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THE M3: S'PORE 3Q HOUSING PRICES

The Macau Metro Monitor, October 28, 2011

 

 

SINGAPORE PRIVATE HOUSING PRICES MODERATE Channel News Asia

Prices of private residential properties increased by 1.3% in 3Q 2011, lower than the 2.0% rise in 2Q 2011.  This was the eighth consecutive quarter in which the rate of increase in overall private housing prices had moderated, according to the Urban Redevelopment Authority (URA).


LVS: WOE IS ME

Cries of bad luck are starting to ring hollow.  So VIP hold needs to be adjusted but high Mass hold is normal?

 

 

Q3 was a strong one for LVS.  We don’t want to take away from that.  We’ll leave the question of whether it was as good as the whisper expectations.  However, the company’s recent pattern of providing hold adjusted EBITDA adjusted only for VIP hold is misleading, in our opinion.  Swings in Mass hold can be impactful too, even more so on profitability given the higher flow through. 

 

So despite all the talk of low hold, we estimate “bad luck” only impacted EBITDA by $6MM across all 3 regions.  That might matter for a company like Isle of Capri but for LVS with over $900 million of quarterly property level EBITDA, was it even worth a discussion?

 

So let’s move on to what does matter.  Singapore VIP volumes were terrific and the October commentary was impressive.  However, despite the conference call drooling by the bullish analysts, should the Q3 numbers really be a surprise?  LVS indicated at their analyst day that they had already eclipsed Q2 VIP volume levels by the end of August.  With that math in mind, it wouldn’t have been a stretch if Q3 volumes grew 50% QoQ.  They actually grew 36%.

 

Macau beat our estimate due primarily to a higher percentage of Direct VIP business which is good for margins.  Of course, as they try to stem the market share declines in junket VIP, margins may suffer.  However, if they are successful, the revenue upside should more than offset the margin decline.  We think Venetian/Four Seasons has already begun to advance junket commissions on a two month basis (versus 15-30 days) to boost the business.  November should be telling.

 

Here is our detailed commentary on Q3:

 

 

Q3 DETAIL

 

MACAU

 

Property net revenue across LVS’s 3 casinos came in 2% above our estimate while EBITDA came in 7% stronger.  Despite Sheldon’s assertion that EBITDA would have been $11MM higher if not for poor hold, when you adjust for higher than ‘normal’ Mass hold, we estimate that hold only negatively impacted EBITDA by $1MM and revenue by $3MM.

 

Sands Macao


Sands net revenue was $12MM lower than our estimate and EBITDA was $10MM lower due to what appears to be higher fixed expenses but was likely due to an unlucky mix (i.e. lower hold on the RC junket play).

  • Despite $9MM of higher gross gaming revenues, net gaming revenue was $11MM lower than we estimated due to higher rebates 
    • VIP gross win of $210MM was $9MM better than we estimated but net revenues were lower by $10MM. Either rebates went up in the quarter or Sands started offering some rebates to mass players
      • The rebate rate was 1.04% or 39.4% of win - much higher than Sand’s run rate of 33% and our estimate
      • Direct play in the quarter increased to 15% from 12% last quarter 
      • The win rate was 3bps better than we estimated and drop volume was 3% higher than our estimate
      • Low hold cost Sands $16MM in gross revenue, $9MM of net revenue and $4MM of EBITDA
    • Mass win was $1MM below our estimate while slot win was $1MM better
  • Net non-casino revenue was $1MM below our estimate
    • Promotional expenditures were 60% of non-gaming revenue
  • Implied fixed expenses appear to be $59MM, up 13% YoY and up $12MM sequentially.  We suspect that aside from playing generally unlucky, Sands also held worse on its RC junket business.

Venetian Macao


Venetian’s net revenues were 3% above our estimate while EBITDA was 11% better than we estimated.  While VIP hold was low, we suspect that the mix may have been favorable and Mass held better than ‘normal’.  Net/net we don’t think that hold had any impact on EBITDA this quarter at the Venetian.

