The Macau Metro Monitor, September 26, 2012




MPEL said it has reached an agreement with its partners in the Studio City project to invest an additional US$350 million (MOP2.8 billion) total in equity capital toward the venture.  An option in the agreement allows Melco Crown’s partners six months to deliver their 40% share of the US$350 million.  If not, the gaming operator will increase its stake in Studio City to 67% from 60% by investing the full US$350 million amount itself, Melco Crown said.


SJM CEO Ambrose So told the media that operators are yet to come up with concrete measures to comply with the new smoking ban law.  The reason for the lack of measures was that the government did not consult the industry earlier, so that operators did not have enough time to make the necessary preparations.  While stressing that they supported the smoking ban, So also pointed out that the gaming industry is “special”, and the government should consider how to better enforce the ban inside gaming venues.


Angela Leong, Managing Director of SJM, said she expected the competition in the gaming industry to become more intense as more neighboring countries and regions joined the business, but she was confident that SJM would continue to play a leading role as its new project in Cotai is expected to give the company an additional competitive edge.  Leong also confirmed to the media that she has opted to run again in the Legislative Assembly (AL) election scheduled for next year.



SJM CEO Ambrose So says he does not see a significant increase in salaries for staff in the gaming industry taking place in the coming years.  Average monthly earnings for employees in the gaming industry increased 22% from MOP14,491 (US$1,811) in June 2007 to MOP17,740 in June this year, according to government statistics.


The government today announced it would give public workers a special grant for exemption from work on October 3.  That means public workers will have a five-day break during the National Day Golden Week.  The leave period starts on Saturday (September 29) and continues until Wednesday (October 3).


Takeaway: $SPLS The risk is severe in this 'change everything' move. 8x EPS may look great, but not if the real multiple is 30x.


SPLS used 10,155 characters in its mammoth press release. It would have been easier to simply say, ‘we’re changing everything’ and top out at 25. The risk embedded in this model is severe.

Struggling retailers are like people with severe obesity – it takes them a long time to get so ill. SPLS is now officially obese with its press release surrounding how it is going to change the company, but we’re astonished with how quickly it got there. After all, SPLS has already been known as having one of the best management teams in retail. Heck, I even sourced analytical talent on my own team from SPLS, and yes, I can say that there are a lot of very smart people there.

But those classic rock faithful (and no to our interns, Nirvana is not Classic Rock) will know that Keith Moon, drummer from ‘The Who’ told Jimmy Paige that his new band will go over like a Led Zeppelin. That’s what SPLS smells like here. But without the success of selling 200 million albums thereafter…

Think about it…when you put great people in a terrible industry – not only mass big box retail – but big box office supplies retail where they have two bleeding competitors in Office Max and Office Depot and compete with everyone from Wal Mart to Radio Shack, to Best Buy to Ikea, then the job will win 9 times out of 10 and the ‘great person’ will walk away a winner only 10% of the time. Not good odds.

Let’s look at what this company is trying to do

  1. integrate its retail and online offering, 
  2. increase investment in its online businesses,
  3. reorganize its operations,
  4. implement senior leadership changes,
  5. initiate a multi-year cost savings plan, and
  6. restructure its International Operations

Let me just say that any ONE of these is an undertaking that is so incredibly risky. But to do all six simultaneously? There is absolutely no shot of this working out – at least not without some more severe pain before they see relief.  There are two things that bother us the most.

  1. That they think they can do this while cutting costs. Mark our words, there has never been a retailer that has made changes like this to ‘accelerate growth’ while cutting costs and has had the strategy work. One of them is trying now. It rhymes with KC Blenney. And no, I’m not saying that to be sensationalistic. This could be another JCP. It’s business is actually less defendable than JCP’s is. The problem at JCP is that the model is so expensive. But the idea is a good one. Here, I’m not even sure what the idea value proposition is.
  2. We should have seen this, at least in part. When looking at the company’s percent of sales coming from on-line, 31% sales growth came from on-line in the four years ending calendar 2009. Despite the added boost from acquiring Corporate Express in 2008, the contribution of on-line to total growth slowed from an average of 8% per year over four years to only 2% in each of the last two topping out at 42% of sales vs. 40% 3-years prior and 27% 6-yrs ago. The company simply stopped spending on its fastest growing business. Hate to break it to them, but spending again now means they possibly benefit in 2 years. Not today.
  3. In the interim, these reorg costs will be steep, and very dynamic. All competitors will be salivating over this.

