March Baccarat revenue fell less than 9% versus last year.  Once again the decline was driven by the Rolling Chip (RC) segment where revenues dropped 12%.  The higher margin Mass Market (MM) segment actually increased 1%.  Good luck prevented a bigger decline in RC revenues.  However, even after normalizing hold % between the two periods, total March revenues in Macau would still have only dropped 13%, an improvement from the 17-19% drop in January and February.


The Mass Market performance was encouraging.  Despite the much talked about visa restrictions, MM revenue grew versus last year.  RC faces difficult comparisons through August as the segment was flooded with junket credit last year.


THE MARCH MACAU DETAIL - macau march mm rev


In terms of market share, both LVS and MGM gained a decent amount of market share as can be seen below.  However, both were attributable to good luck on the RC tables.  Volume, on the other hand, remained consistent with the prior months.  Crown and Wynn Macau did gain a little RC volume share from February, mainly at the expense of SJM.  In the MM segment, Wynn Macau and MGM both experienced a slight sequential increase in revenue share, mostly coming from LVS and Galaxy.


THE MARCH MACAU DETAIL - macau march baccarat


THE MARCH MACAU DETAIL - macau march rc turnover


THE MARCH MACAU DETAIL - macau march mm


We continue to be positive on the Macau market and the March results support our thesis.  Despite the visa restrictions, MM continues to be resilient.  If they haven't already, visa restrictions may be eased later this year when the new Chief Executive takes over.  The RC segment faces difficult comparisons only through August when we expect revenues to flatten.  With growth stemming from the higher margin MM and potential junket commission caps in place, market EBITDA growth could be positive later in the year.



Trivia question:  What regional gaming stock has not had a monster run?  ASCA, ISLE, PNK, PENN, BYD?  All of these are up huge, +81% on average since the March 9th low while Great Canadian is up only 23%.  Hey, Great Canadian Gaming is a regional too.  Where's the love?  Sure they're Canadian.  Some of my best friends are Canadian.  Don't hold that against them.





GC is a valuation story with catalysts.  It's not without hair, but the overhangs appear to be behind the company with the exception of the economy.  Historically, GC has traded at a higher multiple than its regional counterparts south of the border and rightfully so.  GC has a better business model as Capex is generally reimbursed by the Canadian provinces.  Right now, GC trades at 4x 2010 EBITDA versus the US regional operators at about 6x.  That disparity shouldn't exist.




So is this a value trap?  I don't think so.  There are some real catalysts:


  • The Winter Olympics will be held in Vancouver in February, 2010. GC generates 80% of its EBITDA in Vancouver.


  • In advance of the Olympics, The Canada Rail Line, opening later in 2009, will include a stop right in front of River Rock, GC's largest property. River Rock is only 8 miles from the airport on the Canada Line and will be the only gaming facility with a stop. The incremental traffic flow from the Olympics should be huge, albeit temporary. However, the rail stop is permanent.


  • Cash flows should stabilize as comparisons ease from lapping the smoking ban in April of 2008, and the opening of two competing properties, Starlight and Burnaby (opened 12/07 and 12/08, respectively). There won't be any new supply for years.


  • GC's largest competitor in Vancouver is Gateway Casinos which is a high probability bankruptcy candidate. This can only help GC's competitive positioning.



The consumer economy is difficult and GC is facing more competition.  However, the consensus numbers actually look reasonable.  If GC can hit those numbers the stock can only go higher given the low valuation.  Here are some of the negatives:


  • - Small cap: Equity cap only $240MM
  • - Canadian stock
  • - Investors don't trust Ross McLeod - the Chairman & CEO and also the largest shareholder (25% of the float) - although he does have great governmental relations
  • - Company has a history of low ROI investments since the money is "free". However the new COO & CFO seem to be more disciplined
  • - Stock is illiquid



We may be early on this one.  It wouldn't be the first time.  However, considering the low relative and absolute valuation, and the recent surge in the US regional gaming stocks, the timing might be right as we get closer to the aforementioned catalysts.

US Market Performance: Week Ended 4/3/09...


Index Performance:

Week Ended 4/3/09: DJ +3.1%, SP500 +3.3%, Nasdaq +5.0%, Russell2000 +6.3%

April 09' to-date: DJ +5.4%, SP500 +5.6%, Nasdaq +6.1%, Russell2000 +7.9%

2009 YTD: DJ (8.7%), SP500 (6.7%), Nasdaq +2.8%, Russell2000 (8.7%)

Keith R. McCullough


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Shark Bite: SP500 Levels, Refreshed

As we close out the week here, I’ll give you my 3 cents:


1. The SP500 is now breaking out from the intermediate TREND line at 824 (thick green line in the chart below)

2. This is a very trade-able range; buy the down moves, sell the up ones (next resistance is 848)

3. When the US Dollar rolled over intraday, US Equities spiked (if it aint broke, don’t fix it)


Thanking God that Timmy Geithner won’t be on the Sunday talk shows again this weekend,



Keith R. McCullough
Chief Executive Officer

Shark Bite: SP500 Levels, Refreshed - kmth

YHOO breaking out here...

China's Ticking Time Bomb?

Are Bad loans buried in Chinese banks going to be the next blow up?


