• FY 2012:  Mass market revenue grew 13% and slot revenue increased 3% and VIP revenue increased 1%
  • They are particularly encouraged by the QoQ growth in the 4th quarter which grew 11% sequentially on the back of strong VIP growth
  • Their Cotai site will be combined with the adjacent site (amusement park) 
  • Planning to create more space at Grand Lisboa on the main floor and the 3rd floor for premium mass. They are dedicating more of their tables to the premium mass segment.
  • They are constructing a bridge and renovating the Jai Alai building 



  • Grand Lisboa:  isn't EBITDA margin down QoQ despite adding more tables? Yes, the margin is down. VIP grew 15.8% QoQ but the mass was down 1%.  So some of it was mix - 80% VIP mix. Additional margin decline due to junkets performing well and getting higher commissions. They also had to absorb higher bonuses and accrued compensation in the 4Q.  They should have a little north of 14% EBITDA margins or 24-25% on a US GAAP basis going forward. 
  • They are going to get some additional revenues from Jai Alai to re-allocate to Grand Lisboa
  • Down about 2% QoQ on slots and mass.  They took some slots offline to make room for more table games. 
  • They are going to be negotiating a lease with Angela on the adjacent land.  They can only build non-gaming facilities on that land but will complement their gaming asset on that site. Looking to add 6,000 more rooms on that site in addition to the 1,700 that their site can support. Phase I should open in 1Q16. The rest of the towers will open as they reach certain occupancy levels.
  • Trends in Febraury, soft CNY and then the rebound afterwards:  Hard comparisions YoY because of the calendar shift. But if you combine the months of Jan and Feb their business is up 20%.
  • They don't think that there is really anything going on politically. 
  • Their 1Q is usually the weakest Q of the year [for VIP]
  • Jai Alai: In November, they wanted to lease the entire building.  Capex would be HK$600-700MM. For 2013 they are budgeting HK$400MM.  They are going put in better retail etc to complement Oceanus. They will have table space at Jai Alai once the renovations are complete but the tables won't come back from Grand Lisboa.
  • They think that their current dividend payout ratio is sustainable around 76% but they can't guide to that because the Board needs to approve it
  • Theme Park & rooms on Cotai:  They are still negotiating with Angela.  The capex on Angela's site will be roughly the same as what's on their adjacent site.



