The Macau Metro Monitor, February 16, 2012



The Ministry of Trade and Industry said S'pore GDP in Q4 2011 contracted 2.5% QoQ in seasonally adjusted, annualized terms, smaller than the 4.9% contraction estimated last month.  The government maintained its previous forecast that the economy will grow 1%-3% in 2012, and highlighted uncertainty surrounding the global economy, namely political and economic problems in the euro zone and geopolitical risks arising from the Middle East.



Conclusion: There is such a wide disconnect between economic reality and what HBI presented after the close. We’ve been so negative on it, but even if this stock is down 20%, we’d sell every share we owned. HBI said it should get to ‘True Earnings Power in 2H’. That’s what concerns us most. I can make a better case for a Zero than $25.



Is it me, or was this quarter simply surreal? Seriously. For those of you short it, congratulations. It’s going to be a good day for you. But today we’ll see downgrades and capitulation, and now we have to focus on what’s next. But after going the model (several times over) we’re coming up with '12 earnings about $0.90 (37%) below the mid-point of guidance.  


We can bicker about pricing vs cost inflation all we want. But we’re beginning to get concerned about a much bigger tail risk – liquidity. That’s when the logic of looking at this name on a trough multiple on trough earnings is simply flawed.


That’s perhaps the ultimate value trap. An 8x pe on the bottom of management’s guidance suggests a $18-19 stock. But what the market will likely do if our model is right is model this on EBITDA (as it should for such a highly levered company). Assets in this space have historically traded between 3-5x EBITDA. On our 2012 numbers, 5x EBITDA gets you $3.50 per share. At 4x, you’re looking at a donut and the bondholders will be sweating it out.


Let’s look at the Majors…

1)      HBI’s credibility is blown. It was just 13 weeks ago that the company said that it mis-judged the extent to which retailers would tighten inventories. So it reset earnings expectations. Mgmt said that cotton costs are not a profit issue but more of a timing issue, and that pricing was holding and elasticity was not a problem. Then it revealed that WMT cut massive Just My Size program in favor of private label. This happened after price increases went into effect.  How is that not a problem with price elasticity?

2)      This quarter, HBI takes down 1H guidance by $0.30 due to severe price competition in the wholesale distributor channel for its Imagewear (ie screenprinting) segment.

  1. No problem with pricing/elasticity? C’mon…in gauging elasticity, you need to look at the entire portfolio. A PM can’t look at his book of 50 stocks, and say that he outperformed the market if he excludes the 15 that underperformed.
  2. This category is about 40% of Outerwear, but only 8% of total company sales. How does that add up to a $0.30 EPS hit?
  3. HBI noted that ¼ of its Imagewear sales are what it refers to as ‘highly competitive.’ That’s only $95mm. At a 20% incremental margin (which is probably too high if they are right about it being so competitive), then we get to a $0.15 earnings hit if all of it completely goes away. The only way we can get to $0.30 is if half of this business (again, at a generous 20% margin) goes away entirely. I guess that’s possible, but it’s not what they indicated.

3)      Management noted that ‘Aside from the Imagewear business, they are doing quite well.’ Huh? Excluding Imagewear they’re guiding to flat sales for the next 2 quarters. They’re ‘pleased’ with flat? Flat stinks.

4)      ‘Solidified’ 2012 pricing is baked into guidance. Wasn’t Innerwear price baked into guidance six months ago, and Imagewear competition/prices baked into guidance three months ago? Why should we believe it now?

5)      Still plan for international to reach $1bn by mid decade and for Consumer Direct to be a growth driver. In the quarter, they were +0.6% and -1.6, respectively. They don’t sound like growth engines to me.

6)      I have no way to get anywhere close to the company’s $400-500mm in free cash flow guidance in 2012.

