Today we shorted Wynn Resorts (WYNN) at $125.23 a share at 10:38 AM EDT in our Real-Time Alerts. Hedgeye Gaming, Leisure and Lodging Sector Head Todd Jordan says to short WYNN at our immediate-term TRADE overbought signal.
Takeaway: The latest data is incrementally supportive of three of our best ideas on the long side in Asia (Chinese consumer, Hong Kong and Singapore).
Both the data and the tape(s) continue to support our 1Q Macro Theme of global #GrowthStabilizing. Moreover, the fundamental RESEARCH signals continue to affirm what our quantitative RISK MANAGEMENT signals have been suggesting since early-DEC.
ANALYSIS OF KEY DATA AND TRENDS
With regards to China specifically, we received a heaping helping of the country’s 4Q, DEC and JAN GROWTH data overnight; on balance, it was broadly positive – which was in-line with our expectations of continued directional improvement throughout the Chinese economy:
To put this generally positive into context, we parse out some of China’s previously reported DEC economic data below:
Again, when all of the numbers are appropriately crunched, it’s plain to see that the Chinese economy is an acceleration phase with respect to both its GROWTH and INFLATION figures – something we have been calling for as early as the first of NOV.
THE KEY TAKEAWAYS
It’s long been our view that Chinese GROWTH will not accelerate demonstrably to the upside over the intermediate-term TREND or long-term TAIL.
Moreover, our primary investment thesis regarding the Chinese economy centers precisely around taking advantage of the deliberate economic restructuring implied by our fundamental conclusion: LONG the Chinese consumer and SHORT the global mining CapEx bubble (not from every price, of course).
To the extent you’re not yet familiar with this thesis, please review the following two notes and/or send us an email to set up a call.
As a point of keeping score, Chinese consumer stocks (MSCI China Consumer Discretionary Index) is the second-best performing sector on the MSCI China index since 12/10 (#1 is Financials on cyclical NIM expansion) and is outperforming the MSCI China index by ~250bps.
With the Shanghai Composite Index continuing to track in a Bullish Formation on our quantitative factoring, our view continues to be insulated by market beta.
Also, our proprietary G/I/P outlook continues to auger well for continued strength in the CNY, which is just shy of 19YR highs. This is backed by continued pledges of “prudent” monetary POLICY out of the PBOC in the face of a subdued 2013 INFLATION target (+3.5%). Strong yuan = Strong Chinese consumer.
UPSIDE AND DOWNSIDE RISKS
From our purview, the next major catalyst to come down the pike on the POLICY front is the 12th National Party Congress, which convenes in MAR. There, members of the new seven-man Politburo will assume their formal roles as leaders of the Chinese state and formally outline their strategies to promote domestic demand.
We’re hoping for meaningful improvement on the social security front and perhaps some degree of early hukou reform(s) that may help advance China up the urbanization curve, but we’d settle for a continued focus on tax incentives and subsidies for now. Rome wasn’t built in a day.
Also, while perhaps not necessarily a catalyst, a rather important callout is the somewhat-shaky stabilization of China’s property market (~13% of GDP and ~25% of GFCF). Furthermore, to the extent recent price trends continue unabated throughout 1H, we could see the China’s Ministry of Housing and Urban-Rural Development (MOHURD) implement further tightening measures atop the existing ones they recently pledged to “unswervingly enforce” in order to “strictly curb speculation”.
Expanding the existing trial property taxes to a nationwide level would be one avenue they could pursue, but the latest official leanings on such a maneuver appear a bit on the dovish side. In fact, Premier Wen Jiabao recently signaled a delay in implementation amid further central government studies.
For now, China’s property market, and, by extension, it’s property developers have ample political headroom continue higher – at least over the next few months.
In conclusion, we continue to receive confirming evidence of a cyclical recovery in the Chinese economy. This directional strength out of the world’s second-largest economy and core contributor to global GROWTH should continue to underpin our 1Q Macro Theme of #GrowthStabilizing.
On the strength of this proactively predictable pickup in Chinese economic activity and the Chinese Communist Party’s purported POLICY agenda, we continue to hold a bullish bias on Chinese consumer stocks and select international consumer names with a strong Chinese footprint with respect to the intermediate-term TREND and long-term TAIL.
Additionally, both Hong Kong and Singapore (our other two long ideas in Asia on the equity front) should continue to benefit from a rebound in Chinese demand – albeit rather muted relative to China’s glory days – with respect to the intermediate-term TREND.
Takeaway: During our recent dinner with FNP, management noted that ‘not only will it not happen in 2013, but don’t hold your breath in 2014.'
One of the issues we had been watching in 2013 was the potential for the FASB to require retailers to capitalize operating leases. During our recent dinner with FNP, management noted that ‘not only will it not happen in 2013, but don’t hold your breath in 2014, and maybe not 2015 either’.
In the end, this issue really does not matter as it relates to cash flow as it is purely an accounting change. But the reality is that retailers have always given the false appearance of being high return businesses, as their largest asset (real estate) has been considered to be free from a balance sheet perspective.
But capitalizing leases would take up leverage ratios for retailers. Ratings agencies already look at EBITDAR, so it is unlikely that this would impact their ability to borrow. But traditional valuation characteristics would certainly change unfavorably for investors.
Unless FNP is wrong, it looks like we won’t have to worry about this for a while.
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This week, Hedgeye held its Q1 2013 Macro Themes Call which focuses on three main topics: #GrowthStabilizing, #HousingsHammer, and #QuadrillYen.
In our video posted above, we discuss the first theme, #GrowthStabilizing. The US dollar has strengthened significantly since hitting a 40-year low in Q2 2012 and has helped drive growth in America which is ultimately bearish for bonds and gold and bullish for equities.
It has also helped to deflate the commodity bubble created by the Federal Reserve over the past five years. Right now, the biggest risk to growth is our political system and the upcoming debt ceiling debate in late February.
Monster Beverage (MNST) saw its shares slump yesterday and today on the Food and Drug Administration’s concerns over energy drinks. The offices of Sens. Durbin and Blumenthal and Rep. Markey sent a letter to Living Essentials, maker of the 5 Hour Energy drink, questioning the potential health risks associated with energy drinks and the way they’re advertised. Clearly, every other problem in the United States has been addressed so it’s good to see Congress turning their attention to energy drinks.
Hedgeye Consumer Staples Sector Head Rob Campagnino thinks that Coca-Cola (KO) should buy MNST and use their vast legal resources to fight this battle because KO’s products will soon be in the crosshairs of Congressional leaders. It happened in New York City with Bloomberg, so it’ll be interesting to see how this plays out over the next few months.
FQ1 could be a small beat but accelerating growth and better cash flow deployment the story
IGT will report earnings Tuesday night and while we’re not sure the print will itself be a big catalyst, we do expect a solid quarter with the potential for a beat. The report and conference should confirm our positive thesis on this cheap stock. EPS growth will be high in FQ1 and for all of FY2013 (20%+). Cash flow remains strong and we expect IGT to maintain current leverage and potentially lever up somewhat through significant share repurchases. The days of low ROI acquisitions appear to be over.
We estimate that IGT will report $530MM of total revenue and adjusted EPS of $0.25, 1% and 4% ahead of consensus, respectively.
Product sales of $224MM at a 53.5% gross margin
Gaming operations revenue and gross margin of $306MM and $189MM, respectively
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