An in-line quarter negatively impacted by mix




  • GEG Adjusted EBITDA of HK$1.793BN
  • Galaxy Macau Adjusted EBITDA of HK$973MM and revenue of $6,390MM
    • VIP RC: HK$163BN; win: $4.9BN
    • Mass drop: HK$5BN; win: HK$1BN
    • Slots handle: HK$4BN; win: $262MM
    • US GAAP Margin of 23%
    • 2,100 rooms open in 3Q, 91% occupancy
    • "All 2,200 rooms and Macau’s first mega 3D Cineplex to open in late Q4 2011"
  • Starworld Adjusted EBITDA of HK$779MM and HK$6.4BN of revenue
    • VIP RC: HK$180BN; win: HK$5.9MM
    • Mass drop: HK$2.3BN; win: HK$433MM
    • Slot handle: HK$917MM; win: HK$58MM 
    • US GAAP margin 21%
  • City Club Adjusted EBITDA of HK$32MM
  • Construction material Adjusted EBITDA of HK$117MM
  • Balance sheet: Cash of HK$7BN 



  • Galaxy Macau
    • Opened 3 new VIP rooms at Galaxy Macau in the quarter for a total of 10 now
    • Wave pool had 2,000 visits per day in August
    • Hold challenges impacted their results by HK$60MM (bad mix) - would have been $1,030MM
  • Starworld also had an unfavorable mix of RC vs RevShare business which also negatively impacted their business but didn't quantify it.
  • City Clubs's result decline was a result of hold challenges and YoY volume declines


  • 95% gaming and 5% non-gaming revenue split at both Starworld & GM
  • Will likely make an announcement sooner rather than later on PH2 of GM
  • GM's hold was fine but the mix was unfavorable 
  • Added a slot marketing team, new signage around the property at Starworld are some of their new changes that are driving mass
  • Mass business is growing at Galaxy Macau. Their brand awareness is growing. As their dealers gain experience, their Mass hold has increased.  Busing program is successful. 
    • Growing their database is important to grow the Mass business at GM - it just takes time to ramp. Shuttle bus and day tripper business are growing. 
  • The addition to fixed cost isn't as high as you would think as the additional hotel rooms come online; it's mostly just variable costs


MCD will announce September sales, along with 3Q11 results, before the market opens on Friday, October 21st.


I suspect that there will not much to complain about when MCD reports 3Q11 numbers on Friday.  Over the past three months, 3Q11 consensus estimates have declined by 0.4% and now stand at $1.42.  I suspect that the $0.06-$0.07 of currency benefit the company guided to at the start of the quarter is likely now only $0.01-$0.02.  Given all that and any non-operating items, MCD should come close to hitting consensus; but there not a lot of wiggle room.  I put it at $1.41 for the quarter.


From a MACRO stand point MCD is facing some issues.  In particular, beef prices continue to trade higher and consumer confidence and retail sales numbers in Europe are sluggish. 


Recapping the quarter to date sales trends, we know July was a strong month, beating expectations globally.  August, on the other hand, was not a very strong month for MCD sales, largely due to timing issues and one-time items in Europe (Ramadan) and APMEA (power outages in Japan), respectively.  Global comps came in at +3.5%, below the street’s +4.7% estimate.  U.S. comps of +3.9% were only 10 bps shy of expectations, but Europe comps came in +2.7% versus +5.5% expectations.  APMEA missed by the widest margin, -0.3% versus the street at +3.9%. Weak sales in Japan weighed on the overall results.


As important as the reported number in the quarter, sales trends in September and October will likely have a bigger impact on market psychology.  On that front, I suspect that MCD will have sequentially better month in September. 


Compared to September 2010, September 2011 had one less Wednesday and one additional Friday.  As a result, I would not anticipate any major calendar shift.  Below I go through my take on what numbers will be received by investors as GOOD, BAD, and NEUTRAL, for MCD comps by region.  For comparison purposes, I have adjusted for historical calendar and trading day impacts. 


U.S. - facing a compare of +5.7% (including a calendar shift which impacted results by +0.1% to +0.3%, varying by area of the world). 


