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GALAXY SURPRISE

Upside driven by Galaxy Macau which bested arguably conservative initial projections.  A standard ramp of the new property should drive solid ROI. 

 

Galaxy’s 2Q Adjusted EBITDA of HK$1.1BN beat our estimates and the Street’s by about 15%.  Most of the upside – at least versus our numbers – came from Galaxy Macau (GM) which is really what will drive this stock going forward.  GM’s results benefited from high hold to the tune of HK$70-80MM according to management.  However, we and all the HK analysts already knew and should have factored that into their estimates.  If GM ramps as we expect it to do, the property should come in line with the company’s newly revised target of high teens to low 20’s ROI.  

 

Detail 

Galaxy Macau reported revenue of HK$2,384MM and Adj EBITDA of HK$376MM, 4% above our revenue estimate and significantly above our EBITDA forecast due to lower overall commissions and expenses.

  • VIP turnover and gross win was 4% above our estimate due to direct play at the property
    • Galaxy Macau direct VIP turnover was approximately 4% of total VIP RC.  Galaxy noted that they would wade slowly into the direct business.
    • If hold was 2.85%, GM would have reported $346MM less in revenue and approximately HK$80MM less in EBITDA.
    • Rebates were 1.2% or 33.4% of win and we estimate that junket commissions were an incremental 25bps or 10% of win
    • Mass win was in-line with our estimate while slot win was 19% better than we estimated (this was offset by a drop off in slot win at Starworld
    • Estimated net non-casino revenue was HK$80MM
    • Estimated that fixed costs were $290MM

Starworld revenue of HK$5BN was in-line with our estimate and Adj EBITDA of HK$685MM was 3% above our estimate

  • VIP and Mass win were in-line with our estimates while slot win was materially lower
  • Estimated fixed expenses were HK$330MM – 13% above our estimate – this is likely due to unfavorable VIP win mix (low hold on RC play) which manifests itself as higher direct cost

City Clubs saw the impact from Rio switching to a top line deal this quarter from a revenue sharing deal.

 

Outlook

Based on July and August to date numbers, we estimate that Galaxy will report 3Q revenue of HK$12.9BN and Adjusted EBITDA of HK$1.96BN and FY11 revenue of HK$41.2BN and Adj EBITDA of HK$6.08BN.

 

Galaxy Macau:

  • 3Q revenue of HK$6.5BN and FY11 revenue of HK$16.6BN
  • 3Q Adj EBITDA of HK$1.2BN and FY11 revenue of HK$3.1BN

Starworld:

  • 3Q revenue of HK$5.9BN and FY11 revenue of HK$22.9BN
  • 3Q Adj EBITDA of HK$757BN and FY11 revenue of HK$2.9BN

WEEKLY COMMODITY MONITOR: SBUX, DNKN, GMCR, PEET, DPZ, TXRH, CAKE, AFCE

Coffee prices led the way over the last week, gaining 4.5% along with Soybeans, Wings, Rice and Corn which all gained roughly 4% over the same period.  Cheese prices gained week-over-week but have declined rapidly from the elevated prices seen for most of the year and are now only marginally above the 2010 peak.  Gas prices gained week-over-week as demand picked up, per the Mastercard data, ahead of Hurricane Irene hitting the East Coast.

 

WEEKLY COMMODITY MONITOR: SBUX, DNKN, GMCR, PEET, DPZ, TXRH, CAKE, AFCE - commod 831

 

 

Coffee

 

Coffee prices gained 4.5% week-over-week, reaching a three-month high in the process, as concerns mounted that global production will fall short of demand.  Inventories of Arabica coffee monitored by ICE Futures U.S. have fallen 4.4% this month and 27% in the past year, according to exchange data cited by Bloomberg.  Coffee has broken the downward trend that was prevailing for May, June, and July with a strong move to the upside.  Prices are now only 6.6% below the YTD high.