7)      HBI gave the political answer about changes at JCP – that it’s excited about the change. They might lose a little hosiery business there, but that’s all that’s in their plan. That’s a binary outcome, imho. JCP is about a 5%-6% customer for HBI. Family dept stores = 15%. Mass channel = 50%+. Ron Johnson at JCP is going to competitively bid out each section in the stores to see which brand wants it more. JCP might get the revenue, but it will be at a lower margin. PLUS, any special product workup is going to upset Kohl’s, Target, WalMart, Sears, Macy’s, Dollar Stores, etc… This will be a domino effect with or without HBI. Also, be sure to remember that price competition at retaisl in higher end categories is often funded by discounts in more commodity categories (ie discounts on Polo at Macy’s will be paid for by Jones Apparel Group, PVH’s Dress Shirt biz, and underwear vendors like HBI).

8)      Perhaps the biggest positive is that Even the company finally used cash to retire $200mm in debt. But what’s notable here is that – if we’re right on the model – it will be better served to have more cash on hand to meet debt service to the extent that cash flow gets tight.


In the end, as noted above, we can’t  think of a single reason to own this stock as the risk reward does not start to look remotely interesting until it’s a single digit name.


Brian McGough


Soybeans, rice, and beef prices led the way during the past week, registering modest price increases as chicken wing prices also gained.  Coffee prices declined almost 10%.









Beef prices are a significant cost for many companies within the restaurant space but we are highlighting WEN, JACK, CMG and TXRH.  For WEN and JACK, this is particularly relevant as roughly 20% of their respective COGs baskets are comprised of beef.  The chart of live cattle prices, below, shows how strong the momentum is in beef prices currently.  Corn and wheat prices declined over the last week is a bearish sign for beef prices, on the margin, but a far more substantial decline will be required to meaningfully impact price.  Supply and demand dynamics still, in aggregate, point to a continuation of elevated prices.




The supply of beef in the U.S. remains low and production is expected to remain low for years.  According to CattleNetwork, several factors play into the motivation for an expansion of beef cow numbers.  While the January 2012 inventory report did highlight a 1% increase in beef replacement heifers and roughly 37,000 more heifers expected to calve in 2012 versus 2011, these metrics showed significant declines in 2011 versus 2010.  For 2011 and 2012 combined, beef heifers expected to calve dropped dramatically and total beef cow numbers during 2011 declined by almost 970,000. Prospects for future prices, in terms of livestock prices and retail beef prices, as well as profit margins and weather factors, will all impact motivation for an expansion in beef cow numbers.  Here is the full article.  As long as feed costs remain high, and cattle feeders are enduring negative margins, a rapid increase in supply will be difficult.




Demand for US beef remains high.  Record exports in 2011 are being followed up by rising demand both from domestic consumers and global markets.





Coffee prices dropped -9.4% over the past week.  Coffee on the spot market is now 20% cheaper than it was this time last year.  Coffee costs have impacted PEET heavily, as is evidenced by its below-expectations earnings in 4Q that were reported last night (the stock is down today).  The current trend in coffee prices could be positive for PEET over the longer term. 




Reduced robusta coffee exports from Vietnam have helped send prices higher over the past week.  India cut its coffee export forecast for the crop year to September by 0.7%. 




Coffee prices have declined on concern that demand for commodities will soften after weaker-than-forecasted retail sales data caused concern among investors that the recovery may be faltering.





Commodity cost inflation for BWLD will step up in 1Q with 2Q being the most unfavorable compare if prices remain elevated, as wing prices bottomed in 2Q10.




The six-week moving average egg sets number declined by -5.2% for the week ended 2/11 versus a year ago.  The contraction of the chicken supply looks like it is going to continue.




As beef prices go higher, we expect the food service industry to shift focus to chicken to alleviate cost pressures.


WEEKLY COMMODITY CHARTBOOK - egg sets wing price






























Chicken – Whole Breast


WEEKLY COMMODITY CHARTBOOK - chicken whole breast



Chicken Wings














Howard Penney

Managing Director


Rory Green


Early Look

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China to the Rescue? – Again?

Conclusion: We continue to hold the belief that China will not be a source of dumb capital to be used to help Europe fund its bailout mechanisms – if so, it would have done so already in OCT/NOV at much lower prices. Furthermore, we are of the belief that China will continue to demand concessions in return.