GOOD: A print above 5.0% would be received as a good result, as it implies acceleration in two-year average trends.  Despite the slight miss in August, two-year average trends improved on a calendar-adjusted basis.  It will be interesting to see if McDonald’s can continue to drive trends higher in September.  I am expecting a strong month.


NEUTRAL:  A print between 3.0% and 5.0% would be received as a neutral result by investors given that the mid-point of this range implies two-year average trends, on a calendar-adjusted basis, that are relatively in line with trends in August. 


BAD: Same-restaurant sales below 3.0% would imply a sequential slowdown in two-year average trends and could raise significant doubt about the ability of MCD to maintain its recent impressive top-line performance. 


EUROPE - facing a compare of +4.9% (including a calendar shift which impacted results by +0.1% to +0.3%, varying by area of the world).  Europe was a disappointment in August but the timing of Ramadan was largely responsible for the sales shortfall.  As a result, investors are expecting to see this trend reverse in September.


GOOD: A print of 5% or higher would be received as a good result for Europe as it would imply a nearly 200 bp acceleration in two-year average trends after the 190 bp decline (calendar-adjusted basis) in August.  If MCD can reverse last month’s slowdown, investors will more likely be convinced that the slowdown in August was indeed a timing issue.


NEUTRAL: A result between 3% and 5% would be received as a neutral result because it would imply two-year average trends that are improved from the weaker-than-expected trends in August 


BAD:  A result below 3% would imply two-year average trends that are only slightly better than or level with the disappointing two-year average trends seen in August. 



APMEA - facing a difficult compare of +6.2% (including a calendar shift which impacted results by +0.1% to +0.3%, varying by area of the world).  As in Europe, MCD faced some one-time issues in APMEA during August as power outages negatively impacted results in Japan.


GOOD: A print of 6% or higher would be received as a good result as it would imply a sequential acceleration of nearly 200 bps in two-year average trends, thereby showing a reversal of the slowdown during August.  Again, this would help to convince investors that the power outages in Japan were largely to blame for the significant falloff in trends in August.


NEUTRAL: A result between 4% and 6% would be received as a neutral result because it would imply two-year average trends that have accelerated from the worse-than-expected trends in August. 


BAD: Same-restaurant sales in APMEA below 4% would be received as a bad result because it would imply only a slight uptick or level trends with what was a disappointing month.



MCD - A LOOK AHEAD - mcdss


MCD - A LOOK AHEAD - mcdbs


Howard Penney

Managing Director


Rory Green




Underwhelming results and no special dividend.  Not quite what people were expecting.




  • Wynn Resorts reported net revenues of $1.3BN and $381MM of Adjusted EBITDA- in-line with consensus estimates
  • Wynn Macau reported net revenue of $951MM and Adjusted Property EBITDA of $296MM
  • Wynn Las Vegas reported net revenue of $347MM and Adjusted Property EBITDA of $85MM
    • 3.1% of total rooms were unavailable during the quarter due to an air rebalancing project compared to 6.2% last year
    • Entertainment growth of 21% YoY was largely due to revenue growth at the Garth Brooks and La Reve shows
  • "Board of Directors has approved a cash dividend for the quarter of $0.50 per common share. This dividend will be payable on November 16, 2011, to stockholders of record on November 2, 2011."
  • Cash: $1.8BN; Total Debt: $3.1BN ($2.6BN in Vegas)



  • Had a lower hold in Las Vegas, which if normalized would take them back to $100MM of EBITDA vs. $85MM.
  • In Macau, it's not so much about market share but bottom line - which keeps climbing
  • Doing their budgeting on the work that will unfold over the next few years but special dividends are in fact special and there is no certainty about what the board will decide to do going forward.



