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CHINA IS BORING, AGAIN… WILL THAT BE ENOUGH SAVE GLOBAL GROWTH?

Takeaway: Chinese policymakers have increasing scope to stimulate, but we think they are also increasingly less likely to pursue anything meaningful.

SUMMARY BULLETS:

 

  • Importantly, our lackluster outlook for the Chinese property market over the intermediate term – an outlook largely driven by the collective resolve to avoid a bubble among Chinese officials – keeps a lid on our GROWTH expectations for the Chinese economy as a whole. Specifically, we don’t see China returning to anywhere near double-digit growth anytime soon.
  • Moreover, we continue to aggressively downplay market chatter of a sizeable stimulus package to be implemented over the intermediate term. The latest INFLATION data affords Chinese policymakers additional scope to stimulate, but we continue to see signs of limited desire to do so – especially is the GROWTH data continues to improve like it did in SEP.
  • Interestingly, the street is expecting a v-bottom in Chinese growth starting in 3Q12 and extending through the NTM; going forward, it’s all about navigating expectations that may be too high and potentially heading higher over the next few weeks/months – especially if China’s 3Q12 Real GDP growth beats consensus expectations on Wednesday night (our models suggest this is a likely scenario). We see that shaping up as a positive catalyst in the immediate term and a negative catalyst over the intermediate term as stimulus hopes fade.

 

The note below expands upon a topic we discussed late last week – specifically whether or not the global economy was headed for an outright contraction over the intermediate term. Please refer to the following notes for more details:

 

 

Over the weekend, China reported a handful of key SEP economic data; we use our proprietary GROWTH/INFLATION/POLICY lens to analyze the data for you in the prose and charts below.

 

GROWTH

  • Export growth came in at +9.9% YoY, accelerating from +2.7% YoY in AUG. Shipments to the US and EU accelerated to +5.5% YoY and -10.7% YoY from +3% YoY and -12.7% YoY in AUG, respectively.
  • Import growth accelerated to +2.4% YoY from -2.6% YoY prior; anecdotally, copper imports climbed to a 4MO high and the volume of iron ore imports was the largest since JAN ’11.
  • The Trade Balance widened to $27.6B from $26.6B, pushing up FX Reserves to $3.29 trillion from $3.24 trillion.
  • M2 Money Supply growth accelerated to +14.8% YoY from +13.5% YoY in AUG – good for the fastest pace of growth since JUN ’11.

 

CHINA IS BORING, AGAIN… WILL THAT BE ENOUGH SAVE GLOBAL GROWTH? - 1

 

INFLATION

  • Headline CPI slowed -10bps to +1.9% YoY. Food CPI slowed to +2.5% YoY from +3.4% YoY in AUG. Non-Food CPI accelerated to +1.7% YoY from +1.4% YoY in AUG.
  • Headline PPI slowed to -3.6% YoY from -3.5% YoY in AUG. Manufacturing PPI slowed to -4.2% YoY from -3.9% YoY in AUG.

 

CHINA IS BORING, AGAIN… WILL THAT BE ENOUGH SAVE GLOBAL GROWTH? - 2

 

POLICY

On the heels of the SEP GROWTH and INFLATION data, several key Chinese policymakers were out with some interesting quotes, which, on balance, were largely intended to temper market expectations for meaningful stimulus:

 

  • PBOC Vice Governor Yi Gang: “That the most important job for the central bank is to control inflation… While this year's inflation rate is fine and may be +2.7% for the full year, longer-term threats are from agricultural costs and prices for imported raw materials, commodities and energy, which can be driven by global monetary easing… China's fiscal and monetary stimulus will be appropriate to counter the country's economic slowdown and avoid any negative fallout. The stimulus package, I think, this time will be appropriate in terms of size. When I say appropriate in terms of size, that is large enough to stabilize growth, but not too large to cause some further negative impact, or negative problems in the future."
  • PBOC Governor Zhou Xiaochuan: “Quantitative easing policies worldwide could cause inflationary risks… Central banks should consider draining excessive liquidity injected into the market and eliminate inflationary pressure in the long-term."
  • PBOC Secretary of Discipline Wang Huaqing: “The central bank is putting more emphasis on price-based tools to manage monetary policy and strengthening macro prudential rules to shield the country's financial sector from systemic risk. [The PBOC] was putting greater stress on price-based tools and stepping back from direct control on liquidity.” (i.e. reverse repos)