It’s clear that speculation around China’s [pending] involvement in funding the Eurocrat Bazooka matters to global financial markets, particularly considering a short-seller’s fear of: “China to buy everything.” What remains unclear to us, however, are the key details around China’s involvement: “When, how, and to what extent?”


The “why” is a given: in aggregate, Europe is China’s largest export market, accounting for nearly 19% of mainland Chinese shipments in 2011 (*Hong Kong and Singapore also re-export a great deal of Chinese products as well).


China to the Rescue? – Again? - 1


Moreover, with Chinese exports falling -0.5% YoY in JAN on sequentially-slowing YoY growth in shipments to Europe (-3.2% YoY in JAN vs. +7.2% YoY in DEC), the heat is incrementally on Chinese policymakers to come to Europe’s aid – particularly in light of this morning’s weakening European growth data (slowing GDP growth across the board).


China to the Rescue? – Again? - 2


Going back to the most important questions of: “when, how, and to what extent”, we continue to get left in the dark as far as the key details are concerned, leaving our Global Macro team with a thirst for more data in this regard. Consensus speculation on what the Chinese can do (as opposed to re-positioning according to what they will do) carries a great deal of risk at current prices.


This we know – the Chinese can channel investments into Europe via the following three avenues:

  1. An incremental rebalancing of its $3.2 trillion away from USD, GBP, or JPY assets and into EUR assets on the margin;
  2. Incremental investment from China Investment Corp, the nation’s $400B+ sovereign wealth fund; and
  3. Potentially through state-owned financial institutions such as China Development Bank and Export-Import Bank of China.

Moreover, PBOC Governor Zhou Xiaochuan did come out and say that the five “BRICS” countries all hold a “very positive attitude towards helping Europe”, they must continue to wait for the “right time and right opportunity” to invest. He went on to echo Premier Jiabao’s recent commentary that, “China hopes for more innovation from Europe to provide more lucrative products that are truly appealing to Chinese investors.”


All told, we continue to hold the belief that China will not be a source of dumb capital to be used to help Europe fund its bailout mechanisms – if so, it would have done so already in OCT/NOV at much lower prices. Furthermore, we are of the belief that China will continue to demand concessions in return (including real austerity, which is not equal to the promise of future austerity). Refer to our SEPT ’11 note titled “China to the Rescue?” for more details.


Below is a collection of our published remarks from 4Q that chronicle China’s [often-alleged] commitment to financing the Eurocrat Bazooka. The key themes of “when”, how”, and “to what extent” remain paramount:



  • China is allegedly to create a new investment vehicle to manage $300B in EU/US assets. The fund is to mimic SAFE Investment Corporation Ltd., which yields ~$570B, has 65.8% of its assets in FDI and equity securities. If this new fund is real and anything like SAFE, it won’t be used to bail out ailing EU sovereigns. It will, however, look to buy European corporate assets on the cheap – something EU leaders haven’t been particularly in favor of (protectionism).
  • We continue to hammer away on our view that Asia will not be there in size to help lever the EFSF or some other form of E.U. bailout. Zhu Guangyao, China’s Vice Foreign Minister in charge of European affairs, had this to say regarding the use of China’s $3.2 trillion in FX reserves: “China can’t use its $3.2 trillion in foreign exchange reserves to rescue European nations… Foreign reserves are not revenues. China can’t use its reserves to fund poverty alleviation at home or to bail out foreign countries… Now is not the time for China to have a contingency plan in the event a Eurozone country defaults on its debts or exits from the 17-nation single currency. The government has already done its part to help Europe, which has the wisdom and strong economic fundamentals to solve its sovereign debt crisis.”


