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Guangzhou is set to become the third mainland city to offer 72-hour transit visas to travelers from dozens of countries.  The city's inclusion in the short-term visa scheme was announced by provincial authorities who described it as a boon for tourism in the Pearl River Delta.  Beijing and Shanghai introduced the visas last year.


Cheong Chi Man, Vice-president of Macau Travel Agency Association, said the measure will not be a driver to boost the number of package tour visitors to Macau, but it is expected to bring more individual visitors.



The number of passengers moving through Changi Airport increased 6.1% YoY to 4,669,334 in June 2013.





Macau visitor arrivals increased by 10.4% YoY to 2,324,935 in June 2013.  In June 2013, visitors from Mainland China increased by 20.0% YoY to 1,464,665, mainly coming from Guangdong Province (629,648) and Fujian Province (64,466). Mainland visitors traveling under the Individual Visit Scheme (IVS) totaled 603,704.  Moreover, visitors from the Republic of Korea (33,570) and India (21,724) also increased by 12.7% and 14.2% respectively, while those from Hong Kong (558,326) and Taiwan (75,889) decreased by 0.1% and 12.8%.  

The average length of stay of visitors held stable from a year earlier, at 1.0 day in June 2013.




In preparation for LVS's F2Q 2013 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.



POST CONFERENCE CALL FORWARD COMMENTARY (Goldman Sachs Lodging, Gaming, Restaurant and Leisure Conference)



  • "Right now about 51% of the people that come in to Macau don't stay. They go home. I think that's very encouraging, frankly, because that means 49% of the people are staying. And basically, although Guangdong is the closest province with 100 million people, the infrastructure from the bridge, Henqin Island development and other things that are happening with the trains, et cetera, the airports, all create from the distant areas – Beijing, Shanghai, all that– a very, very significant amount of traffic over the next number of years."
  • "We're yielding at the Venetian $12,000-plus a table last quarter. Obviously, we need more tables going forward. Even if we're doing 400 tables, we probably could use another 50 or 100. The junket yields are just down across the market because no matter who you are, you're not getting the yield per table. But we just simply follow the trends. It's hard to predict, but the good news is the government's very helpful, allowing you to move tables around."
  • "We are investing $100 million in the theater and in Site 5, which is in the Holiday Inn, Conrad area to produce 80 more tables at the premium mass level, which will open sometime in the third quarter of 2014."


  • "Our VIP business remains okay. I mean, we did have a great quarter, $18 billion, but we always tell people it's a very concentrated segment that you can't predict quarter-to-quarter. It's $1,000 – $2,000 accounts that really matter in that segment. So, it's highly concentrated."
  • "We'd like to target to get that mass market business back up to about $4.6MM or more a day."
  • "The mall continues to get better and better, and we leased that during a rather difficult time. And as we keep changing out tenants, that gets better by the day and that's a wild asset. The upside of that mall, I think, is yet to be seen."
  • "We're already going to start major room rehabilitation in 2014."


  • [Bethlehem] "We're happy with the results, and unless we're able to get what we want for the property, we have no big rush to sell it and may not sell it."





  • "Based on our current construction schedule and subject to timely government approvals, we're still targeting the opening of The Parisian for late 2015."
  • [SCC] "We're putting in another 80-some odd tables, pushing 100 tables...Our competitors, I'm sure, are doing the same thing. They're putting their underperforming tables to better use and increased revenue. We've got the CapEx approval from our Board of Directors meeting yesterday, and we're moving forward on that. That is going to take about 10 months or so, maybe a little more, 10 or 12 months. It will be ready, I think, next April."
  • [Competition]  "I think it's competitive. Obviously, you have three segments there. Our strength resides in the pure mass. Because our table size and capacity, I think we dominate that segment. The premium mass and super premium mass are obviously very competitive."
  • [Mass table]  "Our goal is to re-segment the Four Seasons, getting more. We did $14,200 per table in the Four Seasons. We want to re-segment that, get a lot more aggressive in that mass table market, or I should say premium mass table market. We want to grow our business, especially at the SCC."


  • "Slot segment continued to show weakness. And that's because Slots is primarily driven by the local market, which has not recovered."
  • "We'll continue to see table growth. We're hoping to see more growth from the slot side as well. But we were back in a positive place in Singapore in the most important segment, the non-rolling and Slot ETG segment.:


  • "There's a lot of noise about Japan, about 100 people in the legislature wanting to get legislation as early as November."