  • Impact of credit tightening on the VIP segment in China
    • Don't see any change in their business
    • They have never had to increase their reserves because they take adequate reserves
  • Have excess cash in Macau - will go through a financing exercise - combo of bank debt and cash next year 
  • Cash: $1.1BN is offshore and $700MM onshore
  • October trends: "October is gangbusters" 
    • $73MM in Macau so far in October through the 18th
    • In Las Vegas. they are doing about $1.25MM per day
  • Depreciation is a real expense for them.  Eventually if you spend less than D&A in Vegas it catches up to you
  • Promotional activity in Macau.  Usually when a new place opens up, things get more promotional and then come back to normal. 
  • MA & FL are very interesting markets - senses that they are acting in a more stable way which should encourage serious investment in those markets. They are looking at those markets. They are also considering if their brand makes sense in those markets. Feeling very positive in a very preliminary way about MA & FL.
  • Leisure has been pretty stable for them in Vegas - Leisure ADR has improved 21%. Also had another great quarter for convention business. 4Q business is also looking great. 1Q12 is coming in similar YoY for group business for them.  Some people are waiting to get their budgets approved.  March will be a challenge since Con Agra isn't in Vegas. So they may be down on group in the first quarter, but feel like things will be stable for the year.
  • Thinks that there continues to be excess demand than supply in Macau. Thinks that they are in the 3rd or 4th inning of development.
  • They have $30MM of retail profits in Macau per quarter - quite phenomenal
  • Every time a new resort opens in Macau, supply gets fully absorbed. They are not concerned about new supply.
  • Only 1% or less of upscale citizens are coming to Macau right now 
  • No change in days outstanding for credit in Macau
  • Florida perfectly suited for being a destination resort destination.  Miami could be a great destination resort city if done right.
  • Wynn Macau is capacity constrained, but there is an opportunity to optimize business. They manage table limits very prudently. Have a little capacity mid week. 
  • YTD in Macau $956MM, last year $561MM EBITDA - through October 18th.  Even for the month, they are up 30% so far. Headed for another $100MM+ month.
  • Cotai update: The government issues a draft contract - which has been signed. That is usually associated with the final approval stages.  A premium was already set.  They are waiting for the gazetting to happen. They have already submitted their plans to the government. When the gazetting takes place, hopefully they can start construction. In Cotai, their hallways are 8 feet wide and 11 feet high. Laying foundation will take a lot of time. Sometimes they need to fill 92 meters and as little as 78 meters.  Between keystones and pile caps, that's almost 10 months of work.  Once they are done they can build one floor per week. 
  • Doesn't think it's relevant to compare the past timelines to now since the approval process is now taking longer. They are going to be the first stop at the monorail. 
  • It's possible to spends hundreds of millions of dollars on foundation 
  • Why was corporate expense so high? It can be choppy but they should be similar in 2011 to 2010 for FY
  • Low hold in the quarter was due to bacarrat. They come in groups - they had some guys win a few million here and there. This month was off by 3-4% - $15-20MM. It wasn't just one event - they are too big for that. 
  • Market share trend in second week of October?
    • Their market share is up
  • According to Steve, the current table cap has to do with the current tables not for future developments, i.e. those that fall outside the limit

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UK Recovery Off-Track, Continued

Positions in Europe: Short EUR-USD (FXE)

The UK recovery is off-track, said Bank of England’s Mervyn King today. You think…?


Our thesis remains intact: the UK economy is experiencing stagflation that should persist for at least the next 2-4 quarters in an optimistic scenario. Real growth should remain impaired from domestic austerity that weighs on confidence, spending, and tax receipts, as sovereign debt and banking contagion fears across continental Europe expand and reduce appetite for UK goods and services. (Note: European nations are collectively the UK’s largest export partners).


Further, while members of the Bank’s Monetary Policy Committee voted 9-0 to increase its gilts purchasing program by £75B over the next four months [the BoE bought £200 Billion in asset purchases (QE) between March 2009 and January 2010] and keep its main interest rate at 0.50% in an attempt to will growth, we think the actions may do little to move the needle.


The BoE minutes from the October 5-6 gathering show that consensus believes Q4 growth will be close to zero. We see the UK dipping back into recession, as inflation continues to surprise the BoE to the upside for a protracted period.  Yesterday’s release of September CPI at +5.2% year-over-year, versus 4.5% in August, on a tough +3.1% comp in September 2010, demonstrates the sticky stagflation hampering the economy. Equally, Input Producer Prices continue to drive Output Prices higher, another negative for spending (see charts below).


