at 44.5 versus expectations of 52.  The sequential drop from the revised July figure of 59.2 was the largest point drop since October 2008.  On August 12th, following the release of the University of Michigan Consumer Confidence number for August also missed expectations by a wide margin.   For an economy that relies on consumption for roughly 70% of its GDP, this is a worrying trend.  As the chart immediately below illustrates, the confidence print has missed expectations on three-of-the-last-four Conference Board releases.





The improvement in consumer sentiment over the past couple of years has been almost entirely driven by the expectation that future conditions were to improve while consumer perceptions of the present situation have been flat (at a historically low level) with some marginal uptick.  We have dubbed this growing spread “The Optimism Spread”.  As the chart below illustrates, this spread has collapsed in recent months as Washington’s incompetence has been under the spotlight as outlook for employment soured and volatility in financial markets increased greatly. 





All in all, despite gasoline prices coming down from their May peak, and declining during the month of August, confidence has cratered in the United States.  Jobless Stagflation is not something the Hedgeye Macro team has been highlighting for some time and we believe the impact of a broken monetary policy is being underscored by these ugly economic data points.









Howard Penney

Managing Director


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European Risk Monitor: Cries of Solidarity?

Positions in Europe: Short EUR-USD (FXE); Short UK (EWU)

There’s been plenty of “pin-action” in European capital markets over the last weeks, including yesterday’s equity market rally (the Athex closed up +14.4%) on merger talks of Greece’s second and third largest banks (Eurobank & Alpha Bank), however little has changed in our outlook over the intermediate TREND to longer term TAIL. The fundamental data remains skewed to the negative (with slowing growth and inflation sticky; and declining confidence ) across much of the region and we see a huge political football ahead of us in the passing of the EFSF, including the ultimate size of the facility, which is not part of the terms, when the governments of Europe vote on its ratification in late September and early October.


Given this time frame, we think there’s plenty of more downside in the capital markets of not only the PIIGS, but also the core, as uncertainty breeds discontent. We were early to flag the negative inflection in German high-frequency data in early Q2 and contagion effects as Italy and Spain move into the sovereign debt spotlight.  We’re currently short the EUR-USD with an immediate term TRADE range of $1.42 to $1.45 and remain short the UK’s sticky stagflation [CPI at +4.4% in July Y/Y and Q2 GDP at +0.7% Y/Y or +0.2% Q/Q].



Political Pandering

As we wait and watch for the European governments to vote on the terms of the EFSF, it’s worth calling out quotes from leaders in recent days. In short, their remarks demonstrate 1.) how uncertain the environment is, that is the health of sovereigns and European banks, 2.) political pandering for reelection purposes, and 3.) the lack of coherent  go-forward policy (constitutional provision) to mandate fiscal consolidation; mechanisms to allow banks to fail; and assistance plans beyond mere bailout band-aids (Euro-bonds?).  Here’s what stood out:


German Chancellor Angela Merkel: “Many are worried, but they don’t need to be because the currency is stable… It’s our aim to come out of this stronger than we went into it, as we did during the banking crisis. I said that in 2009, and look at where the economy is in 2011. This can be achieved again.” (8/29)


Polish Finance Minister Jacek Rostowski: "European elites, including German elites, must decide if they want the euro to survive - even at a high price - or not. If not, we should prepare for a controlled dismantling of the currency zone."  (8/29)


IMF Head Christine Lagarde:  Called for an “urgent” recapitalization of Europe’s weakest lenders, saying that shoring up the banking system was key to cutting “chains of contagion” across the region. (8/28)


ECB chief Jean-Claude Trichet:  “There is no liquidity or collateral shortage for the European banking system." (in response to Lagarde on 8/29)


EU monetary affairs commissioner Olli Rehn: "EU banks are significantly better capitalized now than they were one year ago…This has been confirmed by the stress tests in July. In the run-up of the tests, European banks increased their capital by some €50 billion.” (8/29)



Calendar Catalysts

As we move forward, here are a few calendar catalysts to keep front and center:


German EFSF vote – the German parliament has moved back its schedule vote on the EFSF changes from Sept 23 to Sept 29 or Sept 30 due to the Pope’s visit to Berlin.  Michael Meister, the senior finance and economy spokesman for Merkel’s Christian Democrats, said Merkel would be able to secure a majority of her coalition voting in favor of the changes.  HE: This decision will be tight. As of now, it looks like the headlines may be a bit inflated—we think Merkel gets the vote passed, despite her and her party’s waning confidence. Remember, Germany is playing its cards with the largest voice in Europe. Germany doesn’t want to go about bailing out Europe on its own (even if it ultimately must) and will politic to get the terms it wants.

Germany’s constitutional court is scheduled to deliver its opinion on Germany’s participation in Eurozone bailouts on Sept 7HE: We expect the court to rule in favor of the legality of the State’s right to bailout European neighbors. In any case, this will be an important sentiment gauge for the EFSF.

ECB meeting on Sept 8 - The ECB will be releasing new staff projections for inflation and growth. HE: Expect downward revisions!


