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THE M3: INCHEON CITY PROJECT CANCELLED; JULY GGR

THE MACAU METRO MONITOR, AUGUST 1, 2013

 

 

JULY GGR DICJ

JULY GGR 29.485BN MOP (28.626BN HKD, 3.691 BN USD), up 20% YoY

 

S KOREAN PLAN FOR MACAU GAMBLING RIVAL COLLAPSES Bloomberg

South Korea's Incheon city said a $290 billion plan to transform a fishing village into a rival to Macau has collapsed. Incheon Free Economic Zone official Jung Mi-hyun said luxury hotel operator Kempinski AG, a key member of the development consortium, failed to raise a promised $40MM by the end of July.  Kempinski's Korean unit KI Corp. is the largest shareholder in the consortium, Eightcity Co. Korean Air Lines Co. is the second-largest.

 

Park Seong-hyun, vice chairman of Eightcity, said the company is still trying to attract investment to the project and Incheon city is also responsible for the delay in raising the money on time.

 


IS CHINA A “VALUE BUY” OR A “VALUE TRAP”?

Takeaway: Chinese equities might appear “cheap”, but cheap is likely to get sustainably cheaper in the absence of a positive catalysts.

SUMMARY BULLETS:

 

  • Recent statements out of Chinese policymakers lead us to reasonably conclude that Chinese officials are less concerned about the outlook for future [unabated] property price appreciation than they had been in recent months. While we continue to think Chinese monetary policy will remain relatively tight with respect to the intermediate-term, we must acknowledge the emergence of a more unfettered path towards PBoC easing – which, generally speaking, is being appropriately reflected in Chinese money markets.
  • Even if Chinese officials suddenly decided to implement another big stimulus package for reasons we can’t fathom (Xi and Li will be in office for 10 years; 2H13 growth pales in comparison to the task of maintaining economic stability over the long term), it remains to be seen how much incremental debt the system can take on over a relatively short period of time.
  • Where Chinese growth trends from here is anyone’s best guess; the most probable answer is “sideways” given the uniform guidance out of the Chinese policymaking spectrum of late.
  • Our GIP algorithm suggests a slight uptick in 3Q followed by a deceleration in 4Q; leading indicators for Chinese growth are starting to rhyme with this quantitative outlook. Interestingly, Chinese GDP seasonality trends concurs with the aforementioned “sideways” view. Lastly, the case for continued slowing is supported by diminished cross-border liquidity, at the margins, and a probable uptick in NPLs in the form of debt rollovers across the Chinese banking system.
  • In the absence of meaningful deposit growth, debt rollovers slow broader economic growth by diverting incremental credit away from productive enterprises, at the margins, to unproductive enterprises that are merely trying to stay afloat. This phenomenon remains a core tenet of our structurally negative outlook for Chinese economic growth. Contrary to the 2008-09 period, it’s almost impossible for us to model in another dramatic [positive] inflection in Chinese growth/growth expectations that is worthy of investors getting excited about on the long side of Chinese equities.
  • Economic gravity in China is – at best – trending sideways though 2H13. Moreover, structural growth headwinds for 2014 and beyond remain a clear and present danger for what we’d argue are increasingly consensus “value buyers” of Chinese equities. Chinese equities might appear “cheap” (a view that we wholeheartedly disagree with), but cheap is likely to get sustainably cheaper in this case in the absence of a positive catalyst or series of positive catalysts.

 

POLICY GAME-CHANGER?: SHORTING CHINA JUST GOT A LOT MORE DICEY

From our 6/26 Early Look titled, “Uncertain China”: “We’ve become a broken record on this, but it’s critical to remember that China’s present day economic woes are actually a function of very deliberate macroprudential policies. While highly unlikely, at any given time, Chinese officials can reverse course and keep the credit bubble inflating longer than any of us short-sellers can remain solvent.”

