In preparation for LVS's 4Q earnings release Wednesday, we’ve put together the recent pertinent forward looking company commentary.
1/28/13: SANDS CHINA GETS APPROVAL FOR 200 NEW TABLES: CEO
1/28/13: SANDS CHINA ANNOUNCES INTERIM DIVIDEND OF HK$0.67 CENTS PAYABLE ~FEB 28
1/28/13: SHERATON MACAO HOTEL AT SANDS COTAI CENTRAL ADDS 2,067 NEW ROOMS
11/26/12: LAS VEGAS SANDS BOARD OF DIRECTORS APPROVES $2.75 PER SHARE SPECIAL DIVIDEND PAYABLE DEC 18
YOUTUBE FROM 3Q CONFERENCE CALL
DEVELOPMENT OUTLOOK & UPDATES
Takeaway: The fundamental research signals suggest the respective outlooks for Indian and Brazilian stocks is not a clear as it once seemed.
Central banks in India and Brazil were very active in the past 24 hours. The former expectedly/unexpectedly (depending on who you asked) eased monetary policy by lowering interest rates -25bps across the board:
The latter pseudo-tightened monetary policy by auctioning FX swap contracts, which is the functional equivalent of selling USD to the market on favorable terms for the domestic currency. The BRL strengthened +1.7% on the day (yesterday) and is up an additional +0.5% today, bringing its week-to-date gain to an impressive +2.2%.
WHY THAT WAS BAD FOR INDIA
Given our short-cycle outlook for the Indian economy (i.e. Quad #3 in 1Q = Growth Slowing as Inflation Accelerates), we didn’t think the RBI would be inclined to ease as soon as many market participants were hoping for and we thought this likely pushing out of monetary easing expectations by at least one quarter would lead to the SENSEX and the INR underperforming and/or outright correcting in 1Q.
With the advent of today’s -25bps rate cut, our fundamental research call has been wrong here. We do, however, find a small degree of solace in the fact that the SENSEX closed down -0.6% on the day. Is this as good as it gets in the near-term for Indian financial markets?
From our analytical purview, there’s hardly any reason for the market to believe the RBI will continue cutting rates as more inflation data comes in during 1Q, but Governor Subbarao and his motley crew have obviously been surprised here before. Year-after-year, the RBI is surprised to the upside with respect to its inflation forecasting, but their recent focus on shoring up Indian growth takes credibility pressure off of them for now – at least for financial market participants. We’re all but certain the ~800-plus million Indian citizens living on less than $2/day aren’t too thrilled with this gross lack of vigilance on the inflation front.
What is perhaps most alarming about today’s policy maneuvers is that the RBI confirmed to us that it has absolutely no clue what it’s doing with the following commentary:
Inflation staying “range-bound” around +7% YoY on the WPI series and +10% YoY on the CPI series is not supportive of any sustained pickup in Indian economic growth. In fact, we’d argue a lack of control over inflation is the key factor underpinning the country’s most pertinent economic risk – i.e. twin deficits (sovereign budget balance and current account).
Both Fitch and Standard & Poor’s have warned in 2012 that this risk continues to threaten the country’s investment-grade status, so a continued lack of commitment towards addressing these imbalances in a meaningful way may culminate in the country being downgraded to junk by one or more of the “Big Three” ratings agencies at some point over the intermediate term.
That would have negative implications for Indian debt inflows – which are at/near record highs a TTM basis (aided by various policy maneuvers such as multiple increases to foreign institutional investment quotas) – and the country’s ailing currency, which is at/near all-time lows.
Still, it’s unclear whether or not the threat of the aforementioned catalyst would be enough to derail Indian financial markets without actually being a tangible, near-term event(s). In light of this, we’ll continue to wait for both a better time (start of 2Q) and price (TREND support if it holds on any [pending] correction) to increase our long exposure to India.
Additionally, we’ll likely have more color on Finance Minister Palaniappan Chidambaram’s FY14 budget by then. We’re on record stating that it’s somewhat imperative for continued strength across Indian financial markets that his team proposes a meaningful reduction in public expenditures and subsidies and/or a complete overhaul of the Indian tax code (lower rates; wider base).
A failure to do either will likely culminate in the market challenging his already-lethargic fiscal consolidation platform: the 5.3% of GDP budget deficit in FY13 is projected to narrow to only 3% of GDP by FY17 – very underwhelming indeed.
All told, if you missed the move up in Indian equities, there’s no sense in chasing ‘em up here with a dour near-term fundamental outlook. Our updated quantitative risk management overlay is highlighted in the chart below.