  • Net gaming revenue was 1% ($7MM) better than we estimated
    • Net VIP win was $3MM higher than we estimated
      • Direct play in the quarter increased to 24% up from 22% last quarter and contributed to a lower commission rate than we estimated given the higher margin of this business
      • Hold was 3bps lower than we estimated due to higher direct play which resulted in 4% higher RC volume vs. our estimate
      • The rebate rate was 83bps or 31% of hold - just 2bps or 1% higher than we estimated
      • Low VIP hold cost the property $17MM of net revenue and $5MM of EBITDA
    • Mass win was $5MM better than our estimate due to better hold
      •  Mass hold was 60bps higher than the property’s 12 month trailing average and 1.2% higher than the last 6 quarter’s average.  If we take the mid-point of the 12 and 6 quarter average, higher hold on the mass business benefited revenue by $10MM and EBITDA by $5MM – offsetting bad luck on VIP
    • Slot win was $1MM lower than our estimate
  • Net non-casino revenue were $10MM above our estimate
    • Promotional expenditures were 21% of non-gaming revenue
    • Higher non-casino was driven by $5MM of better room revenue and $5MM better retail revenue – which has particularly high flow-through (basically 100%) since the source of the beat is likely incentive rents kicking in
  • Implied fixed expenses appear to be $90MM, down 11% YoY and up $3MM sequentially.  We suspect that aside from playing generally unlucky, Venetian may have held a little better on RC junket business than hold implies.

Four Seasons/Plaza


Four Season’s net revenue was 9% above our estimate while EBITDA was $11MM higher or 22%.

  • Net gaming revenue was $10MM better than we estimated due to better hold
    • Net VIP win was $7MM higher than we estimated
      • Direct play in the quarter fell to 38% from 41% last quarter; as a result, hold was better than we estimated
      • Hold was 21bps higher than we estimated due to 4% lower RC volume and no downward adjustment vs. monthly estimates (the past 6 quarters averaged a 3% downward adjustment)
      • The rebate rate was 84bps or 33%
    • Mass win was in line with our estimate
      • Mass hold was between 4-7% higher than the property’s 12 month trailing and last 6 quarters average.  If we take the mid-point of the 12 and 6 quarter average, higher hold on the mass business benefited revenue by $6MM and EBITDA by $3MM.
    • Slot win was $2MM higher than our estimate
  • Net non-casino revenue were $6MM above our estimate
    • Driven equally by higher non-gaming revenue and lower promotional expense
    • Higher non-casino of $3MM was due to better retail revenue as incentive rents kicked in
  • Implied fixed expenses appear to be $19MM, down 12% YoY and flat QoQ

 

MARINA BAY SANDS

 

MBS revenues came in 1% above our estimate while EBITDA was 5% ($20MM) lower than we estimated - $6MM of which was due to one-time charges.   Despite EBITDA being lower than we estimated, we must admit that it’s hard not to be impressed by the massive growth in RC volumes and by the Sheldon’s assertion that October saw an acceleration in current trends.  On the flip side, the incremental revenues came at a cost – namely, much higher rebates, promotional expenses and higher fixed expenses.

  • Net gaming were $18MM above our estimate
    • VIP gross revenue was $46MM higher than we estimated, driven by massive growth in VIP RC growth – which was 14% above our estimate.  However, net VIP gaming revenues were only $10MM above our estimate due to a higher rebate rate.
      • Higher volumes were moderately offset by lower hold
      • Hold of 2.69% was 6bps below our estimate and 8bps below the 6 quarter trailing average (excluding the current quarter).  If we use 2.8% as the normal hold rate for the property, we estimate that revenue and EBITDA were negatively impacted by $18MM and $16MM, respectively.  If we assume 2.85% as ‘normal’ hold, then Sheldon’s assertion of a $24MM drag on EBITDA is indeed accurate
      • The rebate rate increased to 1.3% from 1.2% last quarter
    • Mass table revenue was $4MM below our estimate due to 4% lower drop and hold that was 60bps below our estimate
    • Slot revenue was 9% better than we estimated due to 11% higher handle
  • Net non-casino revenue was $11MM below our estimate due to much higher promotional expenses
    • Promotional expenses increased to 27% of non-gaming revenue
  • Implied fixed expenses were $228MM in the quarter - $6MM of the increase was due to one-time expenses.  Excluding the one-time items, there was a $20MM QoQ increase. 

 

LAS VEGAS

 

Las Vegas revenues came in 10% above our estimate while EBITDA was 24% better

  • Net casino revenue was $20MM above our estimate 
    • Table win was $27MM better than our estimate due to strong growth in table drop and better hold
      • Higher than ‘normal hold’ on tables helped revenues by about $14MM and EBITDA by approx $11MM
        • 6 quarter trailing average hold was 18% and 17.5% over of the trailing 12 months
    • Slot win was $7MM better than we estimated due to 5% better handle
    • Better gross gaming revenue was somewhat offset by higher rebates that equaled 5.2% of GGR vs. our estimate of 3.3%
  • Net non-gaming revenues were $9MM above our estimate driven by better RevPAR
  • Property level expenses, excluding taxes increased 9% YoY to $243MM compared to $232MM last quarter 

Irrational Expectations

This note was originally published at 8am on October 25, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Hope is nature’s veil for hiding truth’s nakedness.”