 

Today, Chinese officials finally signaled that they are perhaps more willing to keep the game going for longer than us short-sellers of the heavily indebted Chinese financial system and associated fixed asset bubble might prefer. Today President Xi Jinping said the leadership will guarantee that the +7.5% growth target for this year will be met, despite a notably absent inflection in economic momentum. In addition to Xi’s statement, the official Xinhua News Agency also chimed in with an update from Beijing:

 

  1. “Authorities will maintain steady second-half expansion amid extremely complicated domestic and international conditions.”
  2. “China will keep a prudent monetary policy and a proactive fiscal stance.”
  3. “China will ensure major tasks in full-year economic and social development are completed.”
  4. “Authorities will coordinate the multiple tasks of stabilizing growth, restructuring the economy and promoting reforms.”
  5.  “China will promote reform of the fiscal, tax and financial systems and seek stable and healthy development in the property industry.”

 

Statements #1-4 do not reflect a meaningful shift in China’s fiscal and monetary policy guidance. Conversely, statement #5 does signal a slight change relative to previously implemented property curbs and an overt focus on combating speculation across China’s bubbly property markets.

 

IS CHINA A “VALUE BUY” OR A “VALUE TRAP”? - China Real Estate Climate Index

 

Taken in conjunction with a less-than-subtle statement today put forth by Sheng Songcheng, head of statistics with the PBoC, we can reasonably conclude that Chinese officials are less concerned about the outlook for future [unabated] property price appreciation than they had been in recent months:

 

“Unbalanced supply and demand caused rising home prices, not the country's ample money supply… One of the main targets of monetary policy is to maintain the stability of overall consumer prices and not to target prices of specific goods.” (emphasis our own)

 

The key takeaway from this statement is that the PBoC’s preexisting reservations about meaningfully easing monetary policy in the face of a buoyant property market are now likely mitigated, on the margin. In kind, the property sector outperformed the broader Shanghai Composite Index by +195bps on the day.

 

All told, while we continue to think Chinese monetary policy will remain relatively tight with respect to the intermediate-term (first chart), we must acknowledge the emergence of a more unfettered path towards PBoC easing – which, generally speaking, is being appropriately reflected in Chinese money markets (second chart).

 

IS CHINA A “VALUE BUY” OR A “VALUE TRAP”? - China Interest Rate Markets

 

IS CHINA A “VALUE BUY” OR A “VALUE TRAP”? - China Money Markets Monitor

 

WHERE TO FROM HERE?: CHINA’S 2H13 GROWTH OUTLOOK REMAINS SOFT

Where Chinese growth trends from here is anyone’s best guess; the most probable answer is “sideways” given the uniform guidance out of the Chinese policymaking spectrum of late. Our GIP algorithm suggests a slight uptick in 3Q followed by a deceleration in 4Q; leading indicators for Chinese growth are starting to rhyme with this quantitative outlook:

 

IS CHINA A “VALUE BUY” OR A “VALUE TRAP”? - CHINA

 

IS CHINA A “VALUE BUY” OR A “VALUE TRAP”? - Rebar YoY

 

Interestingly, Chinese GDP seasonality trends concurs with the aforementioned “sideways” view:

 

IS CHINA A “VALUE BUY” OR A “VALUE TRAP”? - China GDP Seasonality

 

Lastly, the case for continued slowing is supported by diminished cross-border liquidity, at the margins, and a probable uptick in NPLs in the form of debt rollovers across the Chinese banking system.

 

IS CHINA A “VALUE BUY” OR A “VALUE TRAP”? - China Cross Border Liqudity Flows

 

In the absence of meaningful deposit growth, debt rollovers slow broader economic growth by diverting incremental credit away from productive enterprises, at the margins, to unproductive enterprises that are merely trying to stay afloat. This phenomenon remains a core tenet of our structurally negative outlook for Chinese economic growth. Contrary to the 2008-09 period, it’s almost impossible for us to model in another dramatic [positive] inflection in Chinese growth/growth expectations that is worthy of investors getting excited about on the long side of Chinese equities.

 

IS CHINA A “VALUE BUY” OR A “VALUE TRAP”? - China GDP Expectations

 

Even if Chinese officials suddenly decided to implement another big stimulus package for reasons we can’t fathom (Xi and Li will be in office for 10 years; 2H13 growth pales in comparison to the task of maintaining economic stability over the long term), it remains to be seen how much incremental debt the system can take on over a relatively short period of time.

