Large bad debt provision hurt results. Cautious tone on credit and Macau.




  • Adjusted GGR grew 10% sequentially helped by a high 3.17% win rate while volumes remained stable
  • Slightly lower visitation was offset by increasing spend per visit
  • With close to peak occupancy, the pending opening of their new hotel will help complement their VIP business
  • They are entering the busiest period of the year now
    • Nov 3rd opening of December
    • West Zone openings
  • The tightening of lending in China is going to have a negative impact on VIP play.  They have already seen an impact of the tightening policies in China. As a result, they are provisioning more against their receivables.



  • RC market share volume: 44%
    • Have 200 luxury rooms coming online by the end of the year and then 20 more villas in the beginning of next year which should help their market share
  • Gaming will always be their core business.  They are very optimistic about some opportunities in Asia.  They are pretty optimistic that Japan will legalize gaming within the next 1-2 years.  The bill will be tabled in this current parliamentary session and voted on in the Spring Diet session.  Looks like there will be one or 2 licenses in Japan.
  • Nothing will happen in Korea for at least 7 months until after the presidential elections
  • Mass market share was 48%
    • Volumes in Mass were flat sequentially
  • No changes with commissions – stable
  • More optimistic that junkets will happen in the next few months
  • Doesn’t think that Macau can keep growing at the rate that it is growing given that China tightening is impacting the real estate business and that property prices have already started to come down.  That must have at least some trickling affect on to the players.
  • A higher provision rate than prior years? This year is already at a higher rate than last year.  Don’t think that they will see a continued rate of provision creep.
  • They were a little slow in ramping up to the max slot/ETG machines.  Will max out to 2500 by year end. They are also replacing some poor performing tables.  Their competitor has already maxed out their machines.
  • They are still looking at their receivables each month. They are taking a more conservative view on collections but they haven’t changed their methodology.
  • Their margins should be between 45-50% going forward for the next 4 quarters. Between now and 3Q12 they will have lots of pre-opening expenses and they are hiring a lot of people but there is no revenue.  So they won’t have stabilized margins until 4Q12/1Q13.
  • 570 tables right now - 1/3 VIP table
  • 1,315 slots, 544 ETG's. By YE, they will have the same # of tables and 1,744 slots and 726 ETGs
  • Not interested in partnering up in Miami; Genting Malaysia looks after NA so they would have no involvement there.
  • Yes, they are very active in North Asia.  They are interested in Korea.
  • They cannot pay dividends until the end of 2013 or 2014 under their bank covenant agreement
  • 48% market share was for Mass + slot; which was roughly the same for each segment
  • No meaningful adjustment needed for luck this quarter because of the bad luck provision
  • Maintenance will stay at $200MM
  • Extra hotel rooms should drive $2MM per day per hotel room of contribution - $713MM * 16-20% = $100MM of extra gaming revenue per year.
  • The villas can drive the Middle East and West Asian markets which they haven’t even tapped yet.  Think that they can also drive North Asian business along with the attractions opening at Marine Life Park
  • Mass market hold has been doing quite well and has been on an increasing trend
  • Split of VIP vs. Mass revenue: 53% of Rolling is gross and on a net basis VIP is 42% net
  • If they are tapped out on rooms why is it that their occupancy isn’t higher vs. what MBS is seeing – same question for ADR.
    • Anything above 90% occupancy you end of giving away your rooms for free on a same day policy many times.
    • They only have half the rooms that MBS has so they need to be more prudent in yielding their rooms than MBS
  • Equarius rooms pretty similar to Ritz Carlton Singapore rooms and the Villas will be 4x the size of their current 4 villas
  • ETG count at the end of 2Q:  543 tables, 1,290 slots, 496 ETGs
  • Change in the profile of their VIP players this past quarter? No
  • What kind of criteria do they look at when they decide how much receivables to write down?  They have a credit committee meeting every month and then decide if they need to write anything down.
  • 80-90% of their VIP customers come from overseas
  • Why is their Mass volume flat QoQ?
    • Even for Mass market, rooms also play a big part – since still a large % of their players are overseas
  • Sense is that the theme park is subject to seasonal trends around the school holidays but since they are just lapping the first year they are just learning about how to manage through seasonal patterns.  Once they open the Marine Life Park they will be able to bundle packages to get people to stay longer.
  • Total gross gaming revenue split – was 48% for them
  • 48% share: Mass drop
  • VIP turnover was flat QoQ
  • Since the average yield per machine hasn’t been increasing, why are they adding more machines?
    • Utilization of machines is different during different days and times of days.  During peak times, they are tapped out- so even if there are only 10-20 days a year where they are peaked out it makes sense to add more machines



