Macau was granted authorization to rent a plot of land on Hengqin island for the development of the new University of Macau campus.  The bill proposing the arrangement was passed by the eleventh National People's Congress (NPC) Standing Committee of China.  Presently under the jurisdiction of Zhuhai, the land will be rented to Macau until 2049. 

The central government has approved a pilot joint development project to make Hengqin Island "a new platform to promote industry upgrade in the west bank of the Pearl River under the 'one country, two systems' policy."


The second locally infected H1 N1 case with an unknown source of infection was reported yesterday.  The Influenza Emergency Coordination Center also announced one additional imported case of Influenza A (H1 N1), bringing the total number of local and imported H1N1 cases to 18 in Macau as of yesterday.

Health Bureau director Lei Chin lon said that tourists from different countries coming in and Macau were contributing to the problem.  "Macau is at risk of a H1 N1 influenza outbreak", he said.


There is quite a bit of new supply entering the Macau market in 2009.  Besides MPEL's City of Dreams (CoD) which opened June 1st, US investors do not seem very focused on the supply picture.  That's typical, since the remaining new builds for 2009 are owned by non-US listed companies.

The most impactful property post-CoD will be SJM's Oceanus.  SJM is already knocking the cover off the ball in terms of recent market share gains.  Add to the SJM portfolio an attractive Mass Market casino, strategically located next to the Macau Ferry Terminal.  Unfortunately for LVS's Sands Macau, Oceanus is situated between Sands and the Terminal.  It is our understanding that SJM will provide covered and air conditioned moving walkways from the Ferry to Oceanus.  Location was a huge competitive advantage for Sands and it soon will be transferred to Oceanus.

Here are some details on Oceanus: 

  • Obscures Sands from the Ferry Terminal
  • 280 Mass tables vs 350 at Sands
  • Almost purely a Mass property
  • Billed as a regional locals property targeting ferry customers from Hong Kong and Guandong Province
  • Property to open in late 2009

Based mostly on the impact from Oceanus, we are now projecting a 20% decrease in 2010 EBITDA at Sands to $169 million.  We believe the Street is projecting well north of $200 million.  Sands is vulnerable because of its location and focus on the Mass market.  We calculate that over two-thirds of its EBITDA is derived from Mass play.  The Mass market has been stable and is likely to grow in the mid single-digits as Beijing keeps a tight grip on visitation.  However, Oceanus is not the only new supply.  L'Arc and City of Dreams (another large Mass property) will contribute to an approximate 25% increase in Mass supply from 12/09-05/09 and a 20% increase for all of 2010 as seen in the following chart.  Not good for the other LVS Mass Market property, Venetian Macau, either.

OCEANUS TO SINK SANDS MACAU - macau mass market table growth 

LVS faces many near-term hurdles including covenants in both credit facilities, a slow start at Sands Bethlehem, and the Las Vegas doldrums which are not over.  Add Oceanus to the list and don't underestimate the potential negative impact to Sands.


Until this week, it seemed fairly safe to suppose that an impenetrable divide existed between the world of SEC filings and the technophiles who have already downloaded MashDeck. And then we read the exhibit to this 8K, which included one of the first references we've seen in SEC filings to the popular social media site Mashable. (And because the web is a giant echo chamber, Mashable has its own account of the story).

It was filed by CKE Restaurants, Inc. (CKR) - the company behind Hardee's and Carl's Jr. restaurants - you know, the fast-food joints where you get those late-night Western Bacon Thickburgers and Jumbo Chili Dogs when nothing else will do.

Here's what we found, which comes shortly after CEO Andrew Puzder explained that while "It has never been my goal to get excited over reporting flat earnings or margins," the fact that the company's operating income and margins remained steady in spite of the poor economy and competitive industry practices was "a testament to our management team and the strength of our brands." Then Puzder said:

We just launched a very innovative partnership with YouTube whereby we are utilizing some of their most popular video stars to produce short videos promoting our burgers. With a combined following of 3.2 million subscribers, these video bloggers ("vloggers") are helping us target our customer demographic where they already are. In addition, the media cost is much lower than with traditional advertising. According to, the world's largest blog focused exclusively on Web 2.0 and Social Media news, our sponsored video content appears to have ‘turned out to be a big hit.' In fact, just one of the Carl's Jr. vloggers created a video that's already received over 2.4 million views across the web. All of the Carl's Jr. vloggers' videos, combined, have been viewed more than 5.7 million times.

