prev

WYNN IS NOT LVS

I’m struggling to see how WYNN creates value by IPOing its Macau operations. LVS has covenant issues and needs capital to complete Lots 5/6. For WYNN, all I see is dilution.

 

Why is a well capitalized company with few investment options seeking more cash?  Here are potential explanations?

 

  • High valuations for Hong Kong and Chinese stocks

WYNN is not exactly trading at a depressed multiple.  We calculate the 2010 EV/EBITDA multiple is around 11x which implies a 12x multiple on Macau EBITDA.  If the multiple isn’t higher than 12x, the offering will dilute current shareholders.

  • Position company to take advantage of potential acquisition opportunities

I’d be wary of WYNN on the acquisition front.  Historically, Wynn has not been acquisitive and really has no expertise in turnarounds.

  • Fund future new builds

Where would they build?  ROI in Las Vegas is dreadful.  Cotai is an option but they do not need an IPO to fund a Cotai project given the balance sheet and current cash flow.  Besides, equity is expensive capital which reduces the NPV of any project.

  • “’Cause everybody is doing it”

At the right price, it clearly makes sense for LVS to raise equity and avoid covenant issues.  Moreover, as we’ve written about, Beijing is pushing for a restart of Lots 5 and 6 by the end of 2009.  WYNN has no pressure.

  • Personal reasons

Steve Wynn’s marital issues have been well publicized.  Divorces are expensive and maybe Mr. Wynn needs the cash.

 

Investors’ knee jerk reaction so far is predictable, but that doesn’t mean it is right.  “Hong Kong IPO?  The news worked for LVS.  Must be good news for WYNN too.  Buy, Buy, Buy.”  When reality sets in the overriding question will be:  where is the value creation to offset the dilution?  We don’t see it.


The 2009 Rear View

"Only the wisest and stupidest of men never change."
-Confucius
 
Now that most of 2009's big market calls have been made, you are going to see people clamoring to make the next call for either another bubble or a crash. This is Wall Street folks - objects in the rear view appear closer than they seem.
 
Today Ben Bernanke will remind us that he'll change this country's highly politicized monetary policy "when the economic outlook requires us to do so." For you, my fellow commoner, that means that he'll raise rates when the Washington winds allow him to blow that way. He has his own job security to consider at year end, don't forget.
 
While Goldman's $55B in "level 3 assets" may not be, there are plenty of legitimate assets in this world that are marked-to-market on a real-time basis. Markets are the most stealth leading economic indicators that a risk manager can embed in their daily investment process. They change dynamically, and the prices don't lie - people do.
 
Looking in 2009's rear view for lagging economic indicators (like unemployment and GDP) are reserved for academics, lawyers, and politicians - you know - the people who are charged with running the US economy.
 
We all know that it is altogether useless to have people managing the US Financial System who have never traded risk capital in their life. We also know that we can proactively make money by taking advantage of their predictable and reactive behavior.
 
I'm not the wisest market operator, but I am not the stupidest either - so let's strap the real-time analytical pants on and take a walk down that path of memory lane.
 
The 2009 Rear View:
 
1.       Yesterday, the Chinese stock market (Shanghai exchange) hit a fresh YTD closing high of 3266 (+79.5% YTD)
2.       Yesterday, the broader (more liquid) stock market in Hong Kong (Hang Seng) took its one week rally to +13% (+35.6% YTD)
3.       Yesterday, the price of what China actually needs (Dr. Copper) hit a new YTD high of $2.48/lb (+78.5% YTD)
 
Now, as "Heli-Ben" gathers all of his notes to enlighten you with his latest rear view outlook, let's look forward:
 
1.       Today, the Chinese stock market, which was greater than 2 standard deviations overbought, sold off -1.6% from her YTD high
2.       Today, stocks in Hong Kong finally stopped going up
3.       Today, the price of Dr. Copper (which has an extremely high correlation to Chinese stocks), dropped -1.2% from his YTD high
 
Good thing I sold our long position in China yesterday. Again, I may not be the wisest in my market timing - but I am certainly not the stupidest... This morning you are seeing the China State Construction company move to go public - this will be the world's largest IPO since, you guessed it, Q1 of 2008... real-time top for China anyone?
 