  • Adjusted Group EBITDA grew by HK$7,631MM and gaming revenue grew by 4.5% to HK$78.9BN
  • Market share of 26.7%
  • Grand Lisboa 2012 revenue:  HK$29.2BN, up 28% YoY and Adjusted Property EBITDA of HK$4.5BN
    • Mass market table gaming revenue increased by 11.5% and VIP gaming revenue increased by 34.4%, while VIP chips sales increased by 16.6%.
    • Grand Lisboa Hotel’s occupancy rate increased by 2.4% to 95% for the full year, and average room rate increased by 3.6% to HK$2,129.
    • Visitation to Grand Lisboa grew during the year, from an average of 34,733 visitors per day in the first quarter, to an average of 40,770 visitors per day in the fourth quarter 
    • During 2012 Casino Grand Lisboa expanded its VIP gaming operations from 134 tables at 1 January 2012 to 175 tables at 31 December 2012. Two areas of the property were converted for VIP gaming, on the 31st floor (since February) and on the 9th and 10th floors (since September). Mass market table gaming grew during the year due to increased numbers of visitors and greater spending at gaming tables, particularly by high limit mass market customers
    • If calculated under US GAAP, the Adjusted Property EBITDA margin of Casino Grand Lisboa would be approximately 25.8% for 2012
    • As at 31 December 2012, Casino Grand Lisboa operated a total of 175 VIP gaming tables, 240 mass market gaming tables and 731 slot machines.
  • Cash: HK$24BN
  • Besides growth of gaming revenue, other factors that contributed to higher Adjusted EBITDA in the year were improved operating results at Ponte 16 and Grand Lisboa Hotel. 
  • The Group’s Adjusted EBITDA margin for the year was 9.6%... If calculated under GAAP, Group’s Adjusted EBITDA margin would be 16.9% for 2012
  • VIP gaming operations accounted for 67.5% of the Group’s total gaming revenue in 2012, as compared with 69.9% for the previous year
  • SJM had 587 VIP gaming tables in operation with 36 VIP promoters, as compared with 609 VIP gaming tables and 32 VIP promoters at 31 December 2011.  At 31 December 2012, SJM operated VIP gaming in 14 of its casinos.
  • As VIP chips sales for the year decreased by 4.0%, the increase in VIP gaming revenue of 1.0% resulted from a higher hold rate for the year. The hold rate for SJM’s VIP operations increased in 2012 to 3.03% from 2.88% in 2011.
  • SJM had 3,532 slot machines in service at 31 December 2012 as compared with 3,910 slot machines at 31 December 2011. Slots were operated at 14 casinos and 2 slot halls.
  • At 31 December 2012, Casino Lisboa operated a total of 48 VIP gaming tables, 131 mass market gaming tables and 72 slot machines.
  • At 31 December 2012, Casino Oceanus at Jai Alai and Casino Jai Alai operated a total of 188 mass market gaming tables, one VIP gaming table and 648 slot machines.
  • Operating results for the Sofitel at Ponte 16, in which SJM’s interest is 51%, improved during 2012 and contributed $184 million in revenue to the Group, compared with a contribution of $162 million in 2011. The occupancy rate of the 408-room hotel averaged 80.8% for the full year 2012 as
    compared with 72.8% in 2011, and the average room rate increased by 0.7% to $1,210.
  • In 2013, SJM is continuing to expand gaming capacity at Casino Grand Lisboa by making more space available for tables on the ground floor for mass market gaming and on the first floor, adjacent to the current high-limit gaming area, for premium mass market gaming. Further space for expansion of premium mass market table games is under consideration involving relocation of food and beverage outlets. SJM is currently working with contractors to determine the actual added capacity, expenditure requirements and timetable. In the first quarter of 2013 additional VIP gaming
    tables were added on the third floor and on the 31st floor.
  • Casino Lisboa is currently upgrading its table capacity and in 2013 will devote more tables for premium mass market gaming in special high-limit gaming areas. In addition, Casino Lisboa has opened a new area for multi-station electronic games and will add 150 slot machines adjacent to the
    main gaming areas by the second quarter of 2013.

M: Why We’re Bearish On The Great Print

Takeaway: Need meaningful EPS upside for M to work from here. With margins at new peak, and competition coming off trough, that’s unlikely.

Conclusion: We’re bearish in light of a great quarter. A lousy secular story that a) is at peak margins and b) had a breakout year that temporarily pushed returns above its cost of capital, and c) is about to see a major competitor comes back online. The stock seems cheap, but not for a department store at peak margins and competitive threats looming. We think that anyone buying it here can at best be playing for a 10-11x pe on $4.25, or about 15% upside. On the bear side, we think you’ve got 8x $3.50 (our 2014 estimate). That’s 29% downside from current levels.



We find it hard to step up and be an incremental buyer of Macy’s here today. It has nothing to do with the quarter that the company posted, but rather, what Macy’s has to do from here to give us confidence in earnings upside.


As it relates to the quarter, there was hardly anything to criticize. M put up a solid 3.9% comp and leveraged that to 8% EBIT growth and 17% growth in EPS.  We’ve often said that if we were given only one operating statistic about a retailer in a given quarter, we’d pick e-commerce sales. And Macy’s blew the doors off with 47% growth in  In the end, when we look back to guidance at the beginning of the year, Macy’s has done virtually everything it said it would do – and then some, winning some clear credibility in our eyes for a business that has hardly warranted much in the past.


We want to stay transparent and accountable on this one in that we’ve had it on our list of top three fundamental retail shorts throughout 2012, and the stock has worked against us over that time (+18% vs +24% for the S&P Retail Index).  The part of the story that we missed was the acceleration in off of a larger base driving both comp and EBIT margin higher. We fared far better from a risk management perspective, going 5 for 6 in our Real-Time Alerts over the past nine months.


There are several reasons why we’re sticking with our short call.  