But it's not just Carl's Jr. We also noticed that the annual report that Bob Evans Farms, Inc. (BOBE) filed earlier this week. In it, the company touts its use of "BE-Mail", Facebook, Twitter, and a revamped web site. Be sure to check out the unlikely pairing of its list of corporate Twitter users with the down-home images of rolling hills. Then again, a quick scan of some of Bob Evans tweeters shows that they're not exactly regulars.

Of course, the real question is whether this embrace of social media technology by decidedly non-tech companies is worth the money and the effort. We've eaten at Bob Evans before and it's hard to imagine much overlap between those folks and people who crashed Twitter yesterday looking for news and sharing memories about Michael Jackson.

Michelle Leder


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And I thought Vegas was a draining trip.  I'm writing this Macau update on the Friday flight back from Hong Kong.  Five days, 15 meetings, and only 20 hours of sleep later, I'm tired, but full of thoughts and observations from a very enlightening trip.

Near term, I'm more negative on Macau, especially on LVS, and to a lesser extent, WYNN.  Our estimates will be going lower on both companies.  Sands, in particular, may get drilled by SJM's Oceanus property opening right next door.

We're still working on the MPEL model - our numbers will be below the Street but nobody believes the Street numbers on this one anyway.  Sentiment is extremely negative on City of Dreams and MPEL which is understandable given the slow start.  The stock has been pummeled.  However, there are reasons to be optimistic as the launch of the VIP effort tonight, and the advertising in China, could drive revenues to leverage what appears to be a lower cost structure than most are projecting.

We will expound on the major takeaways in coming posts but here are our observations:




  • Macau not having a good June
  • June visitation may have been down 20%, similar to May
  • MGM and Grand Lisboa may have been the only major properties to have a decent June
  • Some of the junkets experienced very high hold % in June

Mass Market:

  • Cost of player acquisition and retention going up on the Mass side - margins going lower
  • More evidence of increased rebate activity: "Front end buy in" vs. "Rolling buy in" - 1% rebate on wagering above a certain level vs. 0.3%-0.4% on all dollars wagered - Mass margins could be under pressure
  • Growing belief that Beijing will "manage" Mass growth to coincide with GDP growth in China. Good for stability but the days of 15% growth are over. Over the long-term, predictable growth is probably worth a higher multiple

Visa Restrictions:

  • Beijing tightened up tour group restrictions in June after a few months of abuse - players were skirting visa restrictions through tour groups
  • At least one enlightened participant does not believe a new CE means that visa restrictions will be loosened, despite consensus opinion
  • New CE is not a "guy of change". He is already the 2nd most powerful government official in Macau and is probably not Beijing's first choice
  • Nobody knows what is going on with visa restrictions. Beijing probably cracked down on tour groups but some think that other restrictions may have been loosened. Any impact will be masked by Swine Flu concerns


  • Over the near term, there are more negative catalysts: lower margins due to market share competition, CoD taking share, and L'Arc and Oceanus (SJM) opening this year
  • Delays in Galaxy's Megaresort good for the market




  • I'm increasingly worried about Sands. SJM really going right after the property with Oceanus opening late this year
  • Oceanus will open near Sands, right next to the Immigration Center - covered moving walkways right from Ferry Terminal to Oceanus
  • Sands and Venetian continue to lose VIP share to Jack Lam's Mandarin Hotel operation
  • Venetian Mass business hanging in despite City of Dreams opening - that could change with the new CoD advertising program launched this week in southern China


  • IPO is most likely financing option
  • No asset sales are imminent
  • Government approval for condo sales will be a long way off - no source of cash for LVS