  • Group revs: S$801.8MM, +10% YoY, attributed to higher VIP hold
  • Daily visitation to Universal Studio Singapore: 9,400
    • Average spending: S$84
    • Hotel occupancy: 89%; ADR: S$315
  • Adjusted EBITDA: S$375.6MM, higher VIP hold offset by higher bad debt by S$37.8MM
  • Development/construction at west zone of RWS
    • Equarius Hotel will open at end of 2011, with Beach Villas soon thereafter
    • The last phase will be complete by mid-2012
  • The economic uncertainties in Europe and the U.S. have presented challenges to the Asian economies. Amidst such volatile financial environment, we have exercised caution in our dealings and prudence in our approach.

Big Sports Apparel Trends

Sports apparel numbers continue to defy gravity. Let's see if the trend holds in the coming weeks when comps get tough. Regardless, the numbers look solid. Good for FL FINL DKS HIBB.


Big Sports Apparel Trends - FW aPP chart 1


Big Sports Apparel Trends - apparel 11 9 11


Big Sports Apparel Trends - FW chart


Big Sports Apparel Trends - FW chart 2


Big Sports Apparel Trends - FW chart 3


Big Sports Apparel Trends - FW chart 4


Here are some quotes from recent earnings calls highlighting what we see as two camps in the restaurant industry with respect to rhetoric around the issue of the economy.




"When you look at the backdrop of the economy against our numbers or the other retailers that did not perform as well the last few months, it's really a stunning result."

-SBUX, 11/3/11


"But we still look guardedly at the overall economy, and we didn't really dwell on it looking at next year's comps… The truth is that over a multi-period now, over a decade plus, our consumers, we've proven fairly resilient in both boom times and more difficult economic times. And we continue to be very respectful of that, though we understand the issues that are in the economy."

-PNRA, 10/26/11


"Despite some uncertainty among consumers about the macroeconomic environment, we're pleased to report our fifth consecutive quarter of double-digit comps since the economy began to recover last year, with a comp of 11.3% in the quarter."

-CMG, 10/20/11 [only one mention of “economy” in the transcript]


"As I've mentioned before on these calls that even though today's slow national economy has caused the postponement or cancellation of many new retail projects, our BJ's new restaurant development pipeline remains in excellent shape."

-BJRI, 10/20/11 [only one mention of “economy” in the transcript]


"And in the midst of a global economy that's been both challenged and volatile for over three years, our business has been resilient and even prosperous."

-DPZ, 10/18/11


"In terms of month-to-month, quarter-to-quarter economic trends, I don't know if we're any better than anybody else who is out there. As I said before, I feel we could deal with the environmental shifts, whatever they are, pretty well given the quality of our team, our national presence, and the different day parts that we have” (specific to China).

-YUM, 10/05/11




"As bullish as we are about this initiatives, there's no question that the soft economy is creating challenges."

-DIN, 11/3/11


"As bullish as we are about this initiatives, there's no question that the soft economy is creating challenges."

-PFCB, 10/27/11


"During the quarter, we continued to face challenging macroeconomic conditions, unemployment rate remained high and the policy debates that occurred in Austin around the budget deficit along with the downgraded U.S. credit rating caused the consumer to form a more pessimistic view about the future of the economy."