1. Margins Are Toppy: First and foremost, Macy’s closed out this year with an EBIT margin of 9.6%. It touched that level in 2000, and then flirted with it again in 2004/05. Those were far better periods for the consumer than we’re seeing today. Admittedly, this was when it was a smaller and far less efficient organization (Federated and its predecessors). But even M mgmt noted that margin upside from here will be more difficult – in that weaker Gross Margins will be offset by SG&A leverage.  Margins have gone from 5.6% to 9.6% over the past four years. That’s what made this stock go from 6 to 39 (yes, a 6-bagger). Margins might have a few basis points to go, but we don’t think Macy’s is a business that can sustain margins over 10%.


2. The JCP Factor: We think that another reason the stock worked in 2012 is because of the share gain from JC Penney. It’s kind of funny to hear M mgmt talk on the conference call that “the overlap isn’t 100%, and many of our customers are well above shopping at Penney.” We agree that the average Bloomies customer wouldn’t be caught dead in a Penney. But take a look at the chart below. It is the cumulative sales change for JCP vs M over the past three years. Can anyone really say with any iota of intellectual integrity that there has not been a material share shift? We’ve been big bears on JCP for 1.5 years, and turned positive on Dec 31. We think that the key at JCP this year will be turning the tip line. Even if they buy it – we think they’ll begin to close the competitive gap. Macy’s will still likely get their comp too, but we think they’ll take it on the chin with Gross Margin when all is said and done.



M: Why We’re Bearish On The Great Print - chart1m

3. Dot.Com: Again, hats off to M on this front. But by our math, now accounts for about 7% of total sales. That’s about in line with some specialty apparel retailers that offer a mono-brand experience directly to consumers – a model that presumably plays into e-commerce more easily. As M takes the number of stores that can fulfill orders from 292 up to 500, does that mean that should go up proportionally to 12%?  It might, but it says nothing about their ability to continue to drive people into the stores. Also, part of Macy’s strategy is to allow consumers to order online and pick up merchandise in the stores. Seriously? Short of buying a 300-lb snowblower at Home Depot online and picking it up a few miles away, we can’t think of a single retail model where the ‘order online and pick up locally’ concept is additive.  That might sound like a punitive statement, but we simply think that the big upside in omnichannel -- net of store sales -- has probably past. As a sidenote, management will no longer breakout from store sales. We've seen other retailers do this as well. And in fairness, it's probably the right move. But also means that its getting more mature and evolved.


4. The Big Picture: We all know that department stores have zero square footage growth. That’s no revelation. But longer-term, doesn’t the company need to find a way to make more people shop there? Ultimately, the more powerful brands (that currently sell wholesale inside Macy’s and other department stores) are incrementally going direct, and the ‘proprietary’ brands that Macy’s has are sub-par. Its boxes are massive – averaging 180k+ square feet – the largest out of its peer group. Also, it owns 55% of its stores, and some of the stores it does not own are on 100-year leases. The point here is that it needs to find ways to entice the next generation of shoppers to shop at its stores. We’re not sure if what we’ve heard of its Millennials strategy is enough.


M: Why We’re Bearish On The Great Print - chart2m


Ultimately, we simply don’t like how this story is packaged. This is a lousy secular story with no unit growth that is at peak margins and just had a breakout year that temporarily pushed returns above its cost of capital.  It has a major competitor that is coming back online after a disastrous year, and it will impact the competitive landscape whether it succeeds or fails in hitting its own goals.


Yes, the stock is cheapish at 10x management’s guidance for 2013. But it does not take a whole lot of historical fact-checking to see that department stores have traded at much lower multiples in the past. We think that anyone buying it here can at best be playing for a 10-11x pe on $4.25, or about 15% upside. On the bear side, we think you’ve got 8x $3.50 (our 2014 estimate). That’s 29% downside from current levels.


VIDEO: Keith Takes on Bernanke, Farr


Here’s a clip of Keith from Fast Money earlier tonight. If you go about 4:30 into this video, he talks Bernanke with fellow guest Michael Farr.

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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.


Takeaway: Near-term policy catalysts will confirm the recent weakness across Chinese equities as either a head fake or an early warning signal.