  • Singapore doesn't look like it will open in 2009, April 2010 more likely
  • Junket guys worried about Singapore regulations potentially limiting or prohibiting Junket activity - junket credit, private rooms, background checks - we believe this is potentially a big negative for the two Singapore concessionaires



  • Wynn Macau not having a good June, losing share to MGM and SJM
  • High VIP commissions elsewhere and Mass rebates/higher customer retention costs causing market share losses
  • Wynn Macau also lost a huge high end slot player to MGM and City of Dreams
  • Encore Macau won't open until the spring and the budget is likely to go up a little
  • Not impacted much by CoD yet, but CoD business beginning to ramp in both VIP and Mass
  • No real positive catalysts for WYNN in Macau



  • Mass volume in first two weeks was below expectations but hold % was reasonable
  • VIP volume was fine but hold was actually negative
  • Negative VIP hold % (-0.5% to -0.7%) due to 5-6 players, not widespread through the casino - not sustainable
  • Mass volume has picked up recently
  • Structurally, there does not appear to be any issues with CoD
  • The only legitimate criticism I heard was that the property is difficult to navigate
  • Margins will be much better than expected - probably due to correct staffing and lower wages - 75% of what they expected
  • Revenues ramping and won't be far off near-term expectations
  • The Hard Rock Casino is probably the most unique in Macau
  • Hard Rock doing 60% more per position than CoD casino
  • Rolling Chip (VIP) launch is Friday night
  • The go ahead for advertising in China was given on Wednesday - only 13% of customers are from mainland, needs to be 30%
  • Have not gotten the mid-Mass business yet - advertising in China will help
  • Signing 2,000 Mass customers into City Club database daily - faster pace than the Venetian after 3 weeks
  • Former Venetian marketing people running the database
  • Generally positive commentary from competition
  • Given the stock performance and the incredibly negative sentiment, MPEL is starting to look interesting on the long side



  • Market share still growing, revenues stable
  • Margins lower due to customer acquisition and retention costs
  • L'Arc opening on 9/21/09 - apartment sales not going well (though not part of SJM's financial involvement in the project)
  • Oceanus - 280 mass market tables opening up by end of year - going directly after Sands business
  • Oceanus will be much more accessible to customers arriving at Ferry Terminal than Sands
  • Ponte 16 - doing very well. Casino was packed. Exclusively mass market for now



  • New games doing well in Australia
  • Similar games being introduced in Macau and competitor thinks they will do well



  • Being very aggressive, especially going after Wynn Macau's business
  • There seems to be more optimism surrounding the performance of this property
  • They seem to believe that $250 million in EBITDA is possible
  • Shun Tak's retail center will open in late 2009 and should be a catalyst for the property



  • Starworld lost share in June due to renovations and low hold % in June. However, property seems to be stable
  • Construction on Megaresort deliberately being slowed due to cost savings and market conditions
  • Construction costs may come in 10% below projections - running single shifts, no overtime pay
  • Will target Mass business from mainland China
  • Transportation infrastructure will be much improved by the time the property opens
  • No official opening date but 2011 looks likely



A while back I referred to Japan as a man treading water with a bowling ball in his hands. Since that time the situation has remained unchanged.

With production and exports at record lows and rising unemployment, the stimulus measures that the Aso administration is attempting to use to expand domestic demand look to us as insufficient to move the dial significantly.

Today's CPI figures showed a 1.08% Y/Y decline, with Tokyo specific slightly higher at -0.78%   and prices excluding Food and Energy  registering at -0.5% . With the threat of deflation weighing heavily on the minds of central bankers who have memories of the "lost decade" still fresh in their minds the only way forward will be to continue to pump money into the system -essentially throwing things at the wall until something sticks.

Another prolonged period of stagnation would be catastrophic for Japan as the pronounced demographic shift that is looming gets underway. Remember that as Japanese debt levels have been climbing towards 200% of GDP, the glass-half-full crowd has reminded everyone that all of that debt is held by domestic investors. As the aging Japanese population starts to drain savings and the tax base shrinks, there will be fewer consumers who will be keeping their money parked at banks that pay zero on deposits so that those banks can turn around and buy government bonds that pay barely more.