The stock looks so cheap. But valuation need not apply. They own less than 3% of their stores, and have little else to monetize a breakup value. Maybe an Ackman-type steps in and makes noise, but the company is already making a ton of noise on their own. You can hardly argue complacency to any sane Board member or sympathetic activist. But doesn’t 8x earnings look great? Not if the real multiple is 30x. Maybe they should move to Plano.













Idea Alert: URBN

Takeaway: $URBN is back on the long side of the Real-Time Positions today. Price changed, the research didn't.


Keith added URBN back on the long side of the Real-Time Positions today. The research hasn’t changed – it's the price that did.

Here’s our note “URBN: Feel the Love” we posted on 9/11:


Several brokers were out this morning echoing URBN's positive comp trajectory commentary in its 10Q filed last night, and how it supports the turnaround story that is taking place. We usually step back and re-evaluate when we see so many uniformly similar comments about a name that we have been positive on – especially when the stock is up 50% since May when we added to the Hedgeye Virtual Portfolio. But the reality is that when looked at in context, the Street is still not too bullish on URBN at all. In fact, there are 32 firms that ‘cover’ URBN, and as the first chart below indicates, we’re currently looking at the lowest ratio of Buy ratings, and highest ratio of Sell ratings in the recent (5-year) cycle. While some will consider the 9% of the float being short as too low for URBN (ie suggesting that investors are a step ahead of analysts), we'd look at others like Macy's where short interest is sub 2% -- which is an absolutely unsustainable level. That's makes investors' bearish bets on URBN look more significant.

Idea Alert: URBN - URBN Sent

Source: Factset

Aside from looking at sentiment we need to take this announcement for what it is – a sequential improvement in a high-return concept that has a lot of upside.

Here’s what we said back in May around the time we got more heavily involved…

“Let’s not bend any facts here. The quarter stunk. URBN took 8.6% sales growth and morphed it into a 10.1% EBIT decline. But relative to expectations, it was slightly better. One comped a comp (Urban), while the other (Anthro) comped down on the easiest compare of the year. There were definitely puts and takes. But the big take-away came from simply listening to this management team.

They sounded so extraordinarily focused on the conference call – such a stark contrast to the URBN of six months ago. Seriously…go back and listen to the past two calls. Night and day. That’s what you get when you bring in the founders to save the day.

The message is simple.

  1. Hire all the right talent.
  2. Empower each of them to come up with a concise plan, to which they will be held accountable.
  3. Give them the financial and human resources to achieve the plan.

Along the way, they’ve got shared services initiatives (DC just going up for 3Q) that should allow URBN to leverage the back-end across concepts while investing in areas like mobile and digital to more efficiently flow product and reach new

They don’t really give comp forecasts – which is great bc forecasting comps is ridiculous. They simply focus on the process to put up the numbers, and hold themselves accountable to execute. Anyone reading this knows that I (McGough) rarely throw out public kudos to management teams, but the bottom line is that listening to these guys is like listening to a company with $10bn in revenue, not $2.5bn.

There’s still wood to chop here, no doubt. But we’re coming up with estimates about 20% above consensus. If we’re right, then URBN is trading at about 7.1x our next year EBITDA estimate. If you want to short that, knock yourself out.”

The stock is certainly much more expensive today, but we arguably underestimated the extent to which estimates needed to go up. When estimates are headed higher (as they still have to go) it’s a fool’s game to bet against a high-return growth retailer.