Risk Monitor

Directly below is a chart of European 10YR bond yields across the PIIGS and 5YR CDS. A few callouts include:


1) While yields are off their mid-July highs (except for Greece), we expect the trend to remain up and to the right.


2.) We’re focused on yields in Italy and Spain, two countries that present exponentially more sovereign debt risk than their peripheral peers. While yields have remained below the 5% level for a couple of weeks, this has been a function of the ECB’s SMP bond purchasing program. Trichet has indicated unwillingness for the SMP to be a significant program (in size or duration) meaning yields could well rebound should policy change.


3.) Greece is running away. Yields indicate Greece should be in default.  The powers that be are doing all they possibly can to prevent this reality.  As Keith says, gravity cannot be stopped.


4.) We are keeping a close eye on France, which is critical to the EFSF, and where swaps widened by 12 bps to 165 bps week-over-week. We believe the CDS market is currently pricing in decreased hedge effectiveness in addition to improvement in sentiment around sovereign solvency. 


European Risk Monitor: Cries of Solidarity? - 1.a


European Risk Monitor: Cries of Solidarity? - 1.b


European Financials CDS Monitor – Bank swaps in Europe were wider last week (on a w/w basis from Friday’s close).  35 of the 39 swaps were wider and 4 tightened.   The average widening was 10%, or 40 bps, and the median widening was 3%. The unanswered question remains the extent to which the EFSF could support failing banks. Stay tuned.


European Risk Monitor: Cries of Solidarity? - 1.c


Matthew Hedrick

Senior Analyst

DSW: The Key Issue


Solid number out of DSW capping off results out of the family footwear space. But looking forward, the key issue for us here is that this is a company that we think is average quality at best that is growing into more expensive real estate. And even though it is getting better property deals given the current environment, it still needs to comp at 2-3x the rate of its peers to leverage SG&A (this is the Dick’s Sporting Goods of shoes). It has been comping better than 10%+ for seven quarters now. Was DSW lucky, or was it good? Probably a little of both. But what we know is that another quarter out DSW definitely HAS TO be good. VERY good. We’re not willing to give this one the benefit of the doubt. The business model is simply too complex and inefficient, and too many things are going its way right now.


Here are a few additional callouts from the quarter:

  • The driver here continues to be comps coming in up +12.3% coupled with gross margin expansion. With comps up LDD in the 1H of F11, the company’s updated outlook for full-year comps up MSD implies a sharp 2H deceleration with 2-year comps coming in 400-500bps.
  • DSW was the only company in the family footwear space to post gross margin expansion (+240bps) in Q2 despite LDD product cost increases across the space. We suspect these results were driven by continued success in growing accessories and private brands.
  • Inventory growth was modest up +3% on +15% sales growth resulting in a positive sales/inventory spread for the first time in the last five quarters despite higher costs. In fact, DSW is the only company in the space in the upper right quadrant with PSS, BWS, and SCVL all currently in the bottom right.
  • The company updated its outlook for the full-year taking EPS guidance up only $0.05 to $2.70-$2.85 despite a $0.11 beat suggesting softer 2H expectations. It will be interesting to hear how the company is planning for the 2H as the leader of the family footwear pack.


DSW: The Key Issue - FW FamilyFW CompTable 8 11


DSW: The Key Issue - FW FamilyFW CompCharts 8 11


DSW: The Key Issue - FW FamilyFW SIGMA 8 11




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






Business and consumer optimism in the eurozone slipped in August, reinforcing fears about the region's economy.  The economic sentiment index, issued today, fell 4.7 points to 98.3.   Germany, the largest eurozone economy, reported the largest drop. 


The Conference Board Consumer Confidence number for August is scheduled to be released at 10 a.m. this morning.  The survey is calling for a print of 52 versus 59.5 prior.  The University of Michigan Consumer Confidence number missed the survey, which was calling for a print of 62, by a wide margin when it came in at 54.9. 


The ICSC chain store sales index ended its string of four declines with a slight 0.1% gain in the latest week. Discounters led the growth in some parts of the country as consumers prepared for Hurricane Irene. Year-over-year growth held 3%, the slowest pace in nine weeks and about its year-to-date average.





WINN has been trading strongly over the past couple of weeks and – as often happens – the strong price action in the stock was a precursor for the company to report strong earnings yesterday.  4QFY11 EPS came in at $0.11 vs $0.085 expectations.







  • SBUX said today that it will have packages of its Keurig coffee pods available at U.S. grocery stores and specialty retailers beginning in November.
  • DPZ announced that it has refranchised 30 company-owned stores in Atlanta to four local owner-operators.




  • CBRL and BOBE were cut to “Neutral” from “Buy” at SunTrust Robinson
  • CAKE has tapped Donald Evans as its Chief Marketing Officer.  Mr. Evans most recently spent 11 years at Walt Disney Co., most recently as senior VP-animation marketing for Pixar Animation and Walt Disney Animation Studios.





Howard Penney

Managing Director


Rory Green


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