  • Keep an eye on China’s 12th National People’s Congress (which begins next week), as we’re likely to receive some much-needed clarity from Beijing regarding further curbs in the Chinese property market, as well as the introduction of several structurally-positive economic and socio-political reforms.
  • All told, we continue to like Chinese equities on the long side with respect to the intermediate-term TREND – particularly the consumption-oriented names as USD strength continues to deflate global commodity inflation in line with our expectations. Recall that the CNY is a tightly managed float vs. the USD, so the Chinese economy is particularly exposed to dollar strength/weakness in real-time.
  • Our updated quantitative risk management levels on the Shanghai Composite Index is included in the chart below. Holding above its TREND line of 2,209 would create a fantastic buying opportunity in Chinese equities. Conversely, a TREND-line breakdown would put our bearish Growth/Inflation/Policy scenario in play and force us to consider attacking this asset class or related asset classes (Australia?) from the short side.



Who: All eyes will be focused on the transition of power from outgoing President Hu Jintao to new Politburo Standing Committee #1 Xi Jinping and from outgoing Premier Wen Jiabao to new PSC #2 Li Keqiang.

What: 12th National People’s Congress

When: First plenary session begins MAR 5, 2013

Where: In China… Great Hall of the People, Beijing

Why: The seven new Politburo Standing Committee members will be “elected” to their official roles in the Chinese state government. Several avenues of [mostly positive] economic and political reforms are likely to be pursued:


    • Interest rate liberalization
    • Capital account liberalization
    • Expanding the existing VAT trial to new industries and regions
    • Personal income tax reform (redistribution)
    • Social security expenditure reform
    • Energy tariff reform
    • Reduced reliance on SOEs in favor of SMEs
    • Hukou/urbanization reform
    • Land ownership and property registration reform
    • Increased intra-party democracy
    • Public disclosure of officials’ wealth and assets
    • Increased foreign policy aggression and assertion of territorial dominance (Japan)


*Note: Rather waste our time (or yours) with lengthy prose on each potential reform, we think it’s best to conserve our resources to direct our full attention to any actual reforms that are presented in the coming week(s). Moreover, it should be noted that both Jinping and Keqiang are rhetorically committed to a broad reform agenda, but any measures will likely be rolled out over several quarters and/or years amid opposition from entrenched special interest groups, such as SOE chair-people.



Will the Chinese Communist Party throw down the gauntlet (again) upon the country’s property market; if so, will they do so at the current juncture?


The latest on this front is that the municipality of Beijing is reported to just have finished drafting further macroprudential tightening measures that are to be administered after the central gov’t issues more detailed policies. If this is true, then we may receive some additional clarity on this front next week shortly after the 12th National People’s Congress commences.


  • Best-case scenario (as well as our base case): Any new curbs are not overly punitive and much of the assumed impact has been priced in over the past few weeks of equity-market weakness (particularly amongst Chinese developers).
  • Worst-case scenario: The CCP drops the proverbial hammer (a la 2Q10) and threatens to derail China’s not-yet-stable intermediate-term growth outlook. This lack of true economic stability is evidenced by mainland rebar prices – which are still contracting YoY, but improving from a second derivative perspective.








All told, we continue to like Chinese equities on the long side with respect to the intermediate-term TREND – particularly the consumption-oriented names as USD strength continues to deflate global commodity inflation in line with our expectations. Recall that the CNY is a tightly managed float vs. the USD, so the Chinese economy is particularly exposed to dollar strength/weakness in real-time.


Our updated quantitative risk management levels on the Shanghai Composite Index is included in the chart below. Holding above its TREND line of 2,209 would create a fantastic buying opportunity in Chinese equities. Conversely, a TREND-line breakdown would put our bearish Growth/Inflation/Policy scenario in play and force us to consider attacking this asset class or related asset classes (Australia?) from the short side.


Darius Dale

Senior Analyst



#Growthstabilizing Continues to Confirm: Housing & Confidence Data Both Accelerate

Takeaway: The Housing data continues to confirm our bullish thesis while consumers are shrugging off higher taxes & rising gas prices.

