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The Call @ Hedgeye | March 28, 2024

Guilo - A term for a Person of white ethnicity used by Cantonese speaking Asians.

I thought about this term when watching Steve Leisman on CNBC yesterday morning.  CNBC’s senior economics reporter (oxymoron, I know) was incredulous that Feng Shui could have anything to do with the PBOC’s number choice for the lending rate cut.  Yes Steve, the Chinese are a superstitious bunch and they do believe that numbers matter.

Now I’m not the China expert at Hedgeye.  That role belongs to Darius “da gezi” Dale.  However, I did just get back from a 3 week trip to China and some other Asian countries (of course, I went to Macau) so I feel like an expert. 

A few general observations from my trip are in order before I get to the sector analysis:

  • More than one Mainlander commented to me that there are a lot of people being paid to do worthless things like digging ditches, filling them in and then re-digging
  • A lot of construction – hope there is demand
  • Government development contracts are done on a big scale – instead of building one hotel, they want you to build 10 for instance – again, hope there is demand
  • Flying domestically sucks but the trains are great
  • Saw a lot of buildings outside the main cities but not a lot of people
  • The best jokes in China are the ones ridiculing the central government – quietly of course – maybe playing to the audience

And now on to the subject that’s near and dear to my heart and the main reason for my trip to Asia:  the leisure sector.  First, the hotels in Beijing and Shanghai are great – all new and all very well-staffed.  I couldn’t pick my nose without a Chinese finger there to help.  Loved the service.  I visited quite a few and they were all overstaffed.  Chalk one up for the Americans who manage but do not own any of these hotels.  Margins, shmargins.  Many of the hotels were also part of mixed use development, so it’s difficult for the owners to determine ROI on the hotel piece.  This might explain the extravagance of the hotels and the favorable management contracts for Starwood and Marriott. 

On to the gambling world and its capital – China.  As most of you know, China plays a major role in the world of gaming.  Las Vegas has become almost an afterthought.  Macau is the largest gaming market in the world with the vast majority of the business originating from mainland China.  In June, Macau gaming revenues grew 13% MoM on top of 7% growth YoY.  Investors would be cheering most markets with that kind of growth, but not here.  Macau gaming stocks traded in the US (LVS, MPEL, WYNN) are down 25-30% since their YTD highs in April.  The concern lies in the sharp VIP slowdown.  VIP comprises about 70% of gaming revenues in Macau and although margins are lower than in the Mass business, VIP volumes really haven’t grown sequentially since June of last year.  In fact, VIP YoY growth went negative in June 2012 for the first time in 3 years.

For the purpose of this Early Look, we will update the rather timely analysis we did on 5/22/11 in a note entitled “VIP SLOWDOWN IN THE CARDS”.  Yes, we’re pimping our research a little here (somebody’s gotta do it – this is a business after all), but there is also an interesting macro angle to the analysis that’s appropriate for this forum and once again timely.  At that time, we found that Macau VIP volumes were highly negatively correlated to changes in the China Reserve Requirement (peaked at a lag of 9 months at -0.85) and the China 1-Yr Lending Rate (peaked at a lag of 11 months at -0.75).

The timeliness comes in because China began loosening on June 7th followed by another rate cut yesterday.  If history is a guide, we’re still 3 quarters away from material improvement in VIP but at least there is a light at the end of the tunnel.  From a near-term perspective, the rate cut is probably indicative of a weaker economy than many thought.  If weak VIP volume growth continues to drag these stocks down, there will be a tremendous buying opportunity – a la 2009, the last time VIP cracked.  As long as growth in the Mass segment continues its strength – up 30% in June – further estimate reductions, while likely, shouldn’t be devastating. 

While it may not be time to back up the truck just yet or even start it, the keys should be in the ignition because these stocks are cheap and help is on the way.  Stay thirsty my friends.

Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Germany’s DAX, and the SP500 are now $1, $97.21-102.74, $82.30-83.21, $1.22-1.25, 6, and 1, respectively.

Todd Jordan

Guilo and Managing Director – Gaming/Lodging/Leisure

GUILOS AND GROWTH - ch 1

GUILOS AND GROWTH - ch 2

GUILOS AND GROWTH - vp 7 6


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