We remain negative on future prospects for the Japanese economy, but think that the equity markets there could still get a big boost from a weak yen.


Andrew Barber



The Wrong Headlines

Research Edge Position: Short Italy via the iShares etf EWI

The media has had a field-day with the marital status and personal relations of Italian Prime Minister Silvio Berlusconi over the last months. Apt for inappropriate comments, Berlusconi has recently been quoted saying that "he never paid a woman" and doesn't "understand what satisfaction there is if there isn't the joy of the chase." Suffice it to say that Berlusconi's private life has gotten more attention than the ailing Italian economy in recent weeks.

We're currently short the Italian equity market via EWI, a position we initiated on 6/19 based on overlapping quantitative and fundamental factors. In Europe we've maintained a bearish bias towards countries with financial leverage and over-extended balance sheets. Our short thesis holds acutely for Spain and Ireland who are suffering from the bursting of a decade-long housing property boom as well as Switzerland and the UK, which have high leverage to the financial industry.  At a point earlier this year we were short Switzerland via the etf EWL and the UK via EWU. As an aside, today Bank of England Governor Mervyn King said that banking problems may make the economy's escape from recession a "long, hard, slog."

Because American-style bank "Stress Tests" have not been issued in Italy (or most of Europe), Italian balance sheets remain hazy. Although the Italian financials have proportionally lower foreign exposure than their competitors in France and Germany, meaning that they have not felt the fallout from global real estate and derivatives to the same extent, that domestic bias has historically helped to obscure issues for prolonged periods (a situation exemplified by the Parmalat case).  The continuing decay at Italian banks was underscored by the recent divesture by UniCredit SpA, Italy's biggest bank. Yesterday the bank announced plans to transfer some 640 Million Euros of property assets to a real-estate fund to boost capital and is planning to sell at least 1 Billion Euros of covered bonds. Given these lingering concerns, the fact that the composition of the Italian etf EWI includes a 40.10% weighting in the Financial sector raised a major red flag for us, making it easy to pull the trigger when the quantitative set up provided by price action became attractive.

We believe that as European economies work through depressed levels of production, struggle with rising unemployment and decreased appetite for exports from their main trading partner (Eurozone), governments that over-extend their balance sheets (budget balances) with debt, will see greater tightening of credit, which will push out growth for countries like Italy. This point is supplemented by data from FactSet that shows General Government Debt as a percent of 2008 GDP stands at 105.8% for Italy, compared to 65.9% for Germany and 68.1% for France.  

We continue to have our Eye on the credit markets. Today Italy sold 9.5 Billion Euros of government securities.  To date the Italian credit rating has not been downgraded, unlike its peers Spain, Ireland, and Portugal, yet the chart below of the German vs. Italian 10Y Treasuries clearly shows there is a risk premium in owning Italian debt. The 120 basis point premium over German and US bonds demanded by investors for the 2 and 10 year paper issued today does not bode well for future refinancing on public debt -which  currently stands at over 100% of GDP -a higher leverage ratio than Germany, France, Spain or the UK.    

From a fundamental basis, Berlusconi passed a 2 Billion Euro economic stimulus package in February to aid Europe's third largest economy, which is forecast to contract 5.3% this year by the OECD, a downward revision from a March estimate of -4.3%. Italian CPI came in at 0.8% in May (the lowest in 40 years), down from a target level of inflation of 3.5%, said EuroStat. The contraction will benefit consumers, but indicates the level of contraction the country is feeling. Compared to the Eurozone CPI average of 0.0%, it's a call-out that Italian inflation is running higher. Recently we've seen improved Italian business and consumer confidence reading in June, yet the surveys are forward looking and may be overly optimistic for the next 6 months. Q1 unemployment rose to 7.3% from 7% in the previous quarter, according to the Istat statistics office, with forecasts of 9% late this year and next. We expect sentiment to tick downwards as unemployment rises and predict very modest growth for Italy next year.

The Italia All-Share index is crawling around -1% YTD, similar performance to the S&P500 and German market (DAX). We're looking to increase our European exposure. Stay tuned.

Matthew Hedrick


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