 

The latest statistics from ChinaScope Financial indicate that total assets and liabilities of SOEs were respectively 45T yuan and 30T yuan, respectively, in 1H13. The debt ratio of 66.7% is fast approaching the regulatory ceiling of 70%; among the 294 listed SOEs, 26.9% exceeded the limit and will eventually have to become compliant either through asset growth or deleveraging…

 

Jumping back to the Chinese banking system for a minute, we’ll leave you with a few data points that suggest parts of 2H13 could rhyme with what we saw in JUN from an interbank liquidity perspective:

 

  • The China Banking Association said in an annual report that bad loans at Chinese banks could rise by between +70B yuan and +100B yuan ($11.4-16.3 billion) in 2013 due in part to delinquency risks from industries plagued by overcapacity – which, per recent mandate, must begin to pare back operations starting in SEP. For context, aggregate NPLs across the Chinese banking system are already up +33.6B yuan in the YTD (through 1Q, when liquidity was extremely plentiful). An upside surprise through the top end of the guidance range is more than likely.
  • Some 127B yuan ($20.7 billion) of LGFV notes expire in 2H13 according to Everbright Securities Co., the most in its data going back to 2000 and more than double the 62.7B yuan that matured in 1H13. As it stands currently, the 2014 LGFV debt maturity total of 208.8B yuan ($34.1 billion) is roughly +10% higher YoY. Note that PBoC Governor Zhou estimated in MAR that roughly 20% of local government debt was “risky”. All in, LGFVs may owe more than 20T yuan according to an APR statement from former Finance Minister Xiang Huaicheng, but we’ll soon learn the full extent of local gov’t indebtedness upon the results of the recently announced nationwide LGFV debt audit.
  • Aggregate industrial profit growth slowed in JUN to +6.3% YoY from +15.5% YoY in MAY. A recent report from the China Iron and Steel Association said the group's 86 members made a combined loss of 669M yuan ($109.2 million) in JUN, marking the first aggregate loss this year. The report said that there was unlikely to be any recovery in demand in 2H13 as China's economy slows.

 

CONCLUSION: CHINA REMAINS A VALUE TRAP

We’ll conclude this note with exactly how we concluded our 7/10 note titled, “CHINA WON’T STIMULATE UNLESS GROWTH FALLS OFF A CLIFF… IS THAT WHAT CONSENSUS WANTS?”:

 

“In the immediate term, macro markets mean revert and we recommend having a tried and tested quantitative risk management process to properly interpret the price action. Over the intermediate-to-long term, however, macro markets tend to trend in the absence of a fundamental inflection(s) in economic gravity. With respect to Chinese stocks – specifically bank and property developer shares – we think that trend remains south [for the foreseeable future].”

 

Economic gravity in China is – at best – trending sideways though 2H13. Moreover, structural growth headwinds for 2014 and beyond remain a clear and present danger for what we’d argue are increasingly consensus “value buyers” of Chinese equities. Chinese equities might appear “cheap” (a view that we wholeheartedly disagree with), but cheap is likely to get sustainably cheaper in this case in the absence of a positive catalyst or series of positive catalysts.

 

Darius Dale

Senior Analyst


HYATT 2Q 2013 REPORT CARD

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

 

 

OVERALL:  BETTER

  • Even after adjusting for a lower tax rate and d&a, Q2 was very strong for Hyatt.  Adjusted EBITDA exceeded our estimate handily driven mainly by fees.  We were encouraged by the significant amount of stock repurchased during the quarter as the balance sheet remains underleveraged.   

REPURCHASE SHARES

  • BETTER:  Hyatt repurchased nearly $200 million of stock in the quarter (Hyatt had announced an additional $200MM increase in repurchase authorization in Q1).  Hyatt will continue to evaluate their capital allocation options.
  • PREVIOUSLY:  “So one think I would, just to note is that, our primary application of our capital base on our balance sheet is to support our growth, that's our number one priority. We have been, more formally over the last year, been in the market and repurchasing shares."