  • Jesse Wang, executive vice president of China Investment Corp, the nation’s sovereign wealth fund, recent comments affirm our conviction in the view that China will not be a source of dumb, unlimited capital to finance the Eurozone bailout, but rather a source of smart money looking for attractive investment opportunities in distressed real assets: “The fund wouldn’t be the main channel if China helps tackle the sovereign debt crisis... However, if during such a process there are good investment opportunities in Europe and if CIC’s investment helped the destination company or country to recover and developed the economy, that would be indirect support.” Commerce Minister Chen Deming shared those views in his recent remarks: “While China has always been supportive of Europe’s rescue efforts, these will mainly depend on the euro zone itself… China will definitely be a part of any help offered by the global community… We are willing to further reform and further open our market, but other economies must be more open to us in return.”
  • In China, Gao Xiqing, president of China Investment Corp (the country’s sovereign wealth fund) had this to say regarding the potential of them reallocating assets to aid in the Euozone bailout: “When we talk about international investments, we must consider whether they serve our interests… We can’t say that we’re a generous nation and we can help you at whatever economic costs to us.” Additionally, Jin Liqun, chairman of the board at China Investment Corp, had this to say as well: “China cannot be expected to buy the highly risky bonds of euro-zone members without a clear picture of debt workout programs.” 
  • Two Chinese officials reiterated our view that China is unlikely to take part in bailing out Europe as a source of uninformed, unlimited capital. Zhang Tao, director of the international department at the PBOC suggested that China needs further details regarding the options for bailing out Europe: “At present there’s no specific plan that people have clear understanding of,” he said. Zhu Guangyao, vice finance minister, had similar remarks regarding the EFSF: “There’s no concrete plans yet so it’s too early to talk about further investments in these tools.”
  • Chinese Vice Finance Minister Zhu Guangyao confirmed our belief that China would not be a source of “dumb capital” for the EFSF, publically demanding more details about the “technicalities” of the fund. Additionally, China Investment Corporation (sovereign wealth fund) Chairman Jin Liqun said that “Europe is not really short of money” and publically challenged the European populace to “work harder”, “longer”, and “be more innovative”.

Darius Dale

Senior Analyst


We’re expecting another disappointing quarter from Genting. 



Our property level EBITDA estimate of S$390MM is about 5% below consensus.  Based on our proprietary analysis of government tax data, we believe that the Integrated Resorts in Singapore generated Gross Gaming Revenue (GGR) of S$1.94BN, down 5% QoQ but up 13% YoY.  MBS reported GGR of S$1.01BN, implying that RWS produced only S$930MM compared to S$975MM in 3Q11. 


Part of the issue is that Singapore growth may be somewhat tapped out as we wrote about in ‘SINGAPORE Q3 REVIEW’ on 11/11/11.  RWS also experienced a several week delay in the grand opening of the Equarius Hotel and Beach Villas (opening tomorrow) and its slot/EGT expansion – both originally slated to open by Christmas.  We suspect that management walked down Q4 expectations in January but it looks like numbers still need to come down.  We noticed a change in tone from when we spoke with the company in mid-January, compared to the tone in late November.  In late November, their expectation seemed to be for a big sequential increase in VIP similar to Q4 2010.  However, management was much more cautious in January – shifting the focus on what they need to do to get Phase 2 of their resort open later in 2012 rather than near-term growth.





We estimate that RWS will report net revenue of S$769MM and EBITDA of S$390MM.   RWS did S$375MM of EBITDA last quarter on S$789MM of revenues which included a large bad debt charge of S$38MM.  Without the abnormally high bad debt charge, 3Q EBITDA would have been S$408MM. However, 3Q also benefited from high hold of 3.17%.

