Clearly, these challenges are not specific to JBX. As I have said before, franchisees in general are more greatly feeling the impact of today’s difficult operating environment, and I would expect to see more franchise operators file for Chapter 11 bankruptcy and/or require increased financial support from their franchisors whether it be in the form of loans or deferred payments (please see my post titled “Franchisees are Really Feeling the Pinch” from November 20 for more details).
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Since the beginning of November, Chinese stocks are up over +15% (the USA is down -15%). They are cutting both taxes and interest rates. They are plugging in one of the largest domestic stimulus plans in world history. Who can afford to miss getting this wrong? This is not that complicated.
If we weren’t bearish on China (and Asian growth broadly) at this time last year, I may not understand the bear case as well as I feel my investment team does. We also have a research office there, which gives us both critical contacts and context to make this call. After crashing for a 70% peak to trough move, the nominal slowdown in Chinese growth is baked into the cake.
Operators have consistently used the tool of adjusting room rates to keep occupancy above 90% to leverage the big fixed asset called the casino. The inability to maintain occupancy even with double digit rate cuts is very disconcerting. Gaming revenues are likely to begin declining at a faster rate or the casinos will have to cut rates even more and endure significant margin erosion. Not pretty.
We’ve dusted off our model which has been very accurate in projecting gaming revenues from just the airport data. October 2008 gaming revenues could fall by 17% assuming a normalized slot and table game hold percentage. Last year in October, slot revenue was boosted by an abnormally high hold %. On the table side, October volume was unusually high given the visitation level. October 2008 faces this tough comparison which should amplify the 12.8% McCarran drop.
If occupancy levels track the airport data, this will be a very bad signal for the duration of this downturn. I suspect any sustained Las Vegas recovery is a long way off. This is not good for MGM.