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The Macau Metro Monitor, November 11, 2011




“We see little impact to CotaiJet,” the company’s COO, John Seale said.  “In fact, we will see increased competition because if the relocation or shut down does occur, other ferry service operators will also be moving to Taipa,” he added.


Seale believes changes to the ferry terminal situation will not harm Sands China. “We do not see any impact on our business in general,” he said.  Seale is also unconcerned for Sands Macao casino, located near the Outer Harbour Ferry Terminal. “Sands has been in the market for over seven years and has a very established customer base,” he emphasized.


“Our view is neutral,” said John Seale. However, Sands’ non-executive director Michael Leven said last month the company would “still like the [Outer Harbour] terminal to stay open as long as possible”.



Chinese banks lent 587 BN yuan ($92.5 BN) of new loans in October, +25% MoM and flat YoY, evidence of "selected" policy easing by the government to support growth as inflation falls.  China's M2 money supply eased to 12.9% from 13.0% in September.  The median forecast by economists was for an issuance of 500 billion yuan in October and a 13.0% rise in M2 last month.






University of Michigan Consumer Confidence comes out today at 09:55 a.m.  We’ll be watching for any indication of a further slump in confidence although, at least for the restaurant space, confidence hasn’t seemed to matter lately although it may begin to matter if it slumps much lower.


THE HBM: SBUX, MCD, COSI, WEN, BOBE - umich survey vs actual





THE HBM: SBUX, MCD, COSI, WEN, BOBE - subsector fbr





SBUX: Starbucks announced the acquisition of juice company Evolution Fresh for $30 million in cash.  The company hopes that the purchase will help Starbucks gain a foothold in the estimated $50 billion health food market.  We believe that the company's strategy is to capture the upside in profits by owning these small brands in tangent categories.  Starbucks' distribution channel provides a clear runway for these brands to grow rapidly.


SBUX: Starbucks is targeting 20% of customers in Malaysia to use the newly-launched pre-loaded Starbucks card.  A spokesman for the company said that the card is a stored value card that offered customers convenience when purchasing merchandise at any Starbucks store nationwide.


MCD: McDonald’s is looking to capitalize on the depressed commercial property market and purchase more of the land and buildings where it operates, according to management commentary during an investor conference yesterday. 


COSI: Cosi issued a letter to Brad Blum yesterday saying it would welcome his offer to lead the company for $1 if it were “sincere”.


WEN: Wendy’s was maintained “Overweight” at Barclays.





BOBE: Bob Evans Farms was downgraded to Equal Weight from Overweight at Stephens.


THE HBM: SBUX, MCD, COSI, WEN, BOBE - stocks 1111




Howard Penney

Managing Director


Rory Green



Spooking investors of other stocks as well.



Misery loves company.  Perhaps that's the reason why Genting spooked the market with commentary on the China credit situation after reporting a quarter with no volume growth and a large impairment charge partly ‘saved’ by high hold.  That comment certainly had an impact on the Macau stocks in yesterday's trading.


This marked the 3rd quarter in a row where RWS lost share in RC volume, Mass drop, and slot handle.  Rebates on Mass and VIP also increased this quarter while RevPAR decreased QoQ as did visitation to USS.  Will a new hotel with just 200 high end rooms, some neutered junkets (should they ever get approved), and the opening of a Marine Park and Museum significantly improve the static trends we’re seeing or will this property continue to be a share loser?





