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The Macau Metro Monitor, February 27, 2013




VIP business has seen a “strong comeback” after the festival that ended on Feb. 17, Bill Hornbuckle, chief marketing officer of MGM Resorts, said in Macau today.  MGM China said it hasn’t seen any sign of a Chinese crackdown on the junkets.  “There’s never any real, concrete indication or direction from the government,” said Pansy Ho, chairman of MGM China and daughter of Stanley Ho. “Although the growth rate of VIP business may slow, I’m not aware of any crackdown.”  


Pansy Ho said she has no plan to cut her 27% stake in MGM China.



Macau unemployment for November 2012-January 2013 held stable at 1.9%.  Total labor force was 358,000; the labor force participation rate stood at 72.5%, up by 0.1%.  Total employment increased continuously, reaching 351,000 in November 2012-January 2013, an increase of 1,400 from the previous period. 



Legislative Assembly members yesterday urged city officials to review the partial ban on smoking inside casinos as soon as possible, making them completely smoke-free.  The most vocal assembly member was Angela Leong On Kei, who is also an executive director of SJM.

A regular review of the ban is scheduled for 2015, but assembly members want it to be pushed forward. However, the head of the Health Bureau, Lei Chin Ion, said yesterday the review would only take place in 2015 as scheduled.  Lei said yesterday that the bureau detected 118 violations of the partial smoking ban in casinos between January 1 and February 20, 60% of which involved tourists.



Secretary Francis Tam said that consecutive monthly declines in visitor arrivals could help ease Macau’s strong internal demand and consequently slow down inflation.  Tam said that strong purchasing power of tourists is the “main factor” pushing up the city’s internal demand.  

The Four Horsemen

This note was originally published at 8am on February 13, 2013 for Hedgeye subscribers.

"On the road we're somebody else's guests - and we play in a way that they're not going to forget we visited them."

- Knute Rockne



With Keith and Daryl on the road across the pond I've been tapped to pen this morning's Early Look. In doing so, I'll bring an alternate angle to the morning missive compared to my hockey colleagues since my foundation was forged on the gridiron.


In 1924, the Four Horsemen as they were coined comprised Notre Dame's spirited backfield under legendary football coach Knute Rockne. During their three year run together ('22-'25) they only lost two games. They weren't the biggest, nor the fastest, but together they were dominant.


At Hedgeye, we have our own spirited foursome who delivered on our Best Consumer Ideas call on Monday. With the most recent addition to the team, Rob Campagnino, launching Consumer Staples coverage in December, the records have yet to be written, but that's precisely the spirit of Hedgeye's new Best Ideas product - we'll be keeping score real-time with #timestamps. Later I'll hit on four (IGT, JCP, KMB and BKW) of the nine Best Consumer Ideas presented.


First, let me highlight two new process improvements we introduced to Institutional Hedgeye clients on the call, our Best Ideas Product and new Consumer Coverage initiative that I will be spearheading personally. In brief, the Best Ideas Product will highlight only the Best Ideas from each sector firm-wide (4-8 per year). Clients will be notified of changes and additions to this list through Black Books and research notes.


Our Consumer Coverage offering provides a customized approach to conveying our top calls across all of Consumer, beyond just the Best Ideas. Drawing on my experience covering the Retail sector over the last 4+ years, I am working alongside each of our Four Horsemen infusing original content, analysis and risk management (quant/factor overlay) to select clients. For more information on either of these new offerings, please contact us at sales@hedgeye.com


Back to our horsemen. Similarities can be drawn between each consumer sector head and Rockne's horsemen - quarterback (Harry Stuhldreher), fullback (Elmer Layden) and two halfbacks (Jim Crowley and Don Miller) by comparing sector beta (not physiques).


We have Rob Campagnino (Consumer Staples) representing the lowest relative beta - our 'three yards and a cloud of dust' fullback, two halfbacks in Howard Penney (Restaurants) and Brian McGough (Retail), and our high-beta quarterback in Todd Jordan (Gaming, Lodging and Leisure). A sorted bunch indeed, but I look forward to taking the field with these guys. Before we hit on some Ideas, let's cover a little ground on where we stand on the consumer and sectors.