What's really stupid about all of this macro noise here in the USA is that very few of our American financial institutions have a real-time macro risk management process. If they did, they wouldn't have missed both the -57% crash, then the most recent +41% squeeze. Apart from the most politicized monetary policy in modern history, we are witnessing the You Tubing of the most generationally high levels of economic groupthink this country may ever see. Stupid is as stupid does.
 
Now that we have established another higher-high in the SP500 for the YTD, what else is in the 2009 Rear View?
 
1.       At $78.90 on the US Dollar Index, the US government has Burned The Buck
2.       At $65/barrel, the price of oil in those Dollars has doubled
3.       At $948/oz, the price of gold is making another charge to replace America's fiat currency as a reserve
4.       At 0.17%, the short end of the US Treasury curve has been completely socialized/politicized
5.       At 3.65%, the long end of the US Treasury curve is breaking out to the upside
6.       At +265 basis points wide, the US Treasury yield curve is on the verge of being as wide as it has EVER been
 
Mr. Bernanke,
 
We get the personal job security thing - but what exactly do you mean by changing US economic policy "when the economic outlook requires us to do so"... ??? ... Either you and your Wall Street/Washington cronies think the American people are the stupidest OR that your ole boy Club is the wisest. I can assure you that I and the American public are neither. But we don't come home to the dinner table at night having taken home a paycheck to be willfully blind.
 
If you can't proactively forecast our economic future, just admit it. The real-time markets can. Let the rest of the world mark US bonds and their yields to market. Let American savers earn something other than ZERO on their savings accounts again.  Let those who don't need a government backstop roll up their sleeves and get this country back on track again.
 
My intermediate term (TREND) support level for the SP500 remains 871, and the long term (TAIL) level of resistance remains 954. If we close above 954, sustainably, over the next few days, I will not be wise or stupid - I'll just change.
 
Best of luck out there today,
KM
 

LONG ETFS

CYB - WisdomTree Dreyfus Chinese Yuan- The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.
 
COW - iPath Livestock - This ETN tracks an index comprised of two thirds Live Cattle futures, one third Lean Hogs futures. We initially began looking at these commodities because of recession inspired capacity reductions combined with seasonal inflections. A series of macro factors including the swine flu scare, a major dairy cattle cull in response to collapsing milk prices and the collapse of the Argentine agricultural complex due to misguided policy provided us with additional supporting fundamental data points for the quantitative set up in price action. 

TIP- iShares TIPS -The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield on TTM basis of 5.89%. We believe that future inflation expectations are currently mispriced and that TIPS are a compelling way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

XLV- SPDR Healthcare -We re-initiated our long position in healthcare on 6/29.  Our healthcare sector head, Tom Tobin, wants to fade the public plan, and he's been right on this one all year.

GLD - SPDR Gold - Buying back the GLD that we sold higher earlier in June on 6/30. In an equity market that is losing its bullish momentum, we expect the masses to rotate back to Gold.  We also think the glittery metal will benefit in the intermediate term as inflation concerns accelerate into Q4.
 

SHORT ETFS
 
XLI - SPDR Industrials - We don't want to be long financial leverage, which is baked into Industrials.

EWI - iShares Italy - Italian Prime Minister Silvio Berlusconi has made headlines for his private escapades, and not for his leadership in turning around the struggling economy. Like its European peers, Italian unemployment is on the rise and despite improved confidence indices, industrial production is depressed and there are faint signs, at best, that the consumer is spending. From a quantitative set-up, the Italian ETF holds a substantial amount of Financials (43.10%), leverage we don't want to be long of.

DIA  - Diamonds Trust- We shorted the financial geared Dow on 7/10, which is breaking down across durations.
 
EWJ - iShares Japan -We're short the Japanese equity market via EWJ on 5/20. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

XLY - SPDR Consumer Discretionary - We shorted XLY on 7/9 on a rip as our team has turned negative on consumer.  

SHY- iShares 1-3 Year Treasury Bonds- If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.


THE MACAU METRO MONITOR

GAMING REVENUE FALLS ON FEWER TOURISTS scmp.com

A drop in tourist numbers affected Macau’s casino revenue in the second quarter.  Casino revenue fell by 2.3% quarter on quarter to MOP 25.4 billion, according to the Macau Gaming Inspection and Co-ordination Bureau Website.  The year-over-year change was down 12%.  Visitor arrivals in May fell 20.4% from 2008 and visitor arrivals for the year to date fell 10.6% from a year earlier.

