BUY THE RAMP UP, SELL THE RAMP DOWN

We first went out on the limb with the MPEL call on 6/30 with our "MPEL: NOT QUITE THE CITY OF NIGHTMARES" and the stock is only up slightly.  Granted, the XLY is down 4% since the note and LVS and WYNN are down 15% and 12%, respectively.  Thursday's release of preliminary numbers should've been more of a catalyst but for a 2.5% decline in the S&P and a CS First Boston downgrade post release.  The downgrade carried a lot of weight initially, sending the stock down 12%, but MPEL ended the day only slightly down which is more than I can say for its competitors.  Investors finally realized that calling out City of Dreams (CoD) for lagging the revenues of a property twice its size and fully ramped (Venetian) is not relevant.  Nevertheless, I don't get paid for moral victories.

So why am I still positive on MPEL but not Macau, LVS, and WYNN?  We are very concerned about supply growth, particularly when Beijing is restricting demand.  Specifically, the supply growth is concentrated in the Mass Market and Beijing effectively controls Mass visitation.  Our belief that Beijing is targeting mid-to-high single digit MARKET growth means that same store revenue growth will be decidedly negative.  We want to own the provider of new supply (MPEL, SJM) and sell those properties most susceptible to Mass market share loss (Wynn Macau, Venetian, and Sands).

City of Dreams June numbers were better than the whisper number and our expectations.  Here are our takeaways from last week's release:

  • CoD Mass Market drop was spot in line with our $100MM estimate
  • CoD Rolling Chip volume of $1.94BN was much better than our $1.5BN estimate. It looks like some of this strength came at the expense of Altira's RC which came in at $2.76
  • RC at Altira was down 55% y-o-y in June vs. down 44% in the 2 prior months. However, June was also the toughest comp of the year
  • Slot volume of $81MM came in above our $51MM estimate

The incremental news on CoD is likely to be positive since expectations have been set so low.  Both segments are ramping.  Mass advertising in mainland China only began two weeks ago and the VIP business was effectively launched a few days later.  With CoD's ramp and Beijing controlling the visitation spigot, Mass numbers for the existing Mass properties will be under pressure.  Wynn Macau is at risk due to the Cotai undertow pulling visitors away from the Peninsula while Sands may get drowned by the coming tidal wave of Oceanus (See "OCEANUS TO SINK SANDS").  We don't want to fight those tides.


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