 

Taken in conjunction with the trend of rhetorical leanings from other bodies of Chinese government (State Council, NDRC and MOHURD), we are inclined to interpret this latest batch of commentary from the Chinese central bank as: “inflation is under control now, but key short-term and long-term risks remain; don’t expect too much from us on the stimulus front”.

 

Recently we’ve been flagging the developing trend of CNY strength (at a ~19YR high) and its divergence from the PBOC’s policy exchange rate (at least until late last week) as a sign that international investors were speculating on the PBOC having to defend the country from the inflationary impact of QE3-inspored commodity speculation, as well as poignant China-bashing on the US presidential campaign trail. Chinese interest rate markets, which have traded quite hawkishly in recent months and are no longer pricing in substantial monetary easing over the NTM, are in confirmation of this view.

 

CHINA IS BORING, AGAIN… WILL THAT BE ENOUGH SAVE GLOBAL GROWTH? - 3

 

CHINA IS BORING, AGAIN… WILL THAT BE ENOUGH SAVE GLOBAL GROWTH? - 4

 

Interestingly, the NDF market continues to anticipate a fair degree of CNY and CNH weakness over the NTM, suggesting intermediate-term GROWTH concerns have not fully dissipated.

 

CHINA IS BORING, AGAIN… WILL THAT BE ENOUGH SAVE GLOBAL GROWTH? - 5

 

KEY CONCLUSIONS

The aforementioned divergence between China’s rates and FX markets makes total sense to us, given the POLICY headwinds still facing China’s property market (Fixed Capital Formation = 46.2% of GDP). To the extent the September PRICE and DEMAND data comes in hot, we could be looking at another round of incremental tightening in this sector over the coming months. For our latest deep dive on China’ property market, refer to our 10/4 note titled, “HOPE VS. REALITY IN THE CHINESE PROPERTY MARKET”.

 

Importantly, our lackluster outlook for the Chinese property market over the intermediate term – an outlook largely driven by the collective resolve to avoid a bubble among Chinese officials – keeps a lid on our GROWTH expectations for the Chinese economy as a whole. Specifically, we don’t see China returning to anywhere near double-digit growth anytime soon. Moreover, we continue to aggressively downplay market chatter of a sizeable stimulus package to be implemented over the intermediate term. The latest INFLATION data affords Chinese policymakers additional scope to stimulate, but we continue to see signs of limited desire to do so – especially is the GROWTH data continues to improve like it did in SEP.

 

It appears Chinese policymakers – the very architects of their current economic slowdown – are content with a growth rate trending in the range of ~7.5%, which is exactly what their current 5YR plan calls for. The days of China consistently beating GDP targets by 200-400bps are likely long gone as Chinese policymakers appear committed to truly transforming their economic growth model.

 

Interestingly, the street is expecting a v-bottom in Chinese growth starting in 3Q12 and extending through the NTM; going forward, it’s all about navigating expectations that may be too high and potentially heading higher over the next few weeks/months – especially if China’s 3Q12 Real GDP growth beats consensus expectations on Wednesday night (our models suggest this is a likely scenario). We see that shaping up as a positive catalyst in the immediate term and a negative catalyst over the intermediate term as stimulus hopes fade.