LONG-TERM GROUP BOOKINGS

  • WORSE:  2014 bookings are trending near flat, lower than previous guidance.  Hyatt remains optimistic about 2015-2016 growth.
  • PREVIOUSLY:  
    • “Bookings for 2014 have increased by 10%. So the short-term booking trend is still very volatile. It's still very sensitive on a month-to-month basis and we continue to see that long-term bookings 2014, 2015 and even into 2016 look very healthy, look very promising. We don't see any issues there yet. Although, when you go back to last year August, September, October and you looked at 2013 and the booking trends were and compare it to where we are now with 2013, there has been quite of a wash, cancellation and push out into future years, and we continue to see that trend.”
    • “Overall, we see our booking experience as an indication that the booking window is lengthening.”

GROUP PRODUCTION

  • SAME:  2Q in the quarter for the quarter growth was 1%.  In the quarter for the year, bookings increased 6.5%.
  • PREVIOUSLY:  “As we look to the future, we're encouraged by several data points. First, group pace. Even though realized revenue for group business was down in the first quarter, overall group revenue production was up over 3% in the quarter.”

TRANSIENT DEMAND

  • BETTER:  Strong transient demand was ahead of expectations.  Manufacturing, business serving the housing industry and technology segments continue to lead.
  • PREVIOUSLY:  “Second, transient demand, the overall business climate in the U.S. was strength in manufacturing, technology, housing and other sectors, is supporting robust transient demand levels. Therefore, while we expect group demand to improve relative to what we saw in the first quarter, we still expect transient business to be a stronger driver of improved results this year.”

CHINA

  • WORSE:  Continues to be a challenging market, impacted by austerity measures, renovations and increased supply.  The outlook remains weak for 2013.
  • PREVIOUSLY:  In China, the focus by the new leadership on austerity has and will continue to hurt F&B revenue, in particular in the short-term.”

INDIA

  • SAME:  REVPAR was stable in 2Q
  • PREVIOUSLY:  “In India, the economy is starting to stabilize, while the country enters a national political process leading up to general elections in 2014. Nonetheless, the positioning of our existing portfolio as well as the hotels expected to join our portfolio over the coming year in each of China and India is very encouraging.”

RENOVATIONS IMPACT

  • BETTER:  Impact from renovation of managed properties in 2Q was only $1MM
  • PREVIOUSLY:  
    • "We expect the impact to be towards the lower end of the previously mentioned $3 million to $6 million range per quarter for the next quarter or two. The impact is expected to decline as renovations of managed hotels are completed and year-over-year comparison issues recede.”
    • “I think the modeling disruption beyond the end of this year, we know now and we mentioned that the renovations in the key markets in Asia would continue into next year.”

M&A

  • SAME: Continues to be active.  They have four assets that are generating much interest in the transaction market.
  • PREVIOUSLY:  “Our intention is to continue to be active through the cycle on both the buy-side and the sell-side.”

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CHART DU JOUR: PNK NON-RECURRING BUT RECURRING EXPENSES

PNK’s quarterly exclusions from adjusted EBITDA are material and consistent.

 

  • Consistent - Although not depicted entirely on this chart, over the past 8 years, PNK has excluded GAAP operating expenses from Adjusted EBITDA every quarter.
  • Material - “Non-recurring” operating charges have represented from 5% to 25% of company reported adjusted EBITDA.
  • Reducing EBITDA estimates by 5-10% to account for likely “non-recurring” items going forward would result in ½ to a full turn higher EV/EBITDA valuation
  • We will be looking at the other operators in upcoming posts.

 

CHART DU JOUR: PNK NON-RECURRING BUT RECURRING EXPENSES - pnk1


HYATT 2Q 2013 CONF CALL NOTES

If Hyatt could post these results and distribute this much cash back to shareholders every quarter, maybe there wouldn't be a 2 turn EBITDA valuation discount

 

 

"Our second quarter of 2013 reflected ongoing positive trends in transient demand at U.S. hotels and strong average daily rate progression.  Looking ahead, we remain focused on improving performance at existing hotels and expanding in new and attractive markets. We expect continued healthy levels of transient demand at U.S. hotels, and anticipate further rate growth. Over the short-term, we believe that U.S. group demand growth will be modest and that demand in certain markets, such as India and China, will be volatile. We remain confident in the long-term outlook for both transient and group segments."