Revenue was 4% lower than our estimate while EBITDA was 14% below our estimate

  • Net gaming revenues were S$24MM below our estimate.  We estimate that GGR for RWS was S$975MM, implying 48% market share as the company stated on the call and that rebates, GST and gaming points (mass comps) were S$315MM.
    • Per company commentary and our calculations:
      • RC Volume market share: 44%
      • GGR share: 48%
      • Mass and slot share: 48% (roughly the same for slots and mass tables)
      • Gross VIP accounted for 53% of RWS’s GGR and 42% on a net basis
    • Total market GGR was S$2.04BN – a little below our estimate of S$2.1BN, which explains a large part of the miss
    • Gross VIP win was 7% below our estimate due to no sequential growth in RC volume, somewhat offset by better hold.  It’s disappointing to see RC decreases since 4Q10.  Management said that RC volumes were flat QoQ; our guess is that there was a slight decline to S$16.3BN.
      • Hold since opening has been 3.1% at RWS.  However, if we use the theoretical win rate of 2.85%, gross VIP revenue would have been S$52MM lower, and net VIP would have been S$49MM lower and EBITDA would have been S$46MM lower.  Of course, the high hold was offset by the bad debt charge of S$38MM which is ‘unusually’ high.
      • We estimate that rebate rate increased to 1.34% - a 10bps increase sequentially.  The company claimed that there was no change in rebate policy, but the numbers don’t lie; rebates clearly increased.  It could be that there were just less players that gambled greater amounts getting them higher rebates.
    • We estimate Mass win of S$308MM, 10% above our estimate due to better hold
      • Mass drop was flat sequentially around S$1.4BN.  Genting said that hold has continued to trend upwards for mass play.  We estimate that hold was 22%.
      • Gaming points increased to 4% of drop from 2.4% last quarter or a total of S$57MM
    • We estimate slot win was S$150MM and that handle ticked up slightly to S$3.1BN
  • Non-gaming revenue was S$12MM below our estimate due mostly to lower USS revenues
    • Given the results at MBS, we were surprised to a see a sequential RevPAR decrease at RWS – especially after all the talk of being room constrained.  Yes, MBS gives away rooms to gaming customers and perhaps RWS should follow suit on the 10% of vacant rooms that they have – especially midweek.  Location surely has something to do with the lower occupancy as well.
    • USS park revenues were S$9MM below our estimate given a material decline in QoQ park visitation
  • We estimate that fixed expenses were S$182MM in the quarter

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Once again, the hold impact confuses investors.  Sell side compares apples to oranges.  This was a solid quarter.



Heading into earnings, a lot of analysts raised estimates bringing consensus EBITDA estimate from $178 million just a month ago up to $220 million.  Their reason?  Higher than normal hold percentage.  So MPEL comes in at $240 million - $195 normalized for hold – and some on the Street call it a miss?  Seems disingenuous to us.  High hold was already in their estimates.  It was in ours and they still beat us by $5 million.  If one uses the same VIP hold as last year, EBITDA would’ve still grown 75-80%.  This was a good quarter.


Aside from the hold confusion, there were other factors at play here.  Genting Singapore took a large charge for doubtful receivables and made commentary that they were worried about the credit situation.  MPEL's receivables were also up 14% QoQ, but that was also on higher volumes and a higher percentage of direct play in the quarter.  Property stocks in Hong Kong are also taking a beating.  Mass volume was a little lower than we anticipated but higher hold percentage looks sustainable.  Finally, management didn’t handle the equity question appropriately.  The response to the question should’ve been:  “pigs will fly before we issue equity at these prices.


While November in Macau may be a disappointment relative to October and the expectations of some, continued stability in the market will allow people to conclude that $200 million in EBITDA is a good quarterly run rate which puts MPEL’s valuation at 7x – a ridiculously low valuation for a Macau stock.  Even if VIP were to drop 25% next year (which would mean a 45% sequential drop from current trends), MPEL’s multiple would still only be 9x.  We worry immensely about sentiment and investors expectations for November, but this stock is a value for those that can stomach the volatility.





CoD’s net revenue came in 1% below our estimate but Adjusted EBITDA was $2MM better due to lower fixed costs at the property and /or a favorable hold mix

  • Gross VIP table win was $1M below our estimate
    • RC volume was $600MM above our estimate due to a higher percentage of direct play- which we estimate was 16% vs. our estimate of 13%- a little surprising with the opening of the Neptune room in July
    • It appears that the rebate rate was 90bps
    • We estimate that the commission rate was 1.33%
    • If hold was 2.85%, we estimate that EBITDA would have been $8MM lower
  • Mass table win was $1MM better than we estimated
    • Mass volume was 9% below our estimate but hold was 2.5% better
    • Mass win of 25.5% was higher than the 6 & 4 quarter trailing average of 22%.  We estimate that the higher than historical mass hold boosted EBITDA by $10MM.
  • Slot win was in-line with our estimate with lower handle offset by a higher win rate
  • Non-gaming revenue, net of promotional allowances, were $4MM lower than we estimated
  • It appears that fixed operating expenses were $66MM - $4MM below our estimate.  Although we suspect that what appears to be lower fixed operating expenses is really just a favorable mix of luck on the RC business




Altira’s net revenue came in 1% below our estimate but Adjusted EBITDA was $4MM better due to lower fixed costs at the property and /or a favorable hold mix

  • Gross VIP table win was $2MM below our estimate
    • The rebate rate was .955% or .05% higher than we estimated
    • We estimate that the commission rate was 1.3%
    • If hold was 2.85%, we estimate that EBITDA would have been $7MM lower
  • Mass table win was $4MM lower than we estimated
    • Mass win of 15.7% was lower than the 6 quarter trailing average of 17%.  We estimate that the lower mass negatively impacted results by $1MM.
  • Non-gaming revenue, net of promotional allowances, were $2MM higher than we estimated
  • It appears that fixed operating expenses were $24MM - $4MM below our estimate.  Although we suspect that what appears to be lower fixed operating expenses is really just a favorable mix of luck on the RC business.