-Alfred Nobel

 

In one of the more ironic moments of 2011, Professor Tom Sargent from New York University won the Nobel Prize of Economics.   Sargent was awarded the Nobel Prize for his work on rational expectations.  In effect, this is the theory that postulates that policy makers cannot systematically influence the economy via predictable policy changes.

 

This idea, of course, flies in the face of the current philosophy of the leading central bankers around the world and, in particular, Chairman Bernanke.  In the guise of transparency, not only does Chairman Bernanke foreshadow most of his moves, but he now also holds a quarterly press conference to further alert the market as to his future intentions.  Undoubtedly, wherever he is now, Alfred Nobel is finding this moment in economic history somewhat ironic.

 

The concept of “too big to fail” has now wholly pervaded the economic landscape.  Sargent, as the key proponent of rational expectations, has some interesting thoughts related to failure.  His views likely do not reflect “the conscience of a liberal”, like those of his Nobel Laureate counterpart Paul Krugman, but they do offer some interesting counterpoints to the current debates in economic policy circles.  In a June 2010 interview with the Minnesota Fed, Sargent made a number of noteworthy comments relating to the European debt situation, specifically:

 

“Remember that under the gold standard, there was no law that restricted your debt-GDP ratio or deficit-GDP ratio. Feasibility and credit markets did the job.

 

Here is what went haywire. In the 2000s, France and Germany, the two key countries at the center of the Union, violated the fiscal rules year after year.

 

So, a number of countries at the European Union economic periphery—Greece, in particular—violated the rules convincingly enough to unleash the threat of unpleasant arithmetic in those countries. The telltale signs were persistently rising debt-GDP ratios in those countries.

 

The banks located in the center of the euro area, France and Germany, hold Greek-denominated debt, so a threat of default on Greek government debt threatens the portfolios of those banks in other European countries. Because it is the lender of last resort, now it is the ECB’s business.

 

France and Germany stay “holier than thou” from beginning to end, and always respect the fiscal limits imposed by the Maastricht Treaty. They thereby acquire the moral authority to lead by example, and the central core of euro-area countries are running budgets that without doubt are balanced in a present-value sense. Therefore, the euro is strong. The banks of the core countries,  so the banks in France and Germany are not holding any dodgy bonds issued by governments of dubious peripheral countries that have adopted the euro but that flirt with violating the Maastricht Treaty rules.

 

In this virtual history, the ECB could play tough and let the Greek government default on its creditors by renegotiating terms of the debt. For the euro, letting the Greek bondholders suffer would actually be therapeutic; it would strengthen the euro by teaching peripheral countries that the ECB means business.”

 

In Sargent’s models the threat of failure is critical, whether it be for institutions, countries, or individuals, because it is exactly this threat that will shape future behavior and reform.

 

Relate to Sargent’s comments, one of the more surprising global macro moves since the start of October has been the sharp rally in the EUR-USD going from a low of 1.31 in early October to 1.39 this morning.  This is an expedited move of more than 6% in about three weeks.  In the highly correlated world of global markets, this expedited move has had an impact. In the same period,

  • Brent Crude Oil is up +11.9%;
  • West Texas Intermediate Crude Oil is up +21%;
  • Copper is up +14.1%;
  • SP500 is up +14.1%; and
  • Euro Stoxx 50 is up +12.1%

One of our key three themes for Q4 is Correlation Crash.  So far, on the expedited move up in the Euro, and down move in the dollar, the crash has been to the upside this quarter.  The more accelerated the move to the upside, though, the more increased the risk for an eventual correction to the downside.  A risk that heightens every day in our notebooks.

 

Our view has been that the recent surge in the EUR-USD is a function of both short covering, which obviously builds upon itself, and also Irrational Expectations as it relates to outcomes in Europe.  The best fundamental support we can point for our views is in comparing yields on Italian 5-year government bonds versus the comparable duration German bunds.  Given this spread is at its widest point in the last decade, the read-through, despite some recent manic moves in global markets, is that the European situation is far from solved.

 

The theory of rational expectations would suggest that by bailing out Europe in ever-growing increments, market participants will begin to expect ever-growing bailouts, which, over time, should negatively impact the EUR-USD.  Further, the continued safety net created by European officials won’t adequately underscore the fiscal sobriety that is ultimately required in Europe for a truly healthy currency.  It is akin to bringing a drunk friend water and comfort food every morning after his drinking binge.  In doing so, you are not exactly encouraging his or her sobriety.