-EAT, 10/26/11


"And so, it's been a challenge for us with this change in the economy to use the resources we have, dollars for advertising, menu items, new product news, to be able to move business across those multiple day parts because of what I referred to earlier, that is pre-recession, one promotion really driving business generally."

-SONC, 10/18/11


"Conditions in the U.S. economy and the prices and supply of food and oil continue to be concerns."

-CBRL, 09/13/11


"It's just – I'm just saying the economy has been so difficult, but that's just the conditions. So there's no whining around here. It's the new normal. We'll make it work. (mentioned “economy” 6 times, more than any other restaurant company in our screen)."

-COSI, 08/11/11



Howard Penney

Managing Director


Rory Green


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Over the past month, Wendy’s has traded up 16% on the back of the uptick in comparable restaurant sales coming from the launch of the new burgers.  While the company is headed in the right directions there are still some issues that are an overhang for a sustained improvement in same-store sales. 


It is the early days of the Emil Brolick’s reign at Wendy’s and there is significant work to do.  The new CEO is still working through the legacy issues of his predecessor and we expect him to further refine his approach to the company’s problems as we go forward. 


The following are some of the key takeaways from the quarter. 



BREAKFAST IS NOT WORKING – Wendy’s will continue to struggle at breakfast for the near future.  “While work remains to commercialize breakfast, we are very optimistic.”  The competition that Wendy’s is facing in this category is formidable and will continue make life difficult.  In addition, I don’t understand the company’s coffee strategy as it was described on the call.  Why are they evaluating a “proprietary branding approach” to the coffee program called Redhead Roasters?  It seems like “RedHeaded Roasters” is a branding approach that is somewhat confining.  This is especially clear when one considers that McCafé is a platform that allows MCD to market a number of different beverages and not just coffee.  Why would Wendy’s not follow a similar suit and use a broader branding approach like “Wendy’s Café?   There are going to continue to manage the test markets that they have, but to be successful it will come at the expense of margins.  With beef prices looking to be up significantly in 2012, they can’t afford the margin erosion at breakfast.



DAVE’S HOT AND JUICY BURGER – EARLY TRENDS ARE STRONG BUT FOR HOW LONG? – “We would have to go back to early April-May of 2004 to find a five-week period of sales growth higher than the most recent five-weeks in sales.  We are confident that with the strong results of Dave's Hot 'n Juicy and the continued sales strength with Asiago Ranch Chicken Club we will be able to move the third quarter year-to-date same-store sales growth of 1.1% to the middle of our annual target of 1% to 3% same-store sales growth by yearend.”  In our view, it seems like the company might be adding extra marketing to the calendar to keep sales trends propped up. 



PRODUCT/PRICE MOMENTUM TO CONTINUE IN DECEMBER – Wendy’s is introducing a mid-tier priced burger called “the W.”  The W is positioned between the line of Dave's Hot 'N Juicy Cheeseburgers and the $0.99 price point.  I’m sure the franchisee pushed hard for this to help keep the momentum and to be driver of a higher average check.



MARKETING STILL NEEDS TO BE UPGRADED – The new CEO is looking for a new CMO to fill the existing vacancy and hopes to complete that search in the first quarter of 2012.



ASSET BASE STILL A WORK IN PROGRESS – The Company is currently looking at nine new prototype restaurants.  “We are working to reduce the investment cost of these prototypes, working to determine which prototypes to focus on and, of course, we are anxious to learn how well sales sustain themselves over month’s period of time.”



MARGIN BENEFIT – As I said above, the breakfast business is a drag on margins and the company can’t afford that right now.  “We were able to offset higher commodity cost with strategic pricing and mix shifts that produced a net positive change of approximately 120 basis points. In addition, restaurant margin was favorably impacted by 80 basis points due to a year-over-year reduction in breakfast advertising expense.”



Howard Penney

Managing Director


Rory Green


M: Bad Risk/Reward

We’re still cautious on Macy’s, and even more so after this quarter. Don’t forget how quickly estimates can change on a zero-square footage growth apparel retailer with financial leverage.