 

- Mark S. Hoplamazian, president and CEO of Hyatt

 

 

CONF CALL

  • New capex schedule on page 12 of release
  • 2Q strong:  higher rate, improved F&B and good flow through and earnings from newly renovated hotels
  • 5 owned & lease hotels each grew EBITDA by 50%
  • Strong Transient sectors:  manufacturing, housing, technology
  • Group business weak - timing of Easter partially offset lower govt group business
  • Group
    • In the quarter for the quarter growth: +1%
    • In the quarter for the year growth:  +7%, this pace has been maintained
    • 2014 bookings are flat - corporate associations doing well; govt/specialty groups lagging
    • 2015/2016 up
    • Expect DC in next 18 months to be weaker relatively; expect Chicago/Orlando to be stronger
  • 4 France hotels post conversion:  $5MM - base fees; $5-10MM incentive fees (expect more in 2nd/3rd quarters because of seasonally strong summer); because the annual guarantee is measured on a quarterly basis, Hyatt may be required to fund up to the guarantee level (e.g. 4Q) which could negatively impact incentive fees. Hence, $10-15MM euros in total fees in 1st year.
    • French hotels incentive fees:  $10MM in 2Q; $10MM or slightly below in 3Q, - $5MM adverse impact on 4Q
  • 5% of adjusted EBITDA from Greater China
    • China will continue to be challenging in 2013
  • 2nd half of 2013:  earnings from recently sold hotels will have a negative impact 
  • Baku/London:  difficult comps in 3Q
  • 1/2 Mexico resorts are all-inclusive
  • 3Q 2013:  20% equity stake in Playa for $100MM, $18-20MM EBITDA impact; ROI: mid-teens
    • Min return on convertible preferred equity: 10%
  • Have four hotels in the process of being transacted - (2/3rd of $25 EBITDA impact)
  • Recent MGM marketing deal:  activity levels are higher than expected

Q & A

  • Owned REVPAR:  50-100 bps impact from renovations coming back online
  • Govt remains weak; group nights fell by 50% (consistent with Q1); govt <5% of mix
  • 2Q managed property renovations:  $1MM; 1Q managed property renovations:  $2-3MM impact 
  • Group REVPAR - April: +20%, May: flat,  June: -3%
  • Transient REVPAR - April: mid-single digits, May/June: high-single digits
  • New York REVPAR:  up high single digits (mostly rate and driven by transient demand)
    • Additional supply seems to be getting absorbed
  • DC REVPAR:  up slightly, challenging environment, group is weak, 2014 pace down a bit, 
  • Easter shift impact from 1Q to 2Q:  $2-3MM impact, 130bps on Americas portfolio
  • ASPAC
    • Ex China, ASPAC REVPAR grew 5% (mostly by Japan)
    • Northern China the weakest; Southern China relatively positive REVPAR
    • Maintained comp set leadership in Beijing
    • Competitive environment in China
    • Supply issues in China?  will see new supply coming on
  • Europe - gateway cities strong;  
  • Middle East -strongest region
  • Southwest Asia - India REVPAR has been stable
  • Float:  higher than IPO time (44MM class A vs a little under 44MM Class A)
  • Reup Repurchase authorization?  Continue to evaluate.
  • Capex 2013:  Down from 275MM to 250MM due to timing.  Large owned renovations will be mostly completed.  Investment spending guidance is increased to $500MM because of inclusion of $325MM in Playa investment and $85MM acquisition of Driskol Hotel.
  • M&A:  no changes in price expectations
  • Continue to be active in M&A deals
  • Playa is in the market with a $650MM debt deal
    • 2H 2013 contribution will be 'modest'; closing date hasn't been finalized yet
    • Hyatt investment:  $160k/per key 
    • Impact of renovations in the coming years
  • No significant impact from wage changes

2Q13 GDP: Hurry Up and Wait

Takeaway: The path of least resistance here is to stick with the positive TREND slope of improvement in the domestic macro data.

Conclusion:  So, what do you do with a strong ADP print for July and a (expected) deceleration in a rearview looking 2Q13 GDP number within the context of the consumption and expectation dynamics highlighted below? 