Idea Alert: URBN - URBN RevEbit

Early Look

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Takeaway: We are now long Brazilian equities in our Real-Time Positions signaling product.



  • We are now long Brazilian equities in our Real-Time Positions signaling product and continue to believe Brazilian stocks are a buy on weakness with respect to the intermediate-term TREND duration.
  • On our proprietary GIP factoring alone, Brazilian equities look almost as attractive as they did to us back in early MAY – particularly from a GROWTH perspective, where our models continue to point to a back-half ramp in real GDP. For a variety of factors, the risk of a material ramp in INFLATION over the intermediate term appears to be receding.
  • Risks to our positioning include: a sharp-selloff in “risk assets” across the Global Macro universe, as asset prices realign with their fundamentals. Moreover, a sharp, policy-induced selloff in the BRL vs. the USD remains a risk, though also receding on the margin relative to our previous expectations.


Earlier this afternoon, Keith bought the iShares MSCI Brazil Index Fund in our Real-Time Positions signaling product. Though we haven’t published an official stance until late last week, we did frame up the bull/bear debate on Brazilian equities in our AUG 30 note titled: “CONSTERNATION IN BRAZIL” (8/30). To recap, our interpretation of the bull thesis was as follows:


  1. On our proprietary GIP factoring alone, Brazilian equities look almost as attractive as they did to us back in early MAY – particularly from a GROWTH perspective, where our models continue to point to a back-half ramp in real GDP.
  2. Needless to say, it remains to be seen whether or not the Brazilian government’s aggressive year-long stimulus efforts will provide the intended boost to growth without spurring a measured ramp in INFLATION.


To point #1, intermediate-term Brazil’s GIP outlook is among the healthiest across the dozens of countries we track from a Global Macro modeling perspective. Brazil, having gone through “the soup” earlier and more aggressively than many other economies in the current cycle, appears poised to be well out front leading any global growth acceleration over the intermediate term – albeit from small numbers – on the heels of one of the world’s most aggressive fiscal and monetary stimulus efforts in the YTD.




To point #2, we received world late last week that our initial fears of accelerating inflation over intermediate-term may have been overblown – at least from a reported standpoint (from our WEEKLY ASIA & LATIN AMERICA WRAP-UP):


  • What Happened (9/19): Brazil’s government plans to change the CPI index to decrease the effect of its notorious indexation policies (price increases tied to price increases that beget future price increases). Moreover, Mantega did mention that the electricity cost reduction as well as the recent and pending tax cuts will help keep a lid on Brazilian CPI in 2013.
  • Why This Matters: While it’s hard to take Mantega’s word on CPI at face value, we wouldn’t rule out them altering the way inflation is calculated to help the government achieve the government’s political goals (the US government has mastered this technique). While this is morally bad and has very dour unintended consequences from a long-term perspective, it would remove a fair amount of inflation risk over the immediate-to-intermediate term – which would keep the Brazilian central bank on hold, and, more importantly, the market’s POLICY expectations along with it. After at +19% melt-up from its YTD bottom on JUN 5, I’m getting constructive again on the Bovespa. Shame on me, as my interpretation of these fundamentals has likely been primed by the market reaction leading into and through QE. That being said however, Brazil’s GIP outlook (attached) looks fairly robust from a trend perspective, so that does provide incremental cover for continued gains in Brazilian equities. Brazilian stocks are now officially a buy on weakness from our purview. For more details on our internal bull/bear debate on this asset class, refer to our AUG 30 note titled, “CONSTERNATION IN BRAZIL”.


Additionally, it increasingly appears that QE3 was nearly priced in from an inflation expectations perspective, delivering little more than a 2-day pop in “risk assets”, including global commodities markets. To the extent the trend of lower long-term highs across key commodity prices continues, we’d expect to see continued dovish revisions to inflation expectations in Brazil.