If there’s only one thing I had to look at this quarter for Macy’s, it is the triangulation of sales, inventories and margins. The SIGMA chart below for M shows all… It has been in the sweet spot for 8 consecutive quarters. That’s pretty huge for any retailer. This is when inventories are being managed down, the pipe is clean, prices are generally higher, and closeouts are a smaller part of the mix.


Through history, there have been a few companies who have had a multi-year run in this quadrant – such as Coach, Lulu and Abercrombie.  But most would probably agree with us when we say that M is not of the same caliber. (Conversely, we’ve had companies like Sears, K Mart, and Foot Locker spend the better part of a decade in the opposite quadrant – inventories up margins down).


But to see Macy’s finally take a decidedly negative turn South on this chart is not good. We call this The Denial Quadrant. “Yeah, inventories might be getting a little heavy, but our margins are up, and we’re optimistic about our business,  so everything is cool.”  History proves that higher inventories are manageable, until they’re not.


We still think that Macy’s is one of the most consensus longs in retail. The most common point of pushback I get on a short is that “if you believe the numbers, it’s really cheap.”


Well, let’s run some alternate math. Let’s take comps down 3% next year, GM down 50bp, and SG&A up 1%.  That gets us closer to $2 in earnings. In instances where estimates are being downwardly revised, M will have no problem trading at 8x.


Looking at EBITDA – which we think is more fair – we’ve got 6.5x these numbers. If M trades at 4x – which it has in the past when estimates come down, you get to a $15 stock.


We’re not making that call – yet. But we have a heck of a lot more confidence in a -3% than a +3%.


The risk/reward here doesn’t look good.


M: Bad Risk/Reward - M SIGMA



Brian P. McGough
Managing Director

Don’t Get Juked By Chinese Inflation Data

Conclusion: Recent price action across Chinese interest rate and fixed income markets are siding with the latest economic data that monetary easing is forthcoming. That said, however, our analysis puts any material easing in the form of rate cuts and/or large-scale fiscal stimulus at least 1-2 quarters away (assuming no new Federal Reserve policies to inflate are introduced) – a long time to wait and [potentially] a lot of downside to pay in today’s volatile markets.


Continuing recent trends, Chinese October growth and inflation data came in sequentially slower on the margin, which is in-line with our expectations. Looking to the growth data specifically, we saw retail sales slow marginally to +17.2% YoY, industrial production slow marginally to +13.2% YoY, and YTD fixed assets investment came in flat sequentially at +24.9% YoY.


Don’t Get Juked By Chinese Inflation Data - 1


Turning to the inflation data specifically, Chinese CPI came in at an attractive +5.5% YoY in October, slowing on the margin from a prior reading of +6.1%. Perhaps even more welcoming was the slowdown in producer prices, which slowed -150bps sequentially to +5% YoY in October. This confirms the dramatic easing of supply-side cost pressures we saw in the recent PMI survey(s).


Don’t Get Juked By Chinese Inflation Data - 2


Don’t Get Juked By Chinese Inflation Data - 3


Taken in aggregate, these data points inch China materially closer to cutting interest rates, insomuch that a marked slowdown in inflation must be in the books before Chinese officials can materially loosen monetary policy and ease credit conditions – a necessary catalyst for Chinese growth to rebound in our scenario analysis. To say that there is a glut in supply of anecdotal stories on China’s SME credit crunch and the resultant non-traditional lending would be an understatement at this point. Take the following Bloomberg headline for reference:


“China Credit Squeeze Prompts Suicides Amid Offer to Sever Finger” (11/7)


As always, it’s important to you know where you are in the cycle and headlines like these are helpful in the sense that they suggest to us that the apex of economic pain in China is within reach. As mentioned in previous notes, our algorithms have Chinese real GDP growth bottoming out in 1Q12E within the +8.5%-8.7% range. Nasty fourth quarter data potentially could push that bottom out 1-2 quarters and down 50-100bps, but, for now, that isn’t the most probable scenario and remains outside of our baseline assumptions. Keep in mind, there’s a lot of risk to manage in this high volatility environment, so don’t make the mistake we made this summer of buying China too early! The same message applies to industrial commodities – especially in the context of our King Dollar and Correlation Crash themes.


Again, we cannot stress how important patience will play a factor here in the short-to-intermediate term return profiles of any investments that center on Chinese monetary and/or fiscal easing at this current juncture. Based on our daily grinds through various sources of market commentary, our view is contrary to the near-consensus belief (shared by members of the sell-side and buy-side) of easing sooner-rather-than-later. The snippets below, both of which were published earlier today, frame this setup quite nicely:


“Downside risks from faltering exports and rising housing inventories are building. A broader scale easing is likely to start soon with faster new loan growth and higher budgetary spending on existing government-led investment.”

- Li Wei, a Shanghai-based economist at Standard Chartered Bank


“This is the third month of CPI easing, so investors are now more assured that the trend will continue for the rest of the year. We are now also confident there will be easing by the government.”

- Larry Wan, Beijing-based head of investment at Union Life Asset Management Co., which manages the equivalent of $2.2 billion


No doubt, selective easing has been underway for months now, including, but not limited to: investment public housing, plans to relax SME credit conditions, and supportive changes to the income tax code. This is just the tip of the iceberg. For a real buoy to Chinese [and global] growth, the PBOC needs to cut rates and lower bank reserve requirements. Our analysis of Chinese inflation data and interest rate markets suggests those actions are further out in duration (3-6 months) than consensus is likely hoping for:


Using 2008 as a proxy, when China cut its benchmark household savings deposit rate in early October, we saw five of seven flat-to-down months of annualized MoM CPI growth. In the current cycle, we have seen none. Net-net, inflationary pressure remains much too hot for the PBOC to consider material easing at the current juncture – especially given that containing property prices are to remain a key focus of policy:


"I want to especially emphasize that there will not be even the slightest faltering in the property market curbs.”

- Chinese Premier Wen Jiabao in Russia (11/5-11/6) – the third time in as many weeks he reiterated the government’s tough stance on the property market


Don’t Get Juked By Chinese Inflation Data - 4


Turning to China’s interest rate markets, we are receiving a similar signal of forthcoming monetary easing, albeit to a lesser extent. Using China’s 7day repo rate a proxy for interbank liquidity, the -134bps drop in the month-to-date rhymes with the -45bps day/day drawdown in China’s 1yr sovereign debt yields on the heels of this morning’s CPI release. Inclusive of the latter move, that puts China’s1yr fixed borrowing cost a full -99bps below the benchmark 1yr household savings deposit rate.


Again, using 2008’s first household savings deposit rate cut as a proxy, we saw the PBOC cut rates when this spread was at -77bps (not causal; merely coincidental). That’s encouraging for the “ease now” crowd, but we’d also like to see the aforementioned dramatic move into “positioning” confirmed by the interest rate swaps market as well, which is currently trading -45bps below the  1yr household savings deposit rate – a full 99bps above where it was when the PBOC cut back in 2008.


Don’t Get Juked By Chinese Inflation Data - 5


Don’t Get Juked By Chinese Inflation Data - 6


All told, the recent price action across Chinese interest rate and fixed income markets are siding with the latest economic data that monetary easing is forthcoming. That said, however, our analysis puts any material easing in the form of rate cuts and/or large-scale fiscal stimulus at least 1-2 quarters away (assuming no new Federal Reserve policies to inflate are introduced) – a long time to wait and [potentially] a lot of downside to pay in today’s volatile markets.


Per Merriam-Webster’s online dictionary, to “juke” means “to fake out of position”. As my coach used to tell me when I played defense, “Break down and make the [darn] tackle!” It will pay to acutely manage the TIME and SPACE risk associated with Chinese assets or those assets highly sensitive to Chinese growth over the next one to two quarters.


Darius Dale