In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance



  • IN-LINE:  Strong margins and better than expected results from the Interactive division offset lower revenues. Unchanged guidance was a disappointment especially considering the drive a truck through range of 6c for FQ4.



  • SLIGHTLY POSITIVE:  while the number of units sold came in a little below expectations,  ASPs grew 7% to a solid $16.1K and gaming installed base grew by 700 units YoY
    • "There are systemic issues that have impeded participation in some markets, which we are working to overcome. And the economic headwinds in certain regions continue. However, we remain committed to harvesting the investments that we have made in this business particularly in expanding our portfolio of localized content. Long-term, we still expect international markets to outpace the growth of our North American business."
    • "Europe tend to be more macro. The other two (Latin/South America, Asia Pacific) as we look at them probably have more of a systemic issue within the structure of how they allow the business to operate.


  • WORSE:  Continue to be pressured by soft demand trends although Q2 GGR was worse than expected in most markets.
  • PREVIOUSLY:  "We do need some cooperation from GGR trends. And I would say, over the first two quarters of our fiscal year, we haven't seen anything to indicate that we're going to get some positive tailwind in that area."


  • WORSE:  Average revenue per unit per day F3Q was $47.96, down 4% YoY and down 3% sequentially, both primarily due to lower yields, most significantly in MegaJackpots. 
  • PREVIOUSLY:  "We now expect that our objective of achieving flat year-over-year yield by the fourth quarter will be more challenging than previously anticipated. However, we remain focused on improving yields, confident that we can continue to offset a portion of yield pressures by managing costs."


  • MIXED:  DAUs was flat QoQ, below Street expectations but the growth of bookings per DAU was impressive despite IGT's expansion into international markets which has lower monetization rates.
    • "As we develop these markets, we expect that the number of daily active users will grow, but the average revenue per daily active user could decline slightly...we continue to expect the transaction to be GAAP accretive by 2014."
    • "We think we have the right product in place complemented by the IGT content to continue to grow those numbers. I mentioned we're penetrating a couple of different markets with new language offerings and we expect that will drive DAU though it may slightly impact bookings per daily active user. As you get into a market you need to build familiarity before you can convert to paying users. It's incredibly difficult to precisely identify which metric is going to go up. Lately we've seen them all rise and we continue to expect to make forward progress in all and we will continue to balance that which will provide us the greatest long-term return. So I think you can expect to see them move north."


  • BETTER:  Gross margins of 54% came in above its traditional 51-53% range.
  • PREVIOUSLY:  "Traditionally, we're in kind of the low 51% to 53% range and that's where I would expect it to stay over the remainder of the year."


  • SAME:  Last major shipment will occur in FQ4.  Expect FQ4 to be less robust than FQ3.
  • PREVIOUSLY:  "We expect at the moment that we should see the vast majority of the remaining units ship in the year. But keep in mind these are large bulk orders and depending on either customer needs or other impacts, you could see swings and sometimes those swings border on a quarter. Right now I would say that we believe the vast majority of the remaining shipments will occur in the year. And then there may be some follow on activity as locations top off their floors in 2014."

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PNRA remains on the Hedgeye best ideas list as a SHORT. 




PNRA has now missed expectations for the second straight quarter.


In 2Q13 PNRA reported 16% EPS growth on 11% sales growth, which missed consensus by $0.03 and 2%, respectively.  In addition, the 3.5% increase in same-store sales missed the consensus expectation of a 4.5% increase.  Traffic trends declined 0.5% in 2Q, making it the third straight quarter of traffic declines. 



Panera's Traffic Problem

As we mentioned in early April, PNRA’s position as a healthy QSR option that is relatively free of competitors is gradually changing.  An increased number of casual dining chains are now offering lower price points and other QSR chains are upgrading their menus.  These menu upgrades include items that are marketed competitively as healthy eating options and are cheaper than PNRA’s core offerings.  As a consequence, this secular trend is manifesting itself in the components of comparable sales growth as PNRA traffic trends have shown weakness lately. 


As the chart below illustrates, PNRA’s traffic trends have been declining for the past three quarters.  In 1Q13, management attempted to attribute the decline in traffic to poor weather.  Given the current trends and the lowered sales outlook for the balance of the year, our short thesis appears to be playing out well.


In today’s press release, management offered up the following initiatives to help solve the company’s current issues:


“We now believe that to consistently operate at the very high sales volumes we are generating and to prepare for additional sales from our initiatives to expand access to Panera and utilize marketing, we must improve our peak hour throughput.  While results in the next few quarters may be choppy as we invest in both sales-building initiatives and operational capabilities, we believe that our efforts will ultimately enable us to deliver an enhanced customer experience, grow sales and expand earnings.”


