LEISURE LETTER (05/16/2014)

Tickers: BYI, FLL, PENN, GLPI, MGM, WYNN, HOT, MAR

EVENTS TO WATCH

Friday, May 16

  • Japan Gaming Conference thru Friday, May 16

Tuesday, May 20- Wednesday 21

  • East Coast Gaming Congress 

Tuesday, May 20 -Thursday May 22

  • G2E Asia - The Venetian Macao

http://www.g2easia.com/Conference/#IGaming

COMPANY NEWs

BYI – CEO/President and board member Ramesh Srinivasan to step down; the Board of Directors appointed chairman Richard Haddrill CEO, effective May 23, 2014.  Previously, Handrill was the company’s Chief Executive Officer from 2004 to 2012. Handrill served as a member of the board since 2003 and Chairman of the board since 2012.  Additionally, David Robbins, who has been serving as the board’s Lead Independent Director, has been appointed Chairman of the board effective May 23, 2014. Robbins also served as Chairman from 1997 to 2010. Ramish Srinivasan is no longer an employee of Bally Technologies.

TAKEWAY:  The sell side explanations don't seem to hold much water. The company's hands are probably tied in terms of what they can say but we wonder if there was some kind of incident with Srinivasan. Conduct standards for executives are high these days especially for highly regulated companies in gaming.  That said, we don't have any inside information but we're not sure there is anything to worry about regarding BYI's operations.

BX – will acquire Cosmopolitan from Deutsche Bank for $1.73 billion in cash for ~16.7 times 2013 EBITDA of $103m.  In a related data point, Cosmo Q1 gaming revenues increased 20.2% while hotel revenues jumped 18.8% to  $75.7 million on stronger group traffic which in turn drove ADR $303

TAKEAWAY: Private equity now fully involved in the gaming industry, could more gaming acquisitions be in the offering?

FLL – cancelled its agreement, announced in March, to purchase 507-room Fitz Tunica Casino & Hotel from The Majestic Star Casino LLC for US$62 million. Full House revealed in its recent earnings report that “the company will not likely be successful in obtaining financing for the purchase. As a result, we have requested Majestic Star to consider termination of the agreement.”

TAKEWAY:  Oops

PENN – Greenlight Capital disclosed via 13F filing a 100% increase in shares owned in PENN at a current 2 million shares vs 1 million shares previously.

TAKEWAY: Betting on new casino growth and a regional reversal

PENN / GLPI – Penn National Gaming the parent company of Argosy Sioux City filed for Chapter 11 bankruptcy for the property.  As part of the reorganization, PENN is asking bankruptcy court to allow it to continue operating. PENN’s justification for filing for Chapter II is that it would lose its entire $110 million investment in the market if it loses its license. And that license is part of the bankruptcy estate, meaning bankruptcy court has authority over it, the company contends.  PENN is suing in court to retain its license, but that trial does not begin until autumn.

TAKEWAY: Given PENN's admission that the company recognized it failed to renew its gaming license, this seems like an extreme action.

MGM – “We’re absolutely considering an IPO in Japan, but not initially,” MGM Chief Executive Officer James Murren, 52, said in an interview in Tokyo yesterday. “The best model is to put together an ownership group, finance through equity partners, open the facility, generate a strong track record of performance. We did that in Macau.”

TAKEWAY:  MGM still a longer shot in our opinion.  

WYNN - is “actively looking” for equity partners for a planned integrated resort in Japan and would eventually list the venture, according to comments made by President Matt Maddox at the Japan Gaming Congress.  Additionally, Wynn Resorts intends to conduct an initial public offering if awarded a gaming license for a planned Japan resort with the offering intended to increase the company’s profile in Japan.

TAKEWAY: "We'll list too if it helps us get a license..."

WYNN MACAU, 1928.HK – denies it lets triad-linked junket operators promote VIP gaming .  Wynn Macau has denied accusations leveled by a union boss Jeff Fiedler in a letter to the Macau Gaming Inspection and Coordination Bureau (DICJ) director yesterday (15-May in Asia).  Wynn Macau called Mr. Fiedler's accusations "those of a bitter, unsuccessful union boss who lost representation of employees in Steve Wynn's prior company, Mirage Resorts (SCMP)

TAKEWAY:  Mr. Fielder was the founder of the CasinoLinks web-site that attacked casino companies doing business in Macau. Additionally, Mr. Fielder has strong ties to the Democratic Party and Democratic Leader Nancy Pelosi so there is a political angle here against Steve Wynn. These allegations have been made repeatedly against WYNN by Fielder and CasinoLinks over the years so nothing new.  

HOT – has listed for sale the five-star Sheraton on the Park Sydney, which would continue to be managed by Starwood.  Sheraton on the Park Sydney is situated opposite Hyde Park in the central business district, close to Sydney’s luxury retail precinct. The hotel comes with 557 guest rooms and suites, a restaurant, a tea lounge, a bar, extensive conference and function space, leased retail space and a range of recreational facilities.  JLL's Hotels & Hospitality Group has been appointed to market the freehold hotel. Expressions of interest are welcome until June 20.

TAKEWAY:  Finally, a company owned asset listed for sale.  Could an expanded repurchase program be forthcoming as a result of the asset sale(s)?

MAR - EVP Anthony Capuano sold 4,000 shares of MAR on Monday, May 12th at an average price of $59.45, for a total value of $237,800.00. Following the sale, the executive vice president now directly owns 62,463 shares of the company’s stock, valued at approximately $3,713,425.

TAKEWAY:  Insider selling becoming prevalent in hotel stocks. Will Blackstone in June contribute to the trend (HLT)?

TUI AG

LEISURE LETTER (05/16/2014) - TR

TAKEWAY: Small player (RCL JV) who reaffirmed its turnaround outlook on European cruise industry 

ClubMed - reported 1H results which were in line w ith expectations but offered commentary on current trends with included comments about cumulative summer 2014 bookings as of May 10 with bookings (3.0%) impacted by a strong downturn in the Europe-Africa region, in particular over the last eight weeks at (16.3%), and a slowdown in Asia.  In the Americas, bookings were up 11.5%, mainly driven by the sustained momentum of sales in 
North America.

TAKEAWAY: European slowdown seems to be more company specific (closure of 2 managed short-haul villages) and the Easter shift but the decline in reservations in Asia was due to China/Malaysia rifts.  US bookings were strong.

INDUSTRY NEWS

Macau Smoking Ban - full smoking ban on mass floors beginning Monday, October 6, 2014.

TAKEAWAY: Given the recent Labor Day protests in Macau and the smoking debate, this policy outcome seemed an inevitable conclusion.  We're hearing VIP rooms and Premium Mass will be excluded.

 

Macau Airlift - Starting 1 July 2014, AirAsia will increase the number of flights it operates between Macau and Manila, Philippines. from its