Yesterday’s fire and brimstone gave way to more of what we’ve been expecting on the bullish side of housing and the consumer.   Today’s major econ releases showed housing continues to accelerate while the consumer is largely shrugging off the payroll tax increase, rising gas prices, and continued fiscal policy uncertainty. As we move past mid-quarter, we remain constructive on our 1Q13 Macro Investment themes of #HousingsHammer and #Growthstabilizing.  


Below we provide summary takeaways for today’s New Homes Sales & FHFA Data, Consumer Confidence, and the Richmond Fed Manufacturing survey.     



#HousingsHammer:  Today’s data continues to confirm our bullish housing thesis as the New Home Sales and FHFA HPI both came in extremely strong. 

  • New Home Sales:  New Home Sales rose 15.6% MoM and +28.9% Y/Y, marking the fasting rate of growth in 12 months.  Inventory was flat sequentially at 150K, while monthly supply dropped to 4.1 months, the lowest level since 2005.  The combination of Accelerating Demand (sales) and Declining Supply (months inventory) remain supportive of our expectation for meaningful home price appreciation in 2013. 
  • FHFA Home Prices:  The FHFA home price data for December showed home prices increased 0.6% M/M, accelerating to +5.81% Y/Y, marking the highest level since November 2009.
  • To the extent pricing and construction activity can accelerate from here, the confluence of housing wealth and fixed investment growth stand to serve as a discrete offset to impending fiscal policy decisions. 

Chart Source: Hedgeye Financials

#Growthstabilizing Continues to Confirm: Housing & Confidence Data Both Accelerate - nhs 1


#Growthstabilizing Continues to Confirm: Housing & Confidence Data Both Accelerate - nhs 2 


#Growthstabilizing Continues to Confirm: Housing & Confidence Data Both Accelerate - fhfa 1


Consumer Confidence:  Consumers apparently shrugged off both the payroll tax increase and rising gas prices as the Conference Board Consumer Confidence reading surprised to the upside, printing 69.6 vs expectations for 62.0 and 58.4 prior.  The sub-indices told a cohesive story with present conditions and expectations readings gaining sequentially while measures of current and expected employment conditions both improved.  Today’s reading agrees with beat out of the prelim Univ of Michigan sentiment index which came in at 76.3 vs expectations of 74.8 and 73.8 prior.   


While Economic and Market Price Correlations to Consumer Confidence have broken down significantly in the years since 2009, historically, measures of consumer confidence have served as strong leading indicators for economic activity.  For example, on a 10Y basis, lagged correlations to New Manufacturing Orders, PCE Services, and M2 velocity (the hereto unrealized goal of Fed Policy) are all > 0.85.   


With confidence readings beginning to show some upside to close the year, labor market trends remaining healthy, reflation in distressed housing inventory supporting bank capital positions and credit standards showing incremental loosening, we’ll be watching for any re-tightening in the relevant confidence-econ activity correlations a little more closely.  


#Growthstabilizing Continues to Confirm: Housing & Confidence Data Both Accelerate - Conference Board Consumer Confidence table


#Growthstabilizing Continues to Confirm: Housing & Confidence Data Both Accelerate - Confidence vs M2   New Orders


The FED SPREAD:  The Richmond Fed printed +6 on expectations of -4 and -12 prior.  Under the hood, the Shipments, New Orders and Employment components of the Current Conditions Index all improved sequentially, while Prices Paid decelerated 50bps M/M. 


On balance, the regional fed manufacturing indices have been surprising to the upside in February with the Dallas Fed reading holding positive and Empire State Mfg printing +10 after 6 consecutive months of negative readings and vs. expectations of -2.   The Phili Fed index was the negative outlier printing -12.5 on expectations for +1 in February.  


Across the active history of the collective Regional Indices, the breadth of strength/weakness has served as a decent indicator for growth, particularly when the spread moves towards the extremes.  The read through to growth is largely equivocal thus far in 1Q13 with the spread sitting at -1.   