The components that saw the largest year-over-year moves were gasoline, up +22.3% and alcoholic beverages and tobacco, up 10.0%. Based on September monthly averages of Brent crude on a year-over-year compare, Brent saw a +28.5% gain, a pressure the country can do little to reduce given its dependence on foreign sources. NOV., DEC., JAN., and FEB. Brent comps should could well prove inflationary.  Alcohol and tobacco gains came at the hands of higher taxed for these goods.


The broader UK fundamentals we follow also portend a negative set-up:  PMI (Services and Manufacturing) have yet to confirm a positive uptrend, down around the 50 line for the last months that divides expansion (above) and contraction (below); the Unemployment Rate ticked up 20bps month-over-month to 8.1% in August; Retail Sales remain anemic, at 0.0% in August Y/Y; and housing has yet to show any meaningful improvement.


The downward revisions to Final Q2 GDP, bringing year-over-year growth down 10bps to 0.6% Y/Y and quarter-over-quarter growth down 10bps to 0.1% Q/Q have also contributed to the less-than-rosy outlook (see chart below).


We do not have an active position in the UK in the Hedgeye Virtual Portfolio, but have used the eft EWU as an investment vehicle in the past. 


Matthew Hedrick

Senior Analyst


UK Recovery Off-Track, Continued - 1. UK


UK Recovery Off-Track, Continued - 2. UK


UK Recovery Off-Track, Continued - 3. UK


Galaxy is scheduled to report their 3Q results in the wee morning hours (at least for those of us in the states) tomorrow, and we’re expecting a pretty strong quarter with bullish commentary about their prospects.  Of course they will be positive since they are holding well in the first half of what should be the biggest month ever in Macau.  However, going forward, market share will moderate with hold and Galaxy Macau is vulnerable to the opening of Sands Cotai Central.



3Q Detail:

We project Galaxy Group will report HK$13.44BN of revenue and HK$2.08BN of EBITDA (US$268MM).

  • We estimate that Starworld will report HK$6.44BN of revenue and Adjusted EBITDA of HK$902MM
    • VIP gross win of HK$5.83BN
      • VIP turnover of HK$179.4BN, up 31% YoY and a 3.25% win percentage
      • 45.5% rebate rate (in-line with last quarter) or 1.48% - this likely includes rebates for Mass play as well
    • Mass win of HK$434MM and slot win of HK$64MM
    • HK$114MM of net non-gaming revenue
    • Variable expenses of HK$5,164MM
      • Rebates and commissions: HK$2.65BN
      • Gaming taxes & premium: HK$2.48BN
    • HK$375MM of assumed fixed expenses
    • Net comparable US GAAP revenue would be HK$3.8BN (netting out of rebates) and would result in a comparable GAAP margin of 23.8% vs. a reported margin of 14%
  • We estimate that Galaxy Macau will report HK$6.54BN of revenue and Adjusted EBITDA of HK$1,188MM (US$152MM)
    • VIP gross win of HK$5.035BN
      • VIP turnover of HK$168.4BN, assuming 4% direct play and a 3% win percentage
      • 33.5% rebate rate (in-line with last quarter) or 1%
    • Mass win of HK$1,045MM and slot win of HK$240MM
    • HK$222MM of net non-gaming revenue
    • Variable expenses of HK$4,754MM
      • Rebates: HK$1.69BN
      • Commissions: HK$470.5MM (25bps/ 10% of win)
      • Gaming taxes & premium: HK$2.46BN
    • HK$600MM of assumed fixed expenses
    • Net comparable US GAAP margin of 24.5% vs. a reported margin of 18.2%
  • We estimate that City Clubs will report HK$150MM of revenue and Adjusted EBITDA of HK$37.5MM
    • Most of City Clubs had miserable hold this quarter – which came in at just 1.9% in 3Q (September was actually negative for 2 properties) vs. low hold of 2.3% last quarter.
    • RC volumes at City Clubs declined 11% YoY – in-line with the YoY decline experienced in 2Q11
  • We estimate that Construction Materials will report HK$310MM of revenue and Adjusted EBITDA of HK$76MM
  • Other:
    • Net corporate expenses of HK$125MM
    • D&A:  HK$269MM
    • Finance costs:  HK$155MM
    • JV share of PNL:  HK$40MM 

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