THE LEISURE LETTER (2/28/2014)

Leading the headlines:  hotel earnings, gaming in MA, and as always, developments in Asia and on line gaming.

 

EVENTS TO WATCH:   

TODAY

  • Nevada Gaming Revenue Report for Jan 2014 
  • OEH – 4Q13 earnings, 10 am call

Tuesday, March 4

  • CONEXPO-CON/AGG – Las Vegas thru Friday           

Wednesday, March 5

  • BYD – 4Q13 earnings, after market close, 5pm conf call

COMPANY NEWS

PENN - received prelim approval for MA's 1st slots parlor license. PENN proposed to renovate and expand the Plainridge Racecourse as part of a $225m project in Plainville.  The site would feature 1,250 slots, a Doug Flutie-themed sports pub, an upscale restaurant and four different food court options. The site will also have 1,620 parking spaces.  The slots license will cost $25m, and the slot parlor will pay a 49% state tax on gambling revenue.  

Takeaway:   The Massachusetts Gaming Commission will meet today at 9:30 a.m. and is expected to award the PENN the Slot License at that time.  PENN's stock popped 5% on yesterday's news.  We calculate a NPV for the project of $0.65-$0.95 per share or 5-7% of Wednesday's close. 

LVS - Sands Casino Bethlehem President Robert DeSalvio resigned late Wednesday.  DeSalvio was President since the casino opened in 2009.  LVS spokesman Ron Reese said DeSalvio’s resignation was not related to an apparent internet hacking of the casino’s local web-page which shut down the parent company’s websites for six days and also compromising the Bethlehem casino employees personal information.

Takeaway:  Bethlehem has become mostly irrelevant to the LVS story and we continue to expect management to pursue a sale of this property.

1680.HK Macau Legend - The chairman and controlling shareholder of casino operator Macau Legend Development Ltd, David Chow Kam Fai, increased his stake in the company by nearly US$6.5 million to 30.22% this week.  

Takeaway:  While we don't follow the company, we find it noteworthy when an insider with sizable holdings acquires additional shares.  Stay tuned.

FOXWOODS - Proposed $750MM casino in Fall Rivers, MA. Next step would be a community referendum.  Also seeking that southeastern Mass license is KG Urban in New Bedford and the Mashpee Wampanoag in Taunton. Regulators plan to issue the license in November.

Takeaway:  New markets could be an emerging theme for slot suppliers like IGT, BYI, and SGMS but we're still 3 years away at best.

HST – Fitch raised the credit credit rating to BBB- from BB+, now investment grade rated.

Takeaway:  HST senior management did a good job at communicating the delivering strategy with investors – it is good to see the tacit acknowledgement and confirmation from Fitch.

OEH - announced better than expected 4Q13 results lead by European RevPAR +11%, North America +6% and Rest of the World +10%.  Adjusted EBITDA increased 12% in 4Q and 17% for the year.

Takeaway:  Worldwide Luxury continues to enjoy a strong tailwind.  Europe still improving.

 

RCL - Will transfer the Rhapsody of the Seas in the summer of 2015 from Alaska to Europe to offer its first Black Sea itineraries.  Replacing Rhapsody in Alaska for the 2015 season will be the slightly larger Jewel of the Seas, which will join Radiance of the Seas in that market.

Takeaway:  RCL continues to increase presence into the European market

INDUSTRY NEWS

GAMING               

Package Tour/Hotel Data DSEC 

Visitor arrivals in package tour totaled 745,000 in January 2014, -2% YoY, attributable to the decrease in visitors from the Republic of Korea and Mainland China.  Visitors from Taiwan (57,000); Hong Kong (39,000) and Thailand (13,000) registered YoY increase, whereas those from Mainland China (560,000), the Republic of Korea (33,000) and Japan (11,000) recorded decrease.  The average length of stay of guests held stable as January 2013, at 1.4 nights.  5-star hotel occu at 83%.

Takeaway:  Decline not a concern since these are not big gamblers. January GGR was disappointing, however, but made up for by a 30%+ February.

 

Illinois Senate exploring internet gaming -  The Illinois Executive Senate Committee held a hearing Wednesday to discuss the pros and cons of online gambling.  Recall, Illinois was the first state in the US to offer the sale of lottery tickets over the internet after it received a favorable response from its request of the US Department of Justice to clarify its stance on the Wire Act.

Takeaway:  Illinois legislators continue to eye gambling expansion in the state.  A bill has yet to be introduced in this session that includes internet gaming.  The expansion of gaming will likely become a platform issue for the Gubernatorial election in November.  As such, the outcome of any gaming expansion in Illinois is also dependent on who gets elected Governor.  If a pro-gaming candidate gets elected, we could very well see an expansion of gaming to include new licenses, slots at race tracks, and slots machines at airports.

 

Las Vegas – named one of Elite Eight city finalist to host the 1026 Republican National Convention.  

Takeaway:   We give the early handicap to Las Vegas as 3:2 favorite.

 

Sanya, Hainan, China –  Rosewood Hotels & Resorts announced the company will open a property in Sanya in 2017.  Sanya will be the company’s third property in China following Rosewood Beijing (opening Spring 2014) and Rosewood Chongqing (opening 2015). 

Takeaway:  We were never a believer in gaming's imminent expansion to Sanya given the development prospects now coming out of the ground in Cotai.  However, we find development of business and commerce via the International Finance Forum noteworthy.  

MACRO

Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

 

Chinese banks raise mortgage rates on funding squeeze:  According to Reuters, a private survey by CRIC, showed banks have raised mortgage rates for first-time homebuyers as a result of tighter liquidity. The survey said nearly 90% of 69 bank branches in 22 Chinese cities have stopped offering preferential mortgage rates to first-home buyers, with some increasing the rates 5-10% above the benchmark rate. That compared to 21% of bank branches that offered discount mortgage rates in the survey conducted in December.

Takeaway:  If true, this could be a headwind for the Mass gaming segment in Macau.