 #Growthstabilizing Continues to Confirm: Housing & Confidence Data Both Accelerate - FED SPREAD vs GDP


#Growthstabilizing Continues to Confirm: Housing & Confidence Data Both Accelerate - FED SPREAD vs Ave GDP bar



Christian B. Drake

Senior Analyst 


Italy’s Uncertain Footing

With no one party receiving a true majority across both houses of parliament in yesterday’s vote, it appears we’re set for either another round of elections or the initial days to formulate a grand coalition. We give the latter significantly less probability because we believe the strong voting results for the Berlusconi and Grillo parties across the upper and lower houses will create more polar factions (particular on the fiscal agenda) and therefore less opportunity for fruitful coalition building, that is to say a coalition not hampered by political gridlock. Remember the party platform of Grillo’s Five Star Movement has been one to not form a coalition.  


Below we refresh a number of charts to highlight the broader, challenged economic fundamentals of the country. Our call here is that the uncertainty around the election (another vote or a grand coalition), especially with the likely prospect of Berlusconi renewing his political powerbroker license, should add further downside pressures to many of the charts. 


Given that coalition talks are officially not supposed to take place until the presidents of the lower and upper houses have been elected on March 15, there’s a good runway of political uncertainty ahead that we expect should lead to more downside across Italian capital markets and put pressure on the EUR/USD.



Growth Slowing - As the data from Reinhart and Rogoff shows, when a country’s sovereign debt load exceeds 90% (of GDP) growth is dramatically impaired. We think the market will continue to punish Italy at 120% via higher servicing costs. Interestingly Italian yields have ticked lower since ECB President Mario Draghi called to buy “unlimited” sovereign debt via the OMT program on 9/6/12.  We think the political uncertainty should boost yields and may materially challenge investors’ perception that Europe is 'healed'.


Italy’s Uncertain Footing - 11. italy gdp


Hockey Stick Risky Profile – Yields and CDS have popped since the election results became more clear yesterday (2/25). The 10YR yield is at 4.90% and the spread over German Bunds is up 57bps since Friday (2/22).


Italy’s Uncertain Footing - 11. yields


Italy’s Uncertain Footing - 11. cds


Underperforming Growth - A major leading indicator for growth is derived from PMI surveys. As the two charts below indicate, Services PMIs are well under the Eurozone averages and along with Manufacturing have been under the 50 line that divides expansion (above) and contraction (below) for 13 and 18 straight months, respectively. 


Italy’s Uncertain Footing - 11. services pmi


Italy’s Uncertain Footing - 11. manu pmi


Labor Cost Inefficiencies - A major factor behind Italy’s slower growth profile is stagnation in its productivity, witnessed by higher unit labor casts, while wages, despite declines, have yet to turn negative.


Italy’s Uncertain Footing - 11. unit labor cost


Industrial Production – Slowing and underperforming continued.  In a European Commission paper reviewing Italy, the report noted that stagnation in production is the key factor behind Italy’s loss of cost competitiveness since the euro adoption.


Italy’s Uncertain Footing - 11. IP


Unemployment Hooking - Another grave dynamic is the underemployment across Italian youths at 37%. While short of the 52% for Spanish youth, combine “a lost generation” with Italy’s demographic headwinds of an aging population (near oldest in Europe) and you have a cocktail that puts great pressure on social services, and the debt and deficit loads in the years ahead.


Italy’s Uncertain Footing - 11. unemployment rate


Smashed Piggy Banks - The Italian household savings rate moved from a high of 17.8% in mid 2002 down to 11.6% as of Q3 2011. The chart shows that Italians leveraged their savings in the upturn and in the downturn. The tapping of savings in the last three years demonstrates to pay off debt and the resilience of the Italian consumer to maintain previous spending levels.


Italy’s Uncertain Footing - 11. savings rate


Confidence Down  - Italian economic sentiment has trended lower since mid-2011.


Italy’s Uncertain Footing - 11. economic sentiment


Retail Sales Down  - decidedly down.


Italy’s Uncertain Footing - 11. retail sales


New Car Registrations  Down - Yet another metric we follow. Here again, no surprise, underperformance vs the EU average.


Italy’s Uncertain Footing - 11. car registrations


Square Stagflation - While we expect inflation to moderate in 2013, but currently at +2.4% Y/Y, sticky stagflation continues to be a tax on a citizenry already feeling crushed by austerity.


Italy’s Uncertain Footing - 11. cpi


Matthew Hedrick

Senior Analyst

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