 

CHINA IS BORING, AGAIN… WILL THAT BE ENOUGH SAVE GLOBAL GROWTH? - 6

 

Darius Dale

Senior Analyst


LVS: EARNINGS SHOULD BE SOLID

We’re above the Street with Singapore being the wild card

 

 

We like the LVS setup.  The underlying fundamentals in Macau are strong.  While October market growth may be only in the mid-single digits, the comparison is the most difficult ever.  November and December should show YoY growth acceleration.  LVS’s market share is building again following a hold depressed September and should normalize over the near-term around 20%.  We expect share could move into the 22-24% range in 2013 which would certainly provide some upside to earnings and sentiment.  While the Singapore market is experiencing growing pains, LVS should continue to gain share.  Importantly, following a disappointing Q2, MBS projections have moderated significantly and look appropriate.  With Macau likely providing the upside, we don’t see Singapore as a drag any more.  Higher earnings, improving sentiment, and an attractive valuation of 12x 2013 EV/EBITDA provides a good entry point.

 

 

Here are our projections:

 

OVERALL

 

Our Q3 revenue and EBITDA projection for LVS is $2.88 billion and $962 million which is in-line and 1% above the Street, respectively.  We’re solidly above the Street for Macau, slightly below for Singapore, and slightly above the Street for Las Vegas.

 


MACAU

 

Our estimate for Macau property-level EBITDA and net revenues is 8% and 3% above the street at $511MM and $1.63BN, respectively.  More specifically, we’re above the Street on Sands and Venetian but below the street for Four Seasons and Sands Cotai Central’s performance.  Venetian played lucky this quarter but the rest of LVS’s portfolio didn’t have the the hottest hand.  On a portfolio basis, we don’t believe that the hold impact was material on EBITDA and based on our math, it could have been even slightly positive.  That said, we’re sure that LVS will say otherwise since we estimate that hold across Sands China’s portfolio was 2.81%.

 

Venetian


Venetian is projected to report net revenue of $770MM and EBITDA of $296MM, 11% and 18% above consensus, respectively.

  • Net gaming revenue of $679MM
    • $254MM of net VIP revenue    
      • RC volume of $10.9BN, down 14% YoY and 3% QoQ
        • Junket RC volume dropped another 2% QoQ on top of a 20% QoQ drop in 2Q, to $7.8BN.  We assume direct play of $3BN, down a bit from $3.2BN in 2Q, but in-line with a direct play rate of 28% (same as 2Q)
        • Hold rate of 3.49%, which is 55bps above the property's historical hold rate.  We estimate that high hold benefited net revenues by $38MM and EBITDA by $21MM.
      • Rebate rate of 115bps or 33% of hold
    • Mass table revenue of $366MM, up 23% YoY
    • Slot win of $58MM
  • $91MM of net non-gaming revenue
    • $53MM of room revenue ($232 ADR/87% Occ/$202 RevPAR)
    • $20MM of F&B revenue
    • $52MM of retail, entertainment and other revenue
    • $34MM of promotional expenses
  • Variable expenses of $355MM
    • $313MM of taxes
    • $22MM of junket expenses assuming a commission rate of 1.36% (rebate + promoter expense )
    • $24MM of recorded non-gaming expense
  • $95MM of fixed costs, up 11% YoY but down from an estimated $96MM last quarter

 

Sands Macau


We expect Sands to report net revenue of $312MM and EBITDA of $89MM, 6% and 14% above the Street, respectively.

  • Net gaming revenue of $306MM
    • $122MM of net VIP revenue    
      • RC volume of $6.9BN (down 13% YoY) assuming 9% direct play and a hold rate of 2.81%
      • Rebate rate of 104bps or 37% of hold
      • Assuming historical hold of 2.94%, net revenues and EBITDA would have been $15MM and $9MM higher, respectively
    • Mass table revenue of $159MM, up 10% YoY
    • Slot win of $24MM
  • $6MM of net non-gaming revenue
  • $172MM of variable expenses
    • $147MM of taxes
    • $16MM of junket expenses assuming a commission rate of 1.19% (rebate + promoter expense ) or 33%
    • $4MM of recorded non-gaming expense
  • $47MM of fixed costs, down 21% YoY and 1% QoQ

 

Four Seasons

 

We estimate $230MM of net revenue and $66MM of EBITDA, 12% and 8% below the Street, respectively.    