 

WYNN RESORTS FILES FOR HK IPO OF MACAU UNIT scmp.com

Las Vegas casino company Wynn Resorts is reported to have submitted an application to list its Macau unit on the Hong Kong exchange.  The company hopes to raise between US$500 million and US$1 billion. 

Rival operator Las Vegas Sands is preparing an IPO of its own Macau entity which is expected to raise more than US$3 billion.  Commentators see this strategy as being primarily aimed at supporting struggling operations in Las Vegas. 


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

LOOKING UNDER THE HOOD OF THE MARRIOTT MARGIN CAR

Only a 560 bps margin decline on a 26% decline in RevPAR? Are these guys great mechanics or is something else going on?

 

When MAR reported only a 560 bps margin decline on a 26% drop in RevPAR this past Thursday, it seemed almost heroic.  This masterful cost cutting spurred several analyst questions of whether this kind of massive property level cost cutting can continue. 

If you look under the hood there’s a lot of “other stuff” in Owned, Leased, Corporate Housing & Other.  The “Other” bucket skews the margins and doesn’t exactly paint a true picture of what’s really going on from a cost cutting standpoint. “Other” includes branding fees and termination fees, which have zero associated expenses.  “Other” also includes some application fees which franchisees pay to procure a contract, and re-licensing fees which get paid on properties when ownership changes but the MAR flag is retained.  Marriot doesn’t disclose application or re-licensing fees, so for the purpose of this note we will just ignore them.

Branding fees come from two primary sources: affinity fees on Marriott rewards credit cards and licensing fees on branded Ritz Carlton residences developed in conjunction with Ritz hotels.  As can be seen below, branding fees have become a larger portion of profits from Owned, Leased, Corporate Housing & Other each year since 2006, accounting for 47% in 2008 and 90.5% in 2Q09. 

LOOKING UNDER THE HOOD OF THE MARRIOTT MARGIN CAR - mar exposure to brand fees

Termination fees on managed and franchised hotels are typically collected when MAR branded hotels trade hands and the new owners want to reflag or simply terminate the existing management or franchise contract.  Termination fees have been declining as the transaction environment for hotels has cooled.  MAR recognized $26MM, $19MM, and $15MM of termination fees respectively in 2006, 2007, and 2008.  MAR does not disclose termination fees on a quarterly basis but they did disclose that they were down y-o-y for the first two quarters of 2009. 

On a combined basis, branding and termination fees accounted for 58% of Owned, Leased, Corporate Housing & Other profit in 2008, up from 47% in 2007.  In 1Q09, MAR reported branding fees of $14MM and some small amount of termination fees.  When you strip those out, it implies that Owned, Leased, & Corporate Housing profits were actually negative and declined around 500bps vs the reported 370 bps decline.  This past quarter MAR reported $19MM of branding fees out of $21MM of total profit for Owned, Leased, Corporate Housing & Other.  Even if there were no termination fees, margin excluding branding fees was less than 1%, implying around an 800-900 bps decline in margins (net of fees). 

Affinity fees are pretty stable and most likely growing.  However, we would wager that branding fees on Ritz condos are at best likely to slow along with the entire condo market.  Termination and re-licensing fees are also likely to be down for 2009 and 2010 unless you believe transactions will accelerate.  Finally, application fees should also be on the decline as new builds come to a grinding halt.  As the cost cuts comps become more difficult we expect some negative margins for this business net of fees. 

LOOKING UNDER THE HOOD OF THE MARRIOTT MARGIN CAR - mar margin chart



PSS: Point/Counterpoint

Keith: PSS looking to breakout again from its TRADE line 13.99.

 

Brian

  • The consensus is off by a buck next year – no kidding.
  • PSS was investing in SG&A and PP&E while comps were down, product costs were heading up, and cost of capital was turning unfavorably.
  • 96% China exposure is Big. Yes it hurt while costs were rising, but we’re going the other way as capacity opens up again in China.
  • Leverage is still a concern. I don’t like it one bit. But comps are stabilizing, and both FOB and rent is coming down dramatically.
  • On a flat comp, these 2 items result in $0.55 in EPS over 12 months.
  • I buy into the ‘white space’ argument, meaning that the company can take up ASP to the high teens as it improves product mix.  Opportunities at Sperry and Saucony are gravy.
  • Tough to find a company with this much earnings upside.

GET THE HEDGEYE MARKET BRIEF FREE

Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

next