From a index constituent factor risk perspective, tech, telecom, low debt, low beta, and large caps are all outperforming of late and pose the most risk from a mean reversion perspective on any potential correction – which should be shallow in and of itself if our fundamental outlook materializes. Macro markets are already discounting for a fair amount of economic surprise risk via the recent run-up in implied/historical volatility spreads.
For more details behind our intermediate-term outlook on India, please refer to our 1/8 note titled: “PATIENCE SHOULD PAY DIVIDENDS IN INDIA”.
WHY THAT WAS GOOD FOR BRAZIL
It appeared the market was not yet prepared for the central bank to step in and intervene directly on the currency and probably took it as a signal that Finance Minister Guido Mantega isn’t yet ready to ease capital controls, which more-or-less translates to Brazilian policymakers not yet being ready to be friendly towards foreign capital.
Still, this is ultimately a positive fundamental signal (assuming the resulting currency strength is sustained) as FX appreciation continues to be the only way for Brazil to combat accelerating inflation readings amid President Rousseff’s prohibition of higher domestic interest rates, which should continue to stay glued to the floor, per Central Bank Governor Tombini’s guidance. BRL appreciation remains a critical factor underpinning our intermediate-term bullish bias on Brazilian equities.
All told, we continue to like Brazilian consumer names and industrial names on the combination of currency strength promoting domestic purchasing power and lower interest rates reinforcing penned-up demand for capital outlays (World Cup and Olympic Games preparations are generally well behind schedule) boosts both sectors.
The Bovespa, now bearish-TRADE on our quantitative risk management factoring, looks like it wants to hold its TREND line of support here. A recapture of the TRADE line would be an explicit signal to investors who aren’t yet involved on the long side of Brazil to do just that (i.e. get involved).
That [pending] signal would be supportive our view that there is indeed a silver lining to what the Brazilian central bank is doing – specifically in that in the absence of rate hikes, currency strength really is the only way for Brazil to combat the bevy of inflationary pressures being built-up across its economy.
Moreover, the county’s multi-year international debt binge has really exposed Brazilian corporations to a fair amount of currency translation risk with respect to earnings growth. It’s easy to see why the Bovespa Index has an -0.78 inverse correlation to the USD/BRL exchange rate (trailing 5Y).
From a index constituent factor risk perspective, consumer staples, industrials, high debt, large caps and cheap (EV/EBITDA) are all outperforming of late. Also, the 400bps spread between 3M and 1Y BRL non-deliverable forwards suggests the FX market expects further strength in Brazil’s currency in the weeks to come.
For more background on this thesis, please refer to our 12/5 note titled: “DID MANTEGA JUST GIVE US THE GREEN LIGHT ON BRAZILIAN EQUITIES?”.
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And it’s not much different from what’s wrong with Vegas.
A competitor put out a note questioning the vitality of the regional markets. We wholeheartedly agree that there is something wrong with the regional markets. We’d take it even farther to say that there is something wrong with domestic gaming, not just regional. Indeed, beginning in April of 2012, we put out a series of notes and analyses, discussing the lack of recovery in Las Vegas and the regional markets and the reasons behind it.
The best explanation for domestic gaming weakness is twofold: demographics and economic sensitivity. The core slot player demographic is in decline – younger players are not playing slot machines. There is no new customer base to fill the void of shrinking baby boomer generation. Unfortunately, most attempts at attracting a younger base of players have failed. Here are the bullets:
On the cyclical side, gaming has proved to be more sensitive to an economic downturn than virtually all other consumer sectors. We don’t believe the macro will be an economic tailwind until the economy is consistently and strongly growing. Higher taxes in 2013 will not help.
Back in April 2012, our sequential projection model was showing that the underlying trends in the regional markets were actually not getting better and could actually be getting worse. Since then, monthly regional gaming revenues have generally flat lined on a sequential basis – adjusted for seasonality – and actually deteriorated in the summer. Interestingly, as shown in the chart below, December was actually the best month of the year relative to our model even though the absolute YoY growth was -2%. Unfortunately, Q1 is not shaping up well for the regional markets.
In Las Vegas, we follow the slot volume metric closely as this represents the highest margin revenue driver and ultimately is the best barometer of the health of the Strip. Monthly strip slot volume was down most months of 2012 and generally lower since 2009 as the chart below shows. This is very consistent with our demographic views and supported by the data. As we’ve written about consistently, the data shows that:
Please let us know if you would like a copy of our April presentation “THE SLOW DYING OF DOMESTIC CASINOS”.
We view the Architectural Billings Index as a way to gauge non-residential construction activity. Despite the index gradually easing in December, it continues to show expansion at 52.0. The index is supposed to lead non-residential construction activity by 9-12 months and thus indicates that activity may strengthen by mid-2013.