  • Net gaming revenue of $201MM
    • $154MM of net VIP revenue    
      • RC volume of $9.0BN, up 116% YoY but down 2% QoQ on top of a 28% sequential decrease in 2Q
        • Junket RC volume is down 29% since the opening of SCC QoQ to $7.6BN, no doubt as a result of some of the junkets moving over to SCC.  We assume that direct play is close to the $1.4BN; close to last Q’s number or 16% of total RC.
      • Hold of 2.55%, 19bps below the historical hold at FS
      • Rebate rate of 84bps or 33% of hold
      • Using historical hold rate, we estimate that net revenue and EBITDA would be $11MM and $4MM higher, respectively.
    • Mass table revenue of $36MM, down 14% YoY- the property's first YoY decrease in Mass revenues
    • Slot win of $11MM
  • $29MM of net non-gaming revenue
    • $10MM of room revenue
    • $6MM of F&B
    • $23MM of retail, entertainment and other
    • Promotional expenses of $9MM
  • $138MM of variable expenses
    • $108MM of taxes
    • $24MM of junket expenses assuming a commission rate of 1.11% (rebate + promoter expense )
    • $8MM of recorded non-gaming expense
  • $17MM of fixed costs, down 9% YoY and flat QoQ

 

Sands Cotai Central

 

We estimate $319MM of net revenue and $60MM of EBITDA, 5% and 16% below of the Street, respectively.    

  • Net gaming revenue of $289MM
    • $285MM of net VIP revenue    
      • RC volume of $9.3BN
        • Junket RC volume of $8.3BN.  We assume direct play of 11%, that implies a hold rate of just 2.28%. Direct play in 2Q was approximately 12%.
      • Rebate rate of 79bps
      • Assuming theoretical hold of 2.85%, net revenue and EBITDA would be $32MM and $11MM higher, respectively.
    • Mass table revenue of $118MM
    • Slot win of $32MM
  • $30MM of net non-gaming revenue
    • $24MM of room revenue
    • $14MM of F&B
    • $8MM of retail, entertainment and other
    • Promotional expenses of $15MM
  • $170MM of variable expenses
    • $141MM of taxes
    • $22MM of junket expenses assuming a commission rate of 1.02% (rebate + promoter expense )
    • $13MM of recorded non-gaming expense
  • $77MM of fixed costs

 

SINGAPORE


We project $782MM of net revenue and EBITDA of $414MM, 5% and 1% below consensus, respectively.

  • Net gaming revenue of $641MM
    • $218MM of net VIP revenue    
      • RC volume of $13.4BN, down 20% YoY
      • Hold rate of 2.88%
      • Rebate rate of 1.25%
    • Mass table revenue of $278MM
      • Drop of $1.2BN, up 3% YoY and 22.5% hold
    • $145MM of slot & EGT win
  • $141MM of net non-gaming revenue
    • $84MM of room revenue ($360 ADR/99% Occ/$356 RevPAR)
  • $78MM of gaming taxes and $42MM of GST
  • $240MM of fixed costs, compared to an estimated $228MM in 2Q and $240MM in 1Q

 

LAS VEGAS

 

We estimate that Venetian and Palazzo’s net revenues will be $359MM with EBITDA of $93MM, which are 2% and 4% above Street estimates, respectively.

  • Net casino revenue of $130MM
    • Table revenue of $113MM
      • Drop of $563MM, up 5% YoY
        • 20% hold
    • $42MM of slot win
      • $490MM of slot handle, flat YoY and 8.6% hold
    • Rebates of $24MM or 4.5% of GGR
  • $116MM of room revenue - $181 RevPAR (+2% YoY)
  • $138MM of F&B, retail & other revenue
  • $25MM of promotional allowances or 16% of GGR
  • 5% YoY increase in operating expenses to $255MM and consistent with run-rate in 1H12 

 

BETHLEHEM  

 

We expect Sands Bethlehem to report $120MM of revenue and $29MM of EBITDA, 6% above consensus on both metrics.