 

In the short term, market prices can bring us hope, but they are often “hiding truth’s nakedness.”

 

Daryl G. Jones

Director of Research

 

Irrational Expectations - Chart of the Day

 

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Titillating

“High absolute return is much more recognizable and titillating than superior risk-adjusted performance.”

-Howard Marks (The Most Important Thing, page 57)

 

I wasn’t short the SP500 until 326PM EST (1290) yesterday. I’d sold all of my long-term Treasuries (TLT) on Wednesday. I wasn’t short anything Commodities and/or European Equities…

 

So, yesterday could have been worse.

 

Where I got killed was in my long US Dollar position. The US Dollar Index was down huge (-1.7%), making a fresh low for the month as US stocks completed their biggest 18 day short squeeze ever.

 

Ever is a long time.

 

Like my “Short Covering Opportunity” call on October 4th, my “Buy The US Dollar” call on October 21st has a Time Stamp. While there were plenty of risks building a US Financial Services and Media firm in the 2008-2011 period, for me at least, one of them wasn’t showing you every position I take, when I take it.

 

Time Stamps are cool on Wall St 2.0 because they save you from having to take my word for it.

 

Back to the Global Macro Grind

 

Get the US Dollar right and you’ll get mostly everything else right – if that’s not obvious to someone who is confusing their “high absolute returns” yesterday (everyone nailed it, right?) with what we call beta, I don’t know what is…

 

Using our immediate-term TRADE duration to measure Correlation Risk, here’s a real-time update on the USD’s inverse correlations:

  1. SP500 = -0.97
  2. CRB Commodities Index = -0.88
  3. 10-year US Treasury Yields = -0.81

No matter where you go this morning, there it is. If you have been bearish on the US Dollar (and bullish on the Euro) for the last 3 weeks, you have absolutely crushed it.

 

If you’ve been levered-long beta since April’s YTD high in the SP500 of 1363, you’re still getting crushed. Over that time span, the US Dollar Index is up +2.7% and the SP500 is down -5.8%.

 

But today, all of what you’ve done for 2011 doesn’t matter to the market at all. Mr Macro Market doesn’t care about who is doing the crushing or who is getting crushed. She tends to inflict the most amount of pain on the most amount of players at the same time.

 

So, what do I do “right here, right now?”

 

I was asked that yesterday at a lunch meeting in Boston. My answer: “I finish our meeting then go to my next meeting. And if I see my immediate-term TRADE overbought level in the SP500, I’ll short it, for a trade.”

 

Then client then asked me, “at what price?”

 

I said, “I don’t know. I need to fire up my machine and remodel my volatility parameters for the draw down in the VIX and melt-up in the SP500’s price. I let my process tell me what to do, not my emotions.”

 

So, at 326PM, I hit the button, “shorting the SP500 (SPY) as it is immediate-term TRADE overbought.” Time Stamped.

 

What do I do with that position today?

 

Same answer. The risk management process will tell me what to do. All of my decisions are risk-adjusted to the market’s last price. In other words, Prices Rule my process. Period.

 

The SP500’s setup is now as follows:

  1. Immediate-term TRADE overbought = 1290
  2. Intermediate-term TREND support = 1257
  3. Long-term TAIL support = 1266

In other words, on any pullback towards 1, I’ll cover that short position and get longer of US Equity exposure. If 1266 doesn’t hold, I get shorter.

 

Currently, in the Hedgeye Asset Allocation Model, I have a 9% position in US Equities – that’s all in Consumer Discretionary (XLY). Obviously if I stay wrong on the US Dollar, US Consumption will be adversely affected by inflation. Strong Dollar = Strong America. So with Goldman telling you to chase beta this morning, remember what that implies longer-term – Debauched Dollar = Mad America.

 

If my long-term bullish case for the US Dollar doesn’t convince you of that – let The People. In the face of the biggest 4-week rally ever, Bloomberg’s weekly Consumer Confidence survey dropped to minus -51.1 versus -48.4 last week. Titillating.

 

My immediate-term support and resistance ranges for Gold (bullish TRADE and TREND again), Oil (bullish TRADE; bearish TAIL), German DAX (bullish TRADE and TREND; bearish TAIL), and the SP500 are now $1, $89.36-93.87, 6127-6428, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Titillating - Chart of the Day

 

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CRI: Great Short into 2012

 

Conclusion: CRI is one of the most expensive names in retail. Valuation alone is a bad reason to sell. But growth trajectory and margin are both not sustainable. We think that once the calendar turns into 2012, CRI will be ripe for a far larger group of short and long sellers.