 

In part, you wait for tomorrow’s update to our favored, high frequency read on the Labor Market in the NSA claims data and then you wait again for Friday and the monthly exercise in speculation and data myopia that is the Employment report. 

 

All in, as we highlighted in Monday’s Note - U.S. Growth - #TRENDing – with the research and risk management signals both still aligned on the pro-growth side, the path of least resistance here is to stick with the positive TREND slope of improvement in the domestic macro data until something changes.  

 

Below is a review of this morning’s GDP data along with some summary commentary: 

 

----------------------------------------------------------------------------------------------------------------------

 

2Q13 REAL GDP:  1.7% QoQ (vs. revised 1.1% prior and 1.0% expected)

1Q13 Revision:  Revised down to 1.1% from 1.8%

 

C:  Consumption growing +1.8% QoQ, decelerating 50bps sequentially.  Contributed 1.22% to Total GDP.

I:  Investment growing +9.0% QoQ, accelerating +4.3% sequentially.  Contributed +1.32% to Total GDP 

G:  Government less of a drag in 2Q13, growing -0.4% QoQ vs. -4.6% in 1Q13.  Contributed -0.08% to Total GDP on the quarter.

NX:  Total Exports growing 5.4% QoQ (vs. 9.5% for Imports).  Net exports contributing -0.81% to Total GDP vs. -0.28% last quarter. 

 

Inventories:  Inventories provided a positive contribution to GDP of +0.4.  Down from a positive contribution of +0.9 in 1Q13.

 

Inflation:  The PCE Deflator printed at its second lowest level ever, coming in at 0.8%, helping to support real consumption growth

 

Final Sales (GDP less Inventory Change): Growth in Real final Sales accelerated to 1.3% in 2Q13 vs 0.2% in 1Q13

 

Final Sales to Domestic Purchasers:  Reminder - this metric is a measure of GDP excluding both exports and changes in Inventories. In measuring total U.S. demand from both domestic and international sources, arguably, it offers the cleanest read on the health of the domestic private sector. Growth in Final Sales to Domestic Purchasers accelerated to 2.0% from 0.5% in 1Q13.   

 

Benchmark Revision:  This benchmark revision is interesting, but not particularly investible.  Below we provide a summary review of the methodology changes from Bloomberg Economist Joseph Brusuelas along with a comparison of the Pre and Post revision GDP estimates from the BEA. 

 

Consumption:  Consumption growth decelerated 30bps sequentially in 2Q13. The deceleration, however, was fairly well advertised and not unexpected alongside the rising savings rate, lagged impacts of fiscal policy changes, and the difficult 1Q13 comp in which consumer spending benefited from the special dividend bonanza and compensation pull-forward in December 2012 ahead of impending fiscal cliff related tax law changes. 

 

We continue to think the upside in Disposable Personal Income, and Consumer Spending by extension, will be constrained in 3Q13 as well given the ongoing reduction in the federal workforce and the implementation of furloughs for the balance of the fiscal year.   That said, it’s now August and 2Q13 is rearview, 3Q13 is a third gone, the real-time labor market data remains positive, seasonality will turn positive in September, and we’re close enough to annualizing the fiscal policy drags for it to become a tractable narrative for investors. 

 

Expectations:  With consensus growth expectations for the balance of the year at a moderate 2.30 and 2.60 for 3Q13 & 4Q13, respectively, the setup isn’t as asymmetric to the upside as it was back in December.  Also, congress will likely re-emerge as a negative headline catalyst in the coming weeks as budget and debt ceiling rhetoric crescendo’s yet again. 

 

Meanwhile, flows to U.S. assets remain ongoing and Investor Sentiment, as measured by the II Bull/Bear Survey, showed bulls dropping back below 50% in the latest reading.  On balance, the balance of risk in the market from an expectations perspective is less clear than its been.  From here, it gets a little more interesting.     

 

 

2Q13 GDP:  Hurry Up and Wait - GDP Summary Table

 

2Q13 GDP:  Hurry Up and Wait - GDP Revision Bberg Table With Citation

 

2Q13 GDP:  Hurry Up and Wait - GDP Revision Comparison

 

Christian B. Drake

Senior Analyst 


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