  • $109MM of gaming revenues
    • Table revenue of $36MM
    • $73MM of slot win
  • $11MM of net non-gaming revenue
  • $46MM of taxes
  • $45MM of operating expenses

 

OTHER

  • D&A: $230MM
  • Rental expense: $11MM
  • Corp and stock comp expense: $67MM
  • Net interest expense: $59MM

CRI Black Book: Dial-In and Materials

Takeaway: Hedgeye conference call to discuss $CRI black Book starts in t-minus 30.

Valued Client,

Please dial in 5-10 minutes prior to the 1:30pm EST start time using the number and code provided below:

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 225359#  

 

To access the presentation please follow the link below:

CRI Black Book

 

 

Hedgeye Black Books are deep dive research projects, exposing all details of a company, examining past present and future, they are a tool to be saved. This presentation will discuss how the current macro environment and company specific data points are influencing CRI and the best way to play this stock moving forward. 


Topics of discussion will include:

  1. Product Differentiation: CRI is at a point where it is selling like product in very dissimilar channels. How much longer can it go before there is an impact to the P&L?
  2. The company is going from harvesting mode to investing mode. What are the margin and growth implications?
  3. A detailed look at demographics, and how shifting growth rate in different parts of the birth rate curve should impact CRI.
  4. The evolution of the competitive landscape - both at retail and wholesale. How closely is it tracking the change in demand?
  5. Ultimately, what do you do with the stock here?  

 

If you have any questions please contact .


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MACAU: Accelerating Growth

Now that China’s Golden Week holiday has come and gone, it makes sense that gaming table revenues have dropped off in Macau. Still, revenues are above normal, up +20% year-over-year. Our Gaming, Leisure and Lodging team expects 3-9% gross gaming revenue growth for the full month of October; comps will be difficult as well considering that revenue was up +42% in October 2011 over October 2010. 

 

MACAU: Accelerating Growth - gg


Betting On Banks

Financials have been one of the best performing sectors in the S&P 500 this year. Looking specifically at the big banks out there, one can see that many of them have done quite well with some exceeding expectations and one name in particular that’s struggling to catch up to their peers.

 

The Financials SPDR ETF (XLF) is up +22.2% year-to-date and while that's an excellent return by any investor's standards, buying individual names pays off in the long run with the likes of Bank of America (BAC) and Goldman Sachs (GS) up +66.4% and +55.5%, respectively. The biggest loser of the bunch is Morgan Stanley (MS), whose +15.4% year-to-date performance doesn’t hold a candle the broader market or other banks.

 

Betting On Banks - BANKSchart


CASUAL DINING DATA SUGGESTS CAUTION

Takeaway: Casual Dining same-restaurant sales data for September was not positive for stocks in that category. We are bearish on $TXRH and $BLMN

Casual Dining trends do not seem to be supportive of consensus expectations; we are bearish on the casual dining space and see Texas Roadhouse (TXRH) and Bloomin’ Brands (BLMN) as the best opportunities on the short side.

 

Knapp Track

 

According to Malcolm Knapp, estimated Casual Dining comparable restaurant sales growth for September 2012 was -0.8%.  The sequential change, in terms of the two-year average trend, was -5 bps.  This implies 3Q comps of 0.4% for casual dining.

 

Guest counts declined -2.5% versus September 2011.  The sequential change, in terms of the two-year average trend, was flat.  This implies 3Q traffic of -1.8% for casual dining.  

 

 

Takeaway

 

We continue to believe that consensus is far too bullish on casual dining top-line trends.  Anemic real wage growth is just one of many macroeconomic headwinds that we believe merit caution going forward.  The Restaurant Value Spread, as we wrote about here, is suggesting that inflation at restaurants outstripping inflation at grocery stores may be having an adverse impact on same-restaurant sales growth this year. 

 

The casual dining sales index shown below is a simple average of a broad selection of restaurant companies’ same-restaurant sales data.  The Knapp Track Index, which we are not permitted to illustrate directly in chart form, leads the index depicted below (correlation=0.96). 

 

CASUAL DINING DATA SUGGESTS CAUTION - casual dining SRS vs RVP

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 

 

 


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