 

WEEKLY COMMODITY MONITOR: SBUX, DNKN, GMCR, PEET, DPZ, TXRH, CAKE, AFCE - coffee 831

 

 

Below is a selection of comments from management teams pertaining to coffee prices from recent earnings calls.

 

PEET (8/2/11): “As we indicated, in our first quarter call, we had to buy a small amount of our calendar 2011 coffee beans at significantly higher prices and this coffee will roll into our P&L during the third and fourth quarter.”

 

“Higher priced coffee resulted in gross margins this quarter being 290 basis points below prior year. In our first quarter conference call, we indicated that in addition to the overall higher price coffee market, we had to buy a small amount of coffee this year at significantly higher prices. And as a result, we expected our coffee cost to be 40% higher in fiscal 2011.”

 

HEDGEYE:  Peet’s is a company with a very competent management team that manages coffee costs extremely well.  Its higher-end, loyal customer base makes the price elasticity of demand more inelastic than for other coffee concepts’ products.

 

 

SBUX (7/28/11):  “As I mentioned earlier, are absolutely a headwind for us in the full business and that's most acutely impactful on margins in CPG as it's a much more coffee intensive cost structure, as you know. I can tell you that the decline as I spoke about it earlier from about 30% operating margin in CPG this year down to the target 25% next year is really all explained by commodities. Absent commodity inflation we'd be at or improving our margin in the coming year.”

 

“As we had anticipated, in recent weeks, coffee prices have retreated significantly from a high of more than $3 per pound just a couple of months ago to levels now near $2.40 per pound. As prices have been falling we continue locking up our needs for fiscal '12 and now have virtually the full year price protected.”

 

HEDGEYE: Starbucks is aligning itself with the right partners to gain more control of its coffee costs to provide investors with more certainty going forward and to protect its margins as global coffee demand continues to rise.

 

 

GMCR (7/27/2011): “However, what we've said is that should coffee prices or other material costs spike, we will certainly consider price increases as necessary. We certainly hope that we do not have to cover one again next year. But our objective long-term is attempting to maintain our gross margin as we would see input costs come along.”

 

HEDGEYE:  GMCR hedges out 6-9 months in advance.  Without a rising dollar and some stronger supply growth to counteract growing global demand, we expect sustained elevated prices.

 

 

Cheese

 

Cheese prices gained 0.6% week-over-week but have declined -17% since the end of July.  Sustained higher corn prices should provide some support but prices have been extremely volatile this year.

 

WEEKLY COMMODITY MONITOR: SBUX, DNKN, GMCR, PEET, DPZ, TXRH, CAKE, AFCE - cheeese 831

 

Below is a selection of comments from management teams pertaining to cheese prices from recent earnings calls. 

 

DPZ (7.26.11): “Given higher than originally anticipated cheese prices, we currently expect our overall market basket for 2011 will increase by 4.5% to 6% over 2010 levels. This was up from our previously communicated range of 3% to 5%.”

 

HEDGEYE: We recently highlighted the fact that DPZ’s last earnings call took place during a trough in cheese prices and we expected a change in tone from the commentary in early May.  It remains to be seen if cheese prices will remain above 2010 levels for the remainder of the year but CAKE’s guidance for inflation in 2011 has suddenly become much more realistic, although not a sure thing.

 

TXHR (5.2.11): “We've also got a lot of flow in the dairy markets, in cheese, so there's other things beyond produce that do move around throughout the year.” 

 

HEDGEYE: In 1Q09, TXRH called out favorable beef and cheese prices as being primary drivers of cost of sales being down 126 bps in the quarter.  Cheese was a contributor to a cost of sales increase in 2Q11, as we predicted.

 

 

Corn

 

Corn prices have been moving higher for the past two months as adverse weather conditions have weighed on sentiment for the planting season after what was a poor growing season.  Russia is increasing its grain exports as crop damage in the U.S. and Europe impacts supply.  U.S. corn and soybeans ranked by the USDA as "good" or "excellent" fell to 54% and 57% respectively last week, down from 57% and 59% in the prior week.