Given our below-consensus outlook for global GROWTH with respect to the intermediate term, we do realize the inherent risks of being long the high-beta Brazilian stock market at the current juncture – particularly with its exposure to the Inflation Trade (69% of the Bovespa Index is Energy, Basic Materials and Financials stocks). That said, however, we’d be remiss to ignore the fact that during the Global Financial Crisis the Bovespa Index bottomed in OCT ’08 – well ahead of other global equity and commodity markets – as rapid, state-directed credit expansion helped mitigate the effects of the Great Recession upon the Brazilian economy. It’s worth noting that Brazil scores very well on our proprietary Stimulus Space Index (methodology here).




Another risk we see to being long Brazilian equities is BRL depreciation relative to the USD – particularly of the sharp, POLICY-induced variety. To this point, in an interview in London last week, Brazilian Finance Minister Guido Mantega reiterated his aggressive stance against QE3 and reminded investors that Brazil could implement possible measures such as raising cross-border IOF tax rates and politically pressuring the central bank to incrementally lower the benchmark SELIC interest rate, as well as have them accelerate reverse currency swaps – all with the intent of promoting a lower exchange rate amid what Mantega himself dubbed an international “Currency War”.


Again, it appears increasingly less likely that the USD puts on a sustained down move from here over the intermediate term as the Fed’s POLICY potency appears to be fast losing steam. While that does increase the likelihood we’d see BRL depreciation over that duration, a sharp, policy-induced selloff in the BRL vs. the USD like we saw earlier this year appears less likely.


Darius Dale

Senior Analyst


Takeaway: We like $BKW on the short side

Earlier today, Keith added BKW, on the short side, to Hedgeye’s Real-Time Positions. We like it here because it is trading near the top of its TRADE range and our fundamental thesis remains intact.



Burger King Worldwide is a stock we have been bearish on since the deal was announced. We remain negative on TRADE, TREND, and TAIL durations. The title of our first note (4/10/12) on BKW was “Too Big To Fix?”. In that note we expressed skepticism that the myriad issues that had dogged the chain for a decade had been conclusively resolved – without necessary capital investment – by the new owners over the 18 months prior to its most recent IPO.

A conference call we held following our initial note on Burger King was called “The Latent Risks of Heavily Franchised Business Models” and discussed deep issues affecting the Burger King franchisee base. We calculated that operators within Carrols franchisee base pay out roughly 50% of their store-level cash flow back to the franchisor. The takeaway is that there is very little cash flow available for the franchisee to invest in his/her own business.

Other issues include:

  • Probable continuation of higher beef prices over the next few years due to supply issues
  • “Obamacare” could also add to financial strain on system in coming years
  • McDonald’s is aggressively protecting its share from WEN and BKC



Quantitative Setup

The immediate-term TRADE range is $13.03-$14.95




Howard Penney
Managing Director

Rory Green

MACAU: Turning The Tables

Macau has become the de facto hot spot for gambling in the world. As Las Vegas struggles to emerge from the housing and credit crisis, Macau is experiencing an accelerating rate of growth. Presently, there are 35 casinos in Macau, broken down as follows: SJM-20, GALAXY- 6, SANDS CHINA- 4, WYNN MACAU- 1, MELCO CROWN- 3, and MGM China -1.


Currently, there are currently five new casino projects in the queue all on the Cotai Strip (WYNN, MGM, SJM, GALAXY, and MPEL’s Studio City). Only WYNN Cotai has the green light from the Macau government to build their new casino at this time.


Table games are all the rage and the government has imposed a cap on the amount of gaming tables allowed in Macau. Currently, there is a table cap of 5,500 gaming tables that lasts until March 2013.  After March 2013, the number of gaming tables in Macau can increase by an average of 3% per year for the next ten years. All of the new casinos are asking for a certain number of new tables but it is uncertain if all of their requests will be fulfilled due to the table growth limit.  


One can think of these table licenses similar to liquor licenses in New York City. They are highly coveted and a driver of revenue that businesses are itching to get their hands on. New casinos being built that are able to acquire a substantial amount of tables have the potential to boost table hold and revenue and attract more visitors. 

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