We will soon see how much of an impact the flood of junket credit had on the Macau market in 1H 2008. The following chart shows the quarterly Rolling Chip (RC) volume in 2008 and the 2009 volume assuming a Q4 2008 run rate. Sure there may be some seasonality associated with Chinese New Year in Q1 but the underlying credit situation is deteriorating sequentially. Yesterday, LVS President Bill Weidner commented that junket operators have been unable to collect a lot of the money they lent their VIP players.

RC volume could be down 20-25% in 1H 2009. MPEL will be impacted the most as 96% of its revenues were from RC in 2008. However, Wynn Macau and Galaxy were not far behind, each generating around 80% of their respective 2008 revenues from RC. Granted, the mass market profit margin is roughly double that of rolling chip but rolling chip generates more dollar profits than mass market. That is certainly true for most of the properties in Macau, including Wynn Macau.

Macau estimates certainly look like they need to come down.

1H 2009 Rolling Chip will be impacted by tough comparisons and deteriorating credit environment


Some quick comments from Keith:

PFCB looks better than CBRL on the pullback

WEN still looks best at 4.35 and that’s where I want to buy it … DRI is 2nd, then SBUX, then PFCB… EAT broke like CBRL did today, not sure why….

HP - Fundamental comments

I was not hearing any new fundamental news yesterday. Just the standard “the stocks have rallied to far too fast.” EAT and DRI are the two in the group that had big December performance, albeit from oversold levels.

More to come….

RT – Better than toxic

In FY2Q09 RT, RT’s total revenue declined 9.7% driven by a 10.8% decline in same-store sales. On a monthly basis same-store sales were down 9.4% in September, 10.4% in October and 12.7% in November. Keeping on trend with recent quarters, same-store sales in the Northern markets out performed those in Southern markets. In the quarter, the South’s same-store sales declined 13.9% compared with a decline of 7.7% in the Northern markets. The company’s weakest states are Florida, Alabama, Georgia, Virginia and Tennessee. I would note that things improved slightly since the end of the quarter. In December same-store sales were down 9.1%. The decline in Northern region was 6.5% while the decline in the South was down only 11.7%. At the peak of the decline in August, same-store sales were down 15%.

Turning to the balance sheet, total debt including operating leases, guarantees and letters of credit was $852 million. RT remained in compliance with their covenants at the end of the quarter. RT’s DEBT/EBITDAR ratio was 4.22x versus the maximum requirement of 4.5x. The fixed charge coverage ratio was 2.48 versus the minimum requirement of 2.25. Not surprising, the principle concern with RT is the step down in the leverage ratio going forward. The DEBT/EBITDAR ratio declines to 4.25 in the current quarter through FY1Q10. The debt/EBITDAR declines again in FY2Q and 3Q of 2010 to 4.0x and then goes down to 3.75x at the end of FY2010.

I was somewhat disappointed that the benefit from the store closings was not greater. In FY3Q09 average restaurant volumes should increase approximately $40,000 per year and pre-tax income should increase approximately $10 million. In FY09 RT will generate free cash flow (cash from operations less capital expenditures) between $68-78 million. The combination of the free cash flow as well as proceeds from the sale of other assets will enable RT to pay down $80-90 million in FY09, including the $40 million repaid in the first half of the year.

It’s a bit on the speculative side, but the RT story is one I like to tackle. There is a core RT business that will survive and we are much closer to seeing that core business. Sales comparisons get much easier in the Southern region as we head into the summer and the costs are much better aligned with current sales trends. Any improvement in sales will quickly flow through to the bottom line.

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Once again, rumors of a visa loosening have surfaced. We’ve gotten conflicting opinions from our myriad of sources in Macau. The majority, however, believe that there has been no real change in visa policy for the masses. As we pointed out in our 12/21/08 post “MACAU VISAS: NO MAJOR CHANGES”, Beijing has allowed casinos to target certain direct customers for frequent visitation, but not on a mass basis. This could be causing a lot of the confusion.

Our contacts did indicate a busy New Year’s (western) celebration in Macau. Some of that was due to a big bash at MGM Grand. However, most of the incremental visitors appeared to be from Hong Kong and not mainland China.

We continue to believe that real change in the visa situation may not occur until late 2009, when the new Macau Chief Executive is getting ready to take over. In the meantime, the bigger issue is the lack of credit available to players, especially relative to 1H 2008 when the junkets flooded the market. Visa changes primarily impact the mass market business. As can be seen in the following chart, the Rolling Chip business suffered significantly more than mass market in the back half of 2008.

Lack of credit a bigger issue than visa restrictions as evidenced by the underperformance of RC

SP500 Levels Into The Close

A lot of people expressed difficulty in agreeing with my view that we could very well see a -4% pullback in this tape. That’s probably why we are correcting.

After refreshing our model, here’s how the math flushes out. Be patient – this is turning into a very predictable and trade-able range. Volatility is shooting up today, like we thought it would from those oversold immediate term lows. Next line of resistance for the VIX is $45.83, but as we climb towards that line and see the SP500 fall into the buy zone, this tape sets up very bullishly. For the SP500 my levels are:

BUY “Trend” = 895-901 (see chart)
SELL “Trade” = 951

Keith R. McCullough
CEO & Chief Investment Officer

Romanian Red


Like many of the European markets that closed down today on a stronger Euro and the “reality” of disrupted-- or in some cases completely cut-off--gas lines from Russia, Romania took a very precipitous -12% nose dive on the day.

Today’s slide can be significantly attributed to Banca Transilvania, the country’s second-biggest publically traded bank that accounts for 61% of the index, which lost some 58% of its value, having resumed trading today after the bank’s stock was suspended. Additionally state-owned gas distributor Transgaz fell from a one-month high as Gazprom reduced supplies.

Romania’s market performance in Q4 ‘08 was quite stable. (See graph). From its low on October 27th, the Bucharest’s BET Index rose +18% as of trading yesterday. Q3 GDP growth in Romania stood impressively at 8.9%, the highest in Europe, riding years of growth that drew foreign investment.

Irrespective of today’s crisis in local credibility, we do not think that Romania can sustain 9% GDP growth in 2009. That said, as we look Eastern European countries like Romania, an important question we continue to ask ourselves internally is: could Eastern European growth decouple from that in Western Europe? Stay tuned…

Matt Hedrick

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