 

WEEKLY COMMODITY MONITOR: SBUX, DNKN, GMCR, PEET, DPZ, TXRH, CAKE, AFCE - corn 1106

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


Month End: SP500 Levels, Refreshed

POSITION: Long Utilities (XLU), Short Financials (XLF)

 

Moving off of ZERO percent asset allocation to US Equities on Friday (bought Utilities) was me acting on a signal that in the immediate-term I was going to be wrong (last week) and we were not going to re-test the prior August closing lows on the no QG3 news.

 

So now I’m still short Financials (XLF), long Utilities (XLU) and looking for my level to short the SP500 (SPY). Interestingly, but not surprisingly, I’ve had to re-model the upward bound of the immediate-term TRADE range multiple times this week. Primarily that’s because 2 of 3 factors in my core model (Price and Volatility) are pushing the upward bound higher at an accelerating rate.

 

Gravitationally, this makes sense. The market tends to rise and fall to the most immediate-term point that imposes the most amount of pain on the highest amount of market participants.

 

With month end markups in motion here (not including August data, since April the SP500 has averaged +0.7% price performance in the last 6 days of the month vs down -4.5% down in the first 6 days of the new month) and the 3rdfactor in my core model (Volume) not confirming this price rally, I’m now in wait and watch mode – selectively shorting single stocks and waiting on my SPY price.

 

Across all 3 durations, this market is still broken/bearish with the following resistance lines: 

  1. TRADE = 1234
  2. TREND = 1292
  3. TAIL = 1263 

The most bullish news I can give you is that we have taken out the most immediate-term call for a lower-YTD-low (below 1119). My immediate-term TRADE range is now 1, and I’ll manage risk around that range until 1203 is violated on the downside. If it breaks, I suspect the move down from there in the SP500 will be as swift as this 6 day move up.

 

Big Government Intervention continues to A) Shorten Economic Cycles and B) Amplify Market Volatility.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Month End: SP500 Levels, Refreshed - 1


Early Look

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THE HBM: MCD, KKD

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

 

MACRO

 

Consumer

 

The August slump in consumer confidence, first indicated by the University of Michigan and Bloomberg Weekly Consumer Comfort data, was confirmed yesterday by the Conference Board Consumer Confidence Index which came in at 44.5 versus expectations of 52.

 

 

Subsectors

 

Food processors and QSR stocks outperformed peer subsectors yesterday.  Food retail was led lower by Winn-Dixie, which corrected after a significant increase in the stock price ahead of earnings post-close on Monday.

 

THE HBM: MCD, KKD - subsectors fbr

 

 

QUICK SERVICE

 

MCD is changing its strategy in China to accommodate changing conditions in the industry, according to China Daily.

 

KKD is stepping into the coffee wars in a big way with three new signature coffees debuting this week, and a new marketing campaign set for Friday.  According to NRN.com, the 669-unit, Winston Salem, N.C.- based chain will offer its signature house blend, dark roast and house decaf varieties just as the competitive coffee market is dominated by the likes of Dunkin’ Donuts, Starbucks and McDonald’s.

 

The “better burger” revolution!  According to Technomic which has labeled the upstarts in the sandwich category the "better burger" chains have taken over the top slots on their list of fastest growing limited-service burger restaurants, including places likeShake Shack (133% growth), Smashburger (116% growth) and Mooyah Burgers & Fries (54.5% growth).

 

THE HBM: MCD, KKD - stocks 831

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


MACAU COMMISSION ANALYSIS

The data is in.

 

 

Despite the rhetoric, total commissions have not been rising in Macau.  Maybe they will if LVS turns aggressive next year (see our 08/29/11 note “LVS: SHOWING AGGRESSION”), but overall commission rates were down in 1H of 2011 both on a percentage of revenue and rolling chip basis.  The following chart shows the junket commission trends.  Note that hold percentage was below normal in 2009 which caused the spike in the blue line in that year since the junkets structured on a percentage of rolling chip still get paid the same amount regardless of hold.