We recently received a question from one of our macro subscribers about the threat posed by non-performing loans (NPL) to the banking sector in China, and whether the there was sufficient transparency and regulation among financial institutions there to accurately gauge the risk.   The question struck a deep chord with us; from our perspective the development of the banking system has been a lingering Achilles heel in the explosive Chinese growth story of the past 15 years.


Our conclusion is, ultimately, that the full extent of the potential losses there is unknown, but that this does not undermine our overall thesis on China’s recovery potential. I wanted to share some of the bullet points that we are focused on:


The Bullish factors for Chinese financials seem clear enough: High savings rates, the strict restrictions of international capital transactions due to a closed capital account and the lack of alternatives in China have helped the banks to increase deposits at a rapid rate. Total capital, increased by the government capital injection, IPOs and the introduction of foreign strategic investors also provide opportunities for the banks to increase lending in a global environment where large internationals have seen their lending ability hobbled. What we are left to wrestle with are questions of asset quality and risk management.


Through accounting system reform and public listing, the transparency of the major commercial banks has improved in recent years, making some international comparisons of bank financial results possible, with the caveat that detailed differences do exist in accounting systems. While some Chinese banks have become competitive with the large internationals (state-owned commercial banks/SOCBs, and joint-stock commercial banks/JSCBs) in terms of assets and capital size, they still lag in terms of asset quality and profitability.


The reported average NPL ratio at the recapitalized SOCBs declined to 3.28% at the end of 2006 from 20.62 at the end of 2002. During the first two months of 2009 the level of bad loans in the Chinese banking system decreased by 17.5 billion Yuan, to 1.53 trillion Yuan, with commercial banks’ non-performing loans totaling 553.5 billion Yuan, a non-performing ratio of 2.2%, down from 2.44% at the start of 2009, according to the CBRC. It is assumed that the four-trillion Yuan stimulus plan, accompanied by credit extension of 1 trillion Yuan in new loans on average, each month, will drive the level- and ratio of non-performing loans higher with a long lag before the numbers reflect this increase accurately. The blind spot in these equations is the large number of “special mention” loans on the balance sheets of Chinese banks, a category that is not regarded nonperforming but that is deliciously defined as “the repayment of loans that might be adversely affected by some factors.” This definition leaves a very large carpet to sweep problems under.


The capital adequacy of the SOCBs improved, when measured by their amount of Tier 1 capital, after the CBRC established a regulation requiring commercial banks to keep their capital adequacy ratios above 8% after January 1, 2007, in accordance with the Basel Capital Accord. The central government subsequently committed to providing the Agricultural Bank of China with capital injections but took a harder stance with the JSCBs since most of their shareholders are local governments and state-owned enterprises (SOEs), reluctant to offer a direct bailout, pushing them to seek new money from local governments and the private sector.


In recent years the government has begun implementing a series of reforms to improve the efficiency and profitability of the state banks given the impending opening of the domestic financial sector to foreigners under the WTO. A large percentage of bad loans have been transformed from the wholly state banks to fully state-owned asset management corporations (AMCs) in return for bonds guaranteed by the Ministry of Finance.  Given the weak cash recovery rate of less than 25% reported on these bad loans, these transfers are effectively government recap transactions, in some cases with direct cash injections directly from the pool of foreign reserves.


Three of the SOCBs have been transformed from wholly state-owned to corporations owned by shareholders, although the state remains the largest shareholder, listed on Hong Kong. Now most commercial banks must dispose of NPLs out of their own provisions or profits, which could be problematic due to the banks’ low profitability. In the first quarter of 2006 it was estimated by Fitch that the deposit taking institutions had US$271 billion of NPLs, which were classified as “special mention,”  -the above mentioned purgatory category hovering between normal and nonperforming. Officially, the total amount of NPLs was US$206 billion, of which US$164 billion are held in commercial banks and US$42 billion in noncommercial banks. UBS Securities Asia estimated that Chinese commercial banks might have new NPLs as high as US$225billion of the loans extended during the boom period of 2002 to 2004, with a rapid increase in property loans, a focal point of the Chinese government. Large amounts of NPLs remain on the balance sheets of the AMCs, with the purchasing of US$330 billion NPLs from the four SOCBs and the Bank of Communications (BOCOM). The State Development Bank has also transferred NPLs to the AMCs. The four AMCs were originally designed to be closed within ten years but are now expected to continue under a market-oriented business model and transform their organizations into commercial entities resembling investment banks and establish securities companies with joint-venture asset management companies with foreign banks (The joint-venture AMCs were established, in part, to introduce market-oriented mechanisms into the NPL secondary market).


Having said all this, the immediate conclusion is hardly satisfying:  Considering the questionable reliability of existing data, the recent rapid increase of lending and the remaining huge NPL pools held by AMCs, is still difficult if not impossible to judge whether the NPL problem in China has actually moved toward a significant resolution.


Our bullish thesis on China does not ignore these concerns, we just think that the sustainability of the national budget must also be considered within the context of the NPL issue.


We are betting that massive foreign exchange reserves and a relatively modest fiscal deficit (111billion Yuan in 2008 although with the current contraction in economic activity and the level of stimulus the fiscal deficit will expand rapidly in 2009) leave the Chinese government with the capacity to manage the issue in the short-term while progressing with banking sector reforms (another critical focus for us), capital market development and opening the capital account.


Please keep the questions coming.


Andrew Barber

China's Ticking Time Bomb? - fu12