While management does not share our view on the competition, we also believe that some of the issues the company faces are self-inflicted.








Labor Cost Trends

Shown in the chart below, PNRA has seen a year-over-year decline in labor costs for 12 of the last 13 quarters.  This is a trend that is unsustainable and will likely lead to customer service related issues in the future.  We believe that this trend will need to be reversed in order to fix any peak hour throughput issues.






The company is hosting its earnings call tomorrow morning at 8:30am ET.  We’ll post on anything incremental after the call.




Howard Penney

Managing Director



Margins drive a small beat. Not enough confidence in FQ4 - you can fit the Fed balance sheet in the guidance range




  • NA Machine sales outperformed; continue to capture Canadian VLT market share.
  • DoubleDown recently surpassed Zynga Poker as the top grossing social casino app on Facebook
    • Had the highest grossing social casino app on the iPad
  • 39% increase in NA replacement unit shipments; confident maintained leading ship share in past quarter
  • 4% increase in international sales due to lower mix of used machines sales.  Despite ongoing challenges in certain regions, there is still significant potential.
  • Gaming Ops:  
    • GGR trends were lower  
    • Installed base flat with some mix shift away from megaJackpots into leased operations
    • Positive interest rates have a favorable impact on margins and jackpot expenses
    • Initiatives: Increasing megaJackpot team, introducing game changers
  • DoubleDown monetizing at awesome rates; mobile revenues up 41% sequentially.  DoubleDown will be GAAP accretive in F1Q 2014.
  • Repurchases 345,000 shares ($6MM); suspended stock buyback in the quarter due to 'technical reasons' - IGT was probably involved in bidding for WMS and SHFL

Q & A

  • Product Sales:  2Q Canadian VLT units: 3,300; Illinois VGT units: 1,300
  • 2014 opportunities:  Oregon and some other new states 
  • DoubleDown:  As they enter international markets, bookings rate may be pressured but it didn't materialize in F3Q
  • Wide range of F4Q guidance:  some lumpiness in timing of international orders for F4Q
  • Stock buyback restrictions in Q?  Refuse to elaborate.  $520MM in stock available; continue to target using that authorization over next 2-4 years.
  • Leverage:  a little underleveraged at the moment
  • Will not comment on whether they continue to be restricted in the stock buyback program
  • Will look at opportunities to expand installed base but will not chase yield
  • GGR trends:  calendar 2H 2013 - haven't seen much change in operators' comments in terms of budget volume. 
  • Last major shipment to Canada will conclude next quarter.  Expect FQ4 will be less robust than FQ3.
  • Would not say that 1,300 a quarter in Illinois is a good run rate because last quarter, IGT saw a significant contraction in demand.
  • GGR is having most significant pressure on yield #s. Nothing significant has changed in this part of the business.
  • Canadian/Illinois VLT units mainly drove down ASPs; there was some mix shift out of MLD product which is a higher priced product.
  • Online New Jersey:  waiting for the operators to start up; purely in a B-to-B model with a revenue share model
  • Upgraded DoubleDown poker product and done well with tournaments.
  • International market monetizes at a lower rate than domestic market but will try to convert players at the same level in domestic market.  The launch of new languages will be a tailwind.
  • Mobile growth has been fantastic.  IGT has spent equal time commitment on desktop and mobile platforms. 
  • MegaJackpot G2E lineup will be exciting and diverse e.g. bonus features, new maps, new display format.
  • International:  optimistic on seeing the 6% growth in ASP and growth in installed base
  • South America could be a great opportunity if they can solve the structural issues of getting a product there
  • Asia:  early games have been a success
  • Europe: growing the slowest among the international opportunities;  'very spotty' and depends on the country and product type.  VLTs seem to be growing a bit faster than the traditional casino business. Remain bullish on the international markets.


Last week Hedgeye presented its Q3 2013 Macro Themes call for institutional clients, introducing the three major themes our Macro team has identified as significant drivers of investment strategy for the current quarter.



As a review, our Q2 Macro themes were:

  • #StrongDollar – The Dollar continues to reverse what has been a forty-year slide.  Renewed strength in the currency keeps pushing ahead despite Bernanke’s policy statements designed to weaken the Buck.
  • #GrowthAccelerating – Hedgeye has tracked significant growth in a number of key sectors, including declining unemployment, strength in the housing market, and an upturn in the birth rate, reversing a forty-year decline and leading to a boost in new household formation.
  • #EmergingOutflows – The BRICs are BROKEN, even “stable” countries like Turkey are in the grip of unrest.  The US is once again the safe haven.

