The Macau Metro Monitor, May 24, 2013




James Packer's Crown Ltd has sold its 10% stake in rival casino operator Echo Entertainment Group Ltd for about 264 million Australian dollars (US$254 million).  The deal surprised the market, because it came just two weeks after Crown secured government approval to more than double its stake in Echo, which rekindled speculation that it was preparing a takeover bid for the owner of Sydney's the Star casino.


The sale diminishes the possibility of Crown launching a bid for its smaller rival by market value, but could clear the way for a takeover bid from Genting Bhd, which already holds 5.2% of Echo through affiliate companies.


Crown's investment in Echo meant that Packer would still have some exposure to Sydney's casino market, even if the government rejects his bid for a gaming floor at Barangaroo.  His decision to withdraw from Echo suggests he is confident of receiving approval for a casino license in Sydney.


A spokesman for NSW Premier Barry O'Farrell said the application process is continuing, with final bids due by June 21. A decision would subsequently be made "as soon as possible" following advice from a government advisory committee.



Yu Yio Hung, a Macau junket operator, said that he would like to see the creation of a formal blacklist of VIP gamblers who fail to repay their credit.  Yu said “I’d like to see the setting up of a database – a blacklist database – so that if a VIP customer has an unpaid balance and therefore an outstanding debt, all the junket operators will know about it so that the player cannot then borrow more money from other junket operators and go bust”.


The 27-year veteran of Macau high roller operations, runs a junket business called CCUE with rooms at MGM Macau, L’Arc, and Altira.


The Court of Second Instance rejected LVS's attempts to register “Cotai Strip CotaiExpo” and “Cotai Strip CotaiArena” as trademarks.  The Portuguese-language newspaper Jornal Tribuna de Macau quoted two judgments from the Court of Second Instance that say both the expressions ‘Cotai’ and ‘Cotai strip’ stand for a specific area of the city where gaming, hotel and entertainment activities are being developed.

The court said the expressions are too generic and fail to distinguish Las Vegas Sands from other companies that could produce or sell the same goods. The judgments do not disclose which companies are involved in the dispute.  However, Business Daily reported last week that MPEL was fighting Sands in court over the trademark “Cotai Strip CotaiTravel”.


RL: The Market Is Not Recognizing The Risk

Takeaway: Stocks don't go up when sales slow, costs increase, capex goes up materially and the stock is at 20x EPS. A textbook 'investing year.'

Conclusion: We like what RL is doing, but the near-term financial implications will not be pretty and EBIT growth trajectory and RNOA will suffer. Even though this impact will likely be temporary, investors will need to wait until near the end of this calendar year until the risk profile improves. Until then, valuation matters.



We're surprised that RL was not down more on its 4Q print. Yes, the company overdelivered -- in typical RL fashion.  But there are enough factors that are changing negatively on the margin that we think will make  RL a good candidate for multiple compression in the sloppy quarters that lie ahead in the upcoming fiscal year.


We like this company as much as we ever have. It continually reinvests in its intellectual property to elevate the retail experience and gain share -- something that has worked for RL without fail.

Case in point…we kept a little scorecard of all the times that retailers and brands mentioned the words 'omni-channel' in press releases and earnings calls this earnings season. We stopped count at 100, and no, it did not take us long to get there. This has officially become the biggest cliché buzzword since 'supply chain' made it on to the scene 15 years ago. We swear that half of the execs talking about omni-channel don't even know what it means (if there even is a universally-understood definition). They're just following the cool kids.


Ralph is one of the cool kids.  It did not discuss 'omni-channel' once on its call or press release. Why? The reality is that it has been implementing a true omni-channel strategy for much of the past five-years…at a time when no one knew what it even was. Now RL is implementing retail and e-commerce models that others will be trying to implement in another five years. Simply put, we think that RL will continue to be a winner.  


But this is one of those years where the negatives to the story are likely to outweigh the positives. Specifically…

  1. FX will be a meaningful headwind in FY14 -- especially given RL's significant exposure to Japan.  Check out the Yen's move over the past six weeks. Not good.  FX is a $75mm hit to EBIT for the year.
  2. RL's Global SAP implementation, Korean e-commerce rollout, acceleration of retail rollout -- including NY flagship. There's another $75mm hit to EBIT this year.
  3. Capex is going from $276mm last year to up to $450mm in FY14 -- that's one of the biggest capex increases we're seeing out of anyone in retail.


In fairness to RL, it has proven to be an exceptional steward of capital in the past, and we have no reason to think that will change this year.  But the reality is that the $150mm in extra costs puts RL in a hole for 13% EBIT growth. This would be ok if we could justify solid double-digit top line growth as an offset -- but the reality is that we cannot (even if partially due to FX). So we've got slowing sales, eroding margins, and a step-up in capex. Any way we cut it, we can't justify the combination of these factors leading to any form of multiple expansion.  

Treasury Yields vs. Initial Claims

Takeaway: The US labor market is improving significantly and yields are reflecting these improving economic conditions.

We like to look at the non-seasonally adjusted (NSA) jobless claims numbers. There’s not a lot of distortion there. Year-over-year NSA claims improved to -8.8% y/y from -1.32% y/y last week.


Meanwhile, rolling NSA claims deteriorated marginally w/w going to -7.78% Y/Y from -8.59% last week as the big, week of 4/19 improvement rolls off.  


Bottom line: The US labor market is improving significantly and 10-Year Treasury yields are reflecting these improving economic conditions. 


Treasury Yields vs. Initial Claims - 10Y vs NSA claims 052313

Early Look

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Trade of the Day: EVEP

Takeaway: Keith reiterates the short call on EV Energy Partners (EVEP) at $41.95.

We are reiterating our energy analyst Kevin Kaiser’s short call on EV Energy Partners at $41.95. The company is an oil and gas property MLP. They have a funding gap. That's a big problem.


Trade of the Day: EVEP - EVEP

Keith's Top-5 Tweets Today

Takeaway: Stocks, Goldman Sachs and Doug Kass.

Almost everything on my shopping list is saying, wait - you can buy me lower

@KeithMcCullough 3:17 PM


Sometimes doing nothing is the hardest thing to do - but precisely what you should do

@KeithMcCullough 3:06 PM


You have to be kidding me on the Goldman call here - its raining, so they now forecast rain

@KeithMcCullough 10:45 AM


When my signal and my research team are immediate-term bearish; my decisions to not buy become a lot easier

@KeithMcCullough  10:38 AM


@KeithMcCullough Sincere congratulations - you performed both the roles of market obstetrician and mkt mortician with precision in 2013. @DougKass 5:32 AM

Retweeted by Keith McCullough



Q2 top-line growth should be weak, again


  • Despite an improvement in US consumer discretionary spending and sentiment trends in 2013, domestic gaming continues to lag.  Demographic headwinds are to blame, in our opinion.
  • US domestic gaming revenues (excluding Indian casinos) growth has been slowing since Q3 2012 despite the recent opening of new casino markets
  • Q1 2013 US gaming revenues grew a pathetic 0.5% YoY; on a same-store basis, Q1 revenues dropped 4.2% YoY
  • For the mature regional gambling markets, April same-store revenues tumbled 4% YoY, in-line with our projections.  We believe May revenues could be flat, followed by further declines in June. 




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