  • Gaming revenue, net of commissions of S$626M
    • Gross VIP revenue of S$485MM and net revenue of S$254MM
      • We expect RC volume to increase sequentially to S$17BN, down 21% YoY due to more conservative credit extension and the proximity of Chinese New Year to Jan 1.  This likely reduced what could have been two VIP visits to versus just one last year.  Last year, RC volumes increased 39% from 3Q to 4Q.
      • Hold of 2.85%
      • Rebate of 1.25%
    • Gross Mass table of S$297MM and S$239MM net of gaming points - Gaming points equaled 4% of drop or S$58MM
    • $152MM of slot and EGT win
      • The incremental slots/EGT expansion was installed the second week of January vs. by Christmas as originally scheduled
  • Non-gaming revenue of S$144MM
    • Hotel room revenue of S$35MM
      • There should be a sequential pick up in occupancy due to the holidays
    • S$23MM of F&B and other revenue
    • USS revenue of S$86MM
      • Transformers opened on December 3rd
      • The quarter also benefited from school holidays
  • Gaming taxes of S$89MM
  • Implied fixed costs of S$181 – similar to last quarter


In preparation for HYATT's Q4 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • “Overall as of the end of the third quarter, our signed contract base for future hotels exceeded 150, representing more than 36,000 rooms which is a small increase from last quarter”
  • Renovation of big 5 owned hotels: “We're starting to see the benefits of these renovations as hotels are starting to see RevPAR index growth, higher levels of interest among meeting planners and indications that the renovated hotels will be even more appealing to transient and group guests for 2012 and beyond.” 
  • “From a revenue displacement perspective, because we had rooms out of service in the fourth quarter of last year, we do not expect to see any additional negative impact from displacement on a year-over-year comparative basis going forward”
  • “Visibility to the future continues to be limited as booking windows continue to be tight.  About one-third of our group business and virtually all of our transient business for 2012 has yet to book.”
  • “Corporate rate negotiations have just begun, and while we hope for high single-digit percentage rate increases because of relatively high levels of industry occupancy and continuing limited new hotel supply growth, the fact is that visibility is limited”
  • “We continued to shift more business away from lower discount, promotional and opaque third-party rates to higher rated corporate negotiated rates”
  • “As we did last quarter, we continue to see an increase in food and beverage revenues and ancillary revenues on a per occupied room basis at North America full service hotels. Specifically, all three measures outlet revenue per transient room night, banquet revenue per group room night and other operating revenue per occupied room increased.”
  • “Our adjusted SG&A expenses increased approximately 15% in the quarter. Approximately a third of this increase is due to bad debt expense and performance surcharges related to two properties, a third, due to increased head count driven by growth initiatives and a third due to inflation and increased business levels.”
  • “Our full-year forecasted tax rate percentage is currently in the mid 20% range, excluding discrete items.”
  • “We have fine-tuned our capital expenditure estimate to be between $390 million and $400 million. Our expectation of depreciation and amortization expense has increased to approximately $300 million, primarily due to the LodgeWorks transaction.”
  • “Our estimate for interest expense has increased to approximately $60 million, primarily as a result of our recent debt issuance.”
  • “Our SG&A, if you exclude the one-time I would describe the bad debt expense or the performance cues as really one-time events, is running at approximately a little over 8% on a year-to-date basis.”
  • “The total CapEx investment will be lower than what's reflected for 2011 largely because, 2011 had the renovations that related to our five big hotels which are largely complete, and the figure broadly was about 40% of the $400 million that you have for 2011.”
  • “Approximately a third of the margins were relative to property refunds. Now we do have property refunds. We've seen some last year. We've seen some this year. It just happened this quarter, so when you compare quarter-over-quarter, it is a one-time event.  The rest of it was largely driven by the portfolio and it's driven by a couple of factors. First, the margin increase is broad-based so it's not a few properties driving it. It's across the board, both North America and international. Secondly, mix shift which is trending towards higher rated group and transient business has driven higher room and food margins. And we continue as we've done in the past to drive productivity through effective cost control. Our cost per occupied room increase was less than half of the occupancy increase we saw in the quarter.”
  • “I think overall, the LodgeWorks transaction should marginally help margins over the long-term. So it should be accretive”
  • “Our quarter three RevPAR growth in Europe was in the mid-single digits, so slightly higher than what we've seen in the international business. We've seen really no change, similar trends continue into recent weeks…Our presence is Europe is small. If you look at our total room base, we have about 5% of our room base invested in Europe. And our presence in Europe is largely concentrated in Germany, France and in a few markets in the UK.”