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It's difficult to predict the future but the Macau market participants cannot even predict the present. What's going on with the visa restrictions? Ask ten different people, get ten different answers.  Our best guess is that Beijing is constantly tinkering with the goal of restricting market growth to the mid-to-high single digits, in-line with China's GDP growth.

We think, by now, Beijing has a pretty good feel for how much to turn the spigot to drive the desired growth in Macau. The days of 15% growth are over but controlled mid-to-high single digit is likely. Given the excess demand that Beijing must restrict to maintain moderate growth, Macau EBITDA likely warrants a higher multiple.  However, over the next 18 months, Mass table supply growth will be significant (see chart below) and we doubt Beijing is targeting same store growth.  Thus, same store growth in the Mass segment will be decidedly negative.

BEIJING WON’T OFFSET MASS TABLE SUPPLY INCREASE - macau mass market table growth 

The market share wars are likely to escalate.  As we found out during our trip to Macau in late June, some properties are beginning to offer rebates to players of between 0.3% and 1.0%, depending on whether there is a buy-in amount.  Q2 margins should look worse on a sequential and YoY basis for Q2 2009.  As can be seen in the following EBITDA chart, margins are already in decline.  The promotional environment will only worsen, putting even more pressure on margins through mid 2010. 


The Mass properties are particularly at risk:  LVS's Venetian and Sands, Wynn Macau, and MGM to a lesser extent.  The Sands must also contend with SJM's Oceanus opening up in late 2009 which will be as direct of a competitor as there can be.  We wrote about this in our 6/28/09 note "OCEANUS TO SINK SANDS".  On the other hand, City of Dreams hasn't stolen many customers from Venetian which is good for Cotai but a negative for the Peninsula including Wynn Macau. 

Those clinging to the great Beijing savior might be disappointed.  Yes a new Chief Executive is taking over late this year.  While there may be some incentive for Beijing to provide a bit of a tailwind, a 25% increase in visitation is highly unlikely.  Same store revenues are going lower.

The only potential winner here is the guys adding new supply, particularly MPEL with City of Dreams and SJM with Oceanus. 


Market Commentary

With City of Dreams opening on June 1st, June should've been a better month in the aggregate.  It wasn't a total disaster though as Mass revenue increased and Rolling Chip (RC) volume declined only modestly.  Low RC hold % made the market performance look much worse.

LVS was the only winner this month, due to "lucky" hold at both properties.  WYNN had a bad June, partly attributed to worse hold than May, although still in the "normal" range.  Galaxy & SJM are holding their own.  We all know about the abysmal hold at Crown so no point in belabouring that issue.  Here are the aggregate numbers.

Total table revenues down 17% to $978MM

  • Mass revenue up 3% y-o-y
  • RC revenue down 24%
  • RC volume down only 4%
  • Slot revenue flat


Y-o-Y property observations

LVS's table revenue down 6%

  • Sands table revenue down 27%, with RC down 34% and Mass down 14%
  • Venetian table revenue up 7%

WYNN table revenue down 36%

  • Mass down 16%
  • RC down 41%

SJM table revenue up 3%

Galaxy table revenue down 17%

  • However, Starworld's table revenue was actually up 1%

MGM table revenue down 19%

  • Entire decline coming from VIP as Mass was flat y-o-y

Altira (Crown) table revenue down 57%


Market Shares

LVS market share 25% up from 20% in May

  • Sands market share at 8.5% vs 7.1% in May, mostly due to better hold (65 bps better in June than May)
  • Venetian up to 17% from 13% in May, mostly due to better hold (May was a weak month at 2.4% but June was high at 3.6%)

Wynn down to 13.7% from 17.25% in May

  • Partly due to worse hold at 2.75% vs 3.3% last month
  • Cotai gaining share at the Peninsula's expense?

MPEL share down to 9.1% from 10.4% in May

  • Everyone knows hold was bad, 1.6% blended vs 2.92% in May

SJM share down 1% to 30.75%

Galaxy share flat sequentially at 12.8%

  • Starworld share up to 9% from 7% in May

MGM share up to 8.3% from 7.4% in May

Keith McCullough Sees 'Reflation' in Fourth Quarter

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Be patient here, the immediate term TRADE line for the SPX is broken. I have immediate term TRADE support at 885. -KM

ARO: Bling is Not an Investment Process

Several analysts are out this morning pumping Aeropostale after seeing the fall assortment. If you want to hinge your investment thesis on the company having the right 'skinny jeans, plaid blazers, and bling' then be my guest. If that's your style then you're probably not reading our stuff anyway.

But what I'll ask is this... Have you ever heard a CEO or a head of merchandise stand before ANY external constituent and say "boy, our brand new product line really stinks..." In all the years I've covered retail I have not.

In the meantime, this is a company operating at both peak margins and sales/inventory spread. It's inventory turns defy gravity relative to industry standards (i.e. 3x ANF) and its cash conversion cycle has come down to about 20 days - which is a level that makes it appear as close to a bank as a retailer can conceivably appear to be. I don't want to penalize success, but I scratch my head in wondering how it can get more efficient.

If you believe in more earnings beats, then you could argue that the current 7.5x consensus EBITDA multiple is actually closer to 5-6x. Still not enough to get me excited, but I won't argue that this is an 'expensive' multiple. But while short interest is not exactly low at 16% of the float, it is down from 37% earlier this year.

A point I think is most telling is in the sell-side sentiment chart below. Even as the stock lost 65% of its value and then bounced 170% off its bottom, price targets remained within a $5 band of the price at that point in time. There are 30 analysts covering the stock, and not a single 'Sell' rating.

The bottom line here is that I won't be so close-minded as to say that fashion does not matter. But we need sheer growth in comp and square footage in order to feed this horse. Let's hope that the bling works for Fall.  But neither hope nor bling are part of our investment process. What is part of our process is finding a company where it has something in its DNA that gives it a competitive edge in leading consumer demand as opposed to following it. ARO's inventory turns and speed to market are a plus, but its edge in controlling its destiny is dull.

ARO: Bling is Not an Investment Process - pt

ARO: Bling is Not an Investment Process - si


As almost every market pundit has noted, things have improved for housing on the margin as the rate of decline in home prices continues to slow. As we are fond of saying however, "better than bad" is very, very different from "good" and one negative factor that continues to weigh heavily on the housing market is the continuing sharp declines in the number of Americans applying for mortgages as measured by the weekly MBA index (see chart below). 


Potentially more concerning, the number of refinancing applications is falling at an even faster pace than the aggregate, with the percentage of the total declining from almost 90% at the start of the year as option ARM "victims' and underwater speculators tried to take advantage of falling rates to less than 50% in the most recent weekly figures (see chart).


With rates holding steady at historic lows and home prices indicating signs of a bottom on the horizon, some observers might expect that the pace of these refinancing applications would be more resilient. The reality is, however, that many  people are only willing to increase the size of their debt when they are not increasing their leverage. In other words, with residential real estate values rising it is easy to justify an increase in the absolute debt levels for home improvement or other purposes. In a market environment where prices continue to trend downward, regardless of any signs of bottoming or attractive financing rates,  homeowners are not  motivated to increase their debt to equity ratio.  In other words, refi applications continue to decline for the same reason that we are short the XLY: US consumer confidence has peaked for the intermediate term.

As we sort the factors driving US consumer spending, Refinancing applications will remain a data point on the margin that we follow closely.


Andrew Barber




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

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