 

 

Sales growth of +24% was the strongest CRI has reported in the last 5-years. Looks great optically, but when taking into account the newly acquired Bonnie Togs business – which accounted for +7% and the sales pulled forward accounting for another +1% (adjusting for Q3 sales that were pulled into Q2), organic sales growth actually came in closer to +15%-16%. Good stuff, but this marks a sequential deceleration from the prior quarter at the same time CRI is about to go up against double-digit sales growth driven by accelerating sales in both Carter’s wholesale and mass businesses this time last year.

 

Margins continue to be under pressure with fall product costs up ~25% with mid-teen increases persistent through the 1H of F12. AURs are up anywhere from MSD to high-teens depending on the channel, but CRI is having the most success at Carter’s wholesale where units are actually up +8% on a +6% increase in pricing. In all other channels units are flat to down. We expect continued SG&A leverage to the top-line though think the opportunity for more meaningful cost reduction is modest with incremental Canadian retail expense and U.S. retail store growth investment of nearly $10mm each through the 1H of next year.

 

One thing to keep in mind as it relates to margins is that the sales/inventory spread has been negative for the sixth quarter in a row.

 

In addition, CRI pulled sales forward from Q4 while deferring the operating costs associated with those sales (when the company expected to realize the revenues) – that’s not a pretty setup for Q4. Is it enough to really derail the quarter? No. The call is bigger than that, but it certainly doesn’t help.

 

We’re not saying Carters isn’t a good brand, it’s actually a very good brand, but we don’t think the company is going to have the benefit of both pricing AND unit growth next year. Retailers, for the most part have taken and passed price increases along to the consumer – so far. But a major factor we can’t ignore is the real potential for a price war in the mid-tier channel in 1H12 spurred by JCP’s EDLP strategy. These companies (KSS, GPS, M) are doing their one-on-ones and telling people that they’ve got it under control and that no price war is brewing – but with all due respect, they don’t have a clue.  To intimate in any way that these companies have any certainty on pricing 2 or 3 quarters out is simply arrogant. Wal-Mart is also getting heavier in basics, which won’t help anyone. And who is to say that product costs easing in 2H will be good for Carter’s? As product costs come down, guess what happens? Competitors produce more product. And we all know that 99% of the product needs to sell at the end of each season – i.e. price will come down to accommodate that.

 

We’re shaking out a 10% top-line growth next year driven by retail store growth (3-4%), incremental international/Bonnie Togs (~3%), and another 1-2% each from Carter’s wholesale business and e-commerce. With the acquisition, you’re looking at a MSD-HSD top-line grower. That’s where we come out in F13 while the Street is assuming another double-digit year. Where we’re going to be most different from consensus is on gross margins. We’re modeling a -100bps decline in F12 as the company expects to pass through roughly two-thirds of future costs in the 1H. With cotton costs down sharply in recent months, we think discussions are going to be more challenging come spring for a brand like Carters that has increased prices by as much as mid-teens in some channels. With modest leverage in SG&A (-25bps) we are shaking out at $178mm in EBIT and $1.85 in EPS. Let’s not forget that Carter’s own retail stores boast an average 40% discount on day 1 for 90% of the product. Yes, it competes with itself.

 

The bottom-line is that execution risk is extremely high here, much is outside of CRI’s direct control, and there’s very little margin for error. With the stock now trading at 17.5x earnings and 10x EBITDA off next year’s Street estimates – and 21x and 11.5x ours – expectations are lofty to say the least. Has Carter’s all the sudden become a mid-teens grower – we don’t think so. Even if we were to give CRI the benefit of the doubt and assume a return to peak margins (~14%) some 500bps+ from where the model is today, we’d be looking at a stock trading at 11x P/E and 6.5x EBITDA F13 numbers – that’s where most of CRI’s peers are trading on current numbers. Those former margins represented a period of severe over-earning. We’ll never get back there again.

 

This thing appears to be trading on the Berkshire factor. This is an environment where you don’t get paid, lose your job – or both – for being short a company that’s rumored to be LBO’d and it actually happens. With 2 months left in the year, appetite for risk on small cap names like CRI is not too high on anyone’s list. So people are going along with the herd.

 

We think that once the calendar turns into 2012, CRI will be ripe for a far larger group of short sellers (or long sellers).

 

This one is right up there at the top of our short list.

 

Longs: NKE, LIZ, RL, AMZN

Shorts: JCP, UA, HBI, CRI, GIL

 

CRI: Great Short into 2012 - CRI S 10 11

 

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.61%
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