 

MACAU COMMISSION ANALYSIS - commission1

 

The charts below show the composition, by company, of all-in commissions between the straight junket commission, the rebate that goes back to the player, and non-gaming giveaways.  The first analyzes the dynamics on a revenue share basis, the second as a percentage of rolling chip.  Two main takeaways:  Wynn remains the least aggressive – no surprise here – and higher commissions have not been the driver of the strong growth we’ve seen at City of Dreams. 

 

Here are our observations:

  • Wynn maintained the most profitable VIP business on the Street by the least to acquire it
    • Rebate rate of 85bps of RC or 30.5% of win in 1H11 (88bps/29.3% in 2010)
    • Junket commission of 20bps of RC or 7.1% of win in 1H11 (20bps/6.8% in 2010)
    • All-in rate including comps  of 118bps of RC or 42.35% in 1H11 (122bps/40.6% in 2010)
  • MPEL and MGM were tied in 1H11 for paying the most for their VIP business.  MGM had the highest on a RC basis, while MPEL got the top prize on a % of win basis. 
    • MGM paid the highest rebate rate of 106bps of RC or 35% of win in 1H11. MGM has actually had the highest rebates since 2008 (103bps/35% in 2010)
    • MPEL paid the highest junket commission of 30bps of RC or 10.8% of win in 1H11. MPEL has consistently had the highest junket commissions since 2008 (36bps/12.25% in 2010)
    • MGM had the highest all-in rate including comps of 140bps of RC in 1H11 (137 in 2010) while MPEL has the highest all-in rate including comps as a % of win of 46.7% (46.9% in 2010)
  • LVS hold the prize for deriving the largest % of its revenues from non-casino revenues, however, given the scope of their business they also have the largest non-gaming comps.
    • LVS non-casino comps were 16bps of RC volume or 5.3% of win in 1H11 (18bps/6.2% in 2010). LVS has consistently been the highest non-casino comper since 2008, however, comps as a % of win and RC have been steadily declining since 2008.
  • MPEL’s non-casino promotional expenses as a % of RC and win are the lowest on the street
    • Comps were 7bps of RC or 2.6% of win in 1H11 (9bp/3.1% in 2010)

 

MACAU COMMISSION ANALYSIS - commission2

 

MACAU COMMISSION ANALYSIS - commission3


THE M3: MPEL HK IPO; NEVES COMMENTS

The Macau Metro Monitor, August 31, 2011

 

 

PRESS DIGEST HK Reuters

MPEL plans to launch its HK IPO in October.  Rumors indicate up to US$500MM may be raised.

 

MACAU: VISITORS UP ON THE LAST WEEKEND OF SUMMER Macau Daily News

Border crossing at the Gongbei border reached 600,000 in the last weekend of the summer holiday. The Gongbei port has accumulated up to 16MM passengers during the summer holiday.  Expansion plans for the Gongbei border will be sped up to improve the border crossing experience of travelers.

 

GAMING REVENUE TO GROW 'ABOVE 35%': REGULATOR Macau Daily Times

DICJ director Manuel Joaquim das Neves forecast 2011 Macau GGR growth above 35%.  In April, Neves had said 2011 growth would be between 20-30%.  Neves also stressed that, as Macau’s gaming regulator, he is inevitably inclined to have “a conservative outlook”.

 

The forecast proposed by Neves would place casino revenue for the final four months of this year at less than MOP 83BN, up by only 17.5% from the same period of 2010.

 

DICJ REJECTS JUNKET MONEY LAUNDERING LINK Macau Daily Times

DICJ director Manuel Joaquim rejected yesterday's leaked US diplomatic cable saying, “It’s not impossible but it is very difficult to conduct money laundering in local casinos. We have had no such problem so far. People might think it’s possible to simply buy some chips at a casino and then trade them at another counter but it’s not. Gamblers must prove they played and that they won that amount and casinos have to write a check with the winner’s identification."


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