Our view on the consumer here is one of concern of slowing demand from lower-to-middle income earners and underperformance of the companies over-indexed to this demographic. Meanwhile, the latest results out of Hermes and Michael Kors suggest the higher-end consumer remains resilient. Among the factors at play here include payroll tax increases of 2%; at the same time we're seeing a surge in gas prices over the last 3-weeks to historic February highs. The reality is that a pinch on consumer wallets near-term from both ends does not improve sentiment nor spur spending.


Another factor on the horizon to consider is the wealth effect of an improving housing market. As highlighted in our Q1 Macro Themes call, our #HousingsHammer theme suggests that house prices will increase due to lower supply, rising demand and stabilizing mortgage purchase application activity. This is positive indeed, but it will take time to manifest after which point it will take more time for people to actually feel better about their financial position. The timing here will more likely be measured not in months, but years.


As for sectors, regardless of what duration you pull over the last year, the Staples Sector SDPR ETF (XLP) and Consumer Discretionary (XRT) have consistently outpaced the S&P 500. Year-to-date alone the XLP and XRT are up +7.3% and +8.7% respectively versus the S&P's encouraging +6.5% start.


A look at the chart below reflects this recent performance. Interestingly, yet not surprisingly, the move in price has not been supported in kind by a corollary move in upward earnings revisions with investors seeking yield. This is reflected in a valuation premium in likely sectors (Utilities, Health Care and Staples) 1.4x-2x standard deviations above recent history. The next closest sector? You guessed it, Consumer Discretionary clocking in with a 0.8x STD premium.


While these levels suggest peaky valuations, we're not trying to call a top, but simply recognize that it may be prudent to look beyond fundamentals alone when considering long positions at these levels. As a result, our list of longs consists of largely event/catalyst-driven stories. Fortunately, there are plenty of stocks that fit that criteria for those committed to playing Consumer.


Here are four callouts among the nine Best Ideas discussed Monday, which also included CAG, CAKE, and ASCA (long) and PNK and UA (short):


IGT (Long) - After refocusing on game content and digesting several poor acquisitions to establish online gaming, the stock is at an inflection point with a rebound expected in ROIC. Growing replacement demand and new domestic and international markets should drive multi-year bull slot market. In addition, substantial share repurchase activity expected to continue with accelerating FCF. Bearish sentiment and 11x EPS multiple do not reflect the 20%+ earnings growth we expect. One of the better looking long-term longs as its nowhere near 5yr or all time highs = bullish formation with TREND breakout line of 14.26.


JCP (Long) - Near-term sentiment is too bearish at a time when the delta in top-line is likely to get better. We think improving sales trajectory with comps turning positive in 3Q and improving dot.com will drive the stock higher. Liquidity remains a concern, but we don't see it surfacing over the intermediate-term. TREND breakout above $20.41 is when the long works quantitatively, below that is all storytelling.


KMB (Short) - Top-line growth is masking deteriorating earnings quality at peak valuation. EBIT growth is largely derived from unsustainable restructuring savings and a slowing commodity benefit that swings to a headwind in 2013. Notably, the stock closed at $89.90 flirting with quantitative TRADE support at $89.81 - below that is where you press.


BKW (Short) - Never 'fixed' during its stint as a private company, the outlook for the U.S. and Canada (60% of total) is deteriorating. Some North American franchisees are tracking well below expectations. Decelerating comps are likely to compress BKW's industry high multiple. The stock is breaking down through both TRADE (17.45) and TREND (16.78) lines of support - short it here.


With the calls on the board and #timestamped, the Four Horsemen are off and running. For a replay of our Best Consumer Ideas call and slides, contact sales@hedgeye.com


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, and the SP500 are now $1641-1667, $116.98-118.91, $79.71-80.31, 92.78-94.46, 1.96-2.01%, and 1510-1526, respectively.


We are off to a strong start YTD, however, as my Hall of Fame coach Dick Farley liked to remind this Eph, "keep your head on a swivel."


Casey Flavin

Director of Consumer Research and Sales



The Four Horsemen - Chart of the Day


The Four Horsemen - Virtual Portfolio



  • 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.

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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 dot.com.  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 dot.com 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, dot.com 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 dot.com 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 dot.com 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 dot.com 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.


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



Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%