The Macro View

Macro trends are sensitive to government policy.  When governments meddle in the financial markets, they compress natural market and economic cycles.  This causes volatility to spike – free money for short-term high-frequency traders (especially those who get economic news a few seconds early), and a trigger for waves of nausea for the individual investor.


But while high-frequency traders focus on specific economic numbers, scalping a few pennies on a short-term lift in Financial stocks when the Fed looks dovish, Hedgeye’s broad Macro work focuses on rates of change in the economy.  A public statement from Ben Bernanke may provide shot term profits for algorithmic traders, but it’s not a signpost to America’s economic future.  Nor is it anything the individual investor can rely on. 


Our analysis focuses on rates of change – we look at theslope of the line, the cumulative rate of change over time in key economic indicators.  If you track rates of change, you will see where the growth comes from – or fails to come from.  If you know where the growth is in the economy, you can position yourself to succeed as a long-term investor.

Hedgeye’s  Macro Themes for Q3 2013:

  • #RatesRising
  • #DebtDeflation
  • #AsianContagion

Our themes are simple.  The dollar has been strengthening.  Meanwhile housing, employment and consumption have all been surprising to the upside – not major blow-out numbers, but the slope of the line is definitely in the direction of Growth.  In this environment, Fed “tapering” is a pathetically weak dog wagged by a potent tail: interest rates are rising, the Dollar doesn’t want to go down, and growth has taken root in key areas of the economy.


Throughout the Middle Ages, the most educated people in Europe were convinced the sun rotated around the earth.  Today we chuckle derisively at how they could reject proofs from the likes of Copernicus and Galileo.  In the face of real signs of accelerating growth, Bernanke is behaving like the Defender of the Faith, as though he had the authority to direct gravity.  He needs to have his King Canute moment and publicly allow the sea to wash over him.  We’re convinced the waves are about to break.


Here we offer the first of our three Macro Themes, Rates Rising.  



‘POP!’ goes the bubble as interest rates start to rise, reversing the most asymmetrical set of relationships on our Macro screen.  The gradual decline in rates that has prevailed for forty years is turning.  Like the Queen Mary, it turns ponderously – so slowly that at times you can’t tell it’s reversing course.  As the slope for interest rates turns up, so much that has been tied to declining rates will unravel.  Hedgeye continues to emphasize this on our bearish call on commodities.


Keith went out on a Macro limb and said we are not likely to see the 2012 lows on ten-year bond yields again.  Not soon, and maybe not ever.  With longer-term historical rates averaging over 6%, there’s more than four hundred basis points – over four full percentage points – for rates to reflate as the 40-year bonds bubble pops without entering the historical Danger Zone for inflation.  Hedgeye expects the bond bubble to melt over the coming 3-5 years.


What’s an Investor to Do?

Keith digs into the historical record and shows that rising interest rates are not the enemy of economic growth.  To the contrary, historically there is a high coincidence of rising bond yields during periods of high economic growth.  Mr. Bernanke’s fear mongering notwithstanding, there’s no reason to believe it has to be any different today.


In a growth environment, as characterized by rising 10-year bond yields and a strengthening Dollar, Consumer Discretionary and Financial stocks tend to perform well, along with Industrials and, to a lesser extent, Energy.  Yield plays – notably Utilities – are at a disadvantage, as increases in current yields are offset by declines in the price of the stocks.


But Growth isn’t Good News yet, as too many major investors have large portfolios based on declining rates – and short-term traders are enamored of the volatility created by Fed uncertainty.


To us, the problem continues to be political.  Wall Street boasts many of Washington’s biggest donors, money managers and bankers whose largesse in recent years has come from the built-in guaranteed profits of declining rates, as they repeatedly locked in the spread between 10-year Treasurys and 2-years.  Like the Fed, a lot of these folks hold an awful lot of fixed income paper – Treasurys, but also corporate, and even mortgages – all of which will decline in price as rates climb.  Unlike the Fed, they can’t print their own money to remain liquid.  Write-downs on these bond portfolios could get ugly.  Even if managed right, it won’t be easy to get out of billions of dollars’ worth of bonds without getting spanked.


So Bernanke keeps the myth alive, the sun continues to revolve around the earth, and the house of cards stands firm as the Inchcape Rock.  Until it doesn’t.  Meanwhile, volatility in your portfolio will likely be the order of the day.  That, and uncertainty about the future.


You weren’t planning on retiring any time soon…?


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