Self Indulgence

This note was originally published at 8am on November 08, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The crisis, he came to believe, was a consequence of the self indulgence of the older generation.”

-Niall Ferguson (High Financier, page 64)


That’s what Siegmund Warburg thought about European governments coming out of the 1920s. I wonder what he’d think about them now? Top 3 headlines on Bloomberg this morning: 1. Olympus (massive Japanese corporate fraud), 2. Berlusconi (budget vote on the Italian Job) and 3. Cain (to grope or not to grope, remains the question).


Alleged or not, there is a pattern here. Self Indulgence by 21st century central planners is really wearing on The People. When I write about Old Wall Street, I don’t mean old people – I mean the mentality, opacity, and process that is what these conflicted people do. Governments, banks, and their legacy media “contacts” are all intertwined like never before. The People get that too.


Good News: Wall Street 2.0 is going to change that. The truth is very difficult to hide on Twitter. How else would sources with no real names be building higher levels of credibility than both heads of state and the manic media correspondents who are tasked with being “connected” with them? Change is good.


Back to the Global Macro Grind


On October 4th(at the US stock market’s 2011 bottom), Harvard’s Ken Rogoff wrote an Op-Ed in the Financial Times titled “Debt, Deficits, and Deadlock: Welcome to 2012.” While I think Rogoff’s “This Time Is Different” is one of the most important empirical works in recent economic history, in the belly of his article he made a statement that blew my mind:


“…it is absurd to be worrying excessively about a 1970s stagflation.”


Notwithstanding the inflammatory wording of the statement, given the data that’s emerged in both recent history (and across the longest of long-term data in his book) that piling-debt-upon-debt-upon-debt with fiat currencies produces inflation, I have no other choice this morning than to highlight something many of these academics have a hard time dealing with – real-time market prices.

  1. Brent Oil prices are pushing back toward $115 (ie up +15% from the time of Rogoff’s article)
  2. WTIC Oil prices are pushing back above our long-term TAIL line of $93.88/barrel to $96.12 (up +23% since October 1st)
  3. Gold is moving back into a Bullish Formation (bullish TRADE, TREND, and TAIL), up +10% since early October

At the same time, European economic data continues to show classic signals of Stagflation (Slowing Growth, Accelerating Inflation):

  1. British Retail Sales drop -0.6% y/y in October (a 4 month low) as British GDP is tracking at 0.5% y/y w/ +5.2% inflation
  2. France’s Services PMI report dropped to a rock bottom 44.6 in OCT, signaling a recession in French Consumption Growth
  3. Italy’s inflation for OCT was +3.8% (vs +3.6% in SEP) as unemployment hit a new highs and GDP growth is signaling recession

Never mind the “absurdity about worrying about stagflation”, if oil prices remain near generational highs (using the 2008 all-time peaks is not what a long-term investor should be normalizing), there is a very high probability that Western Europe is entering an intermediate-term period of negative GDP growth and accelerating inflation growth (ie Stagflation).


Before the Keynesians hit the roof on these calculations (accepting responsibility for their policy recommendations? how absurd!), let’s bring in another market practitioner’s view. In his most recent monthly note titled “Pennies from Heaven”, Bill Gross asks a very simple question: “Can you solve a debt crisis by creating more debt?”


Of course not.


Why? Because, as Reinhart & Rogoff empirically prove in “This Time Is Different”, once a country crosses the proverbial Rubicon of 90% debt-to-GDP (Japan, USA, Italy, etc), creating more debt structurally impairs/slows whatever economic growth that was left.


So, as we worry about the worries of the day – the crises that politicians have created so that they can now save us from the “depression” of it all – remember that the US Treasury market has had this right all year long. Growth Slowing is structural. And, as a result, I’ll Self Indulge and ask Mr. Rogoff why it is so “absurd” to be “worrying” about these very probable Global Macro risks?


My immediate-term support and resistance ranges for Gold (Bullish Formation), Oil (Bullish Formation), German DAX (bullish TRADE; bearish TREND) and the SP500 (bullish TREND; bearish TAIL) are now $1745-1797, $93.88-96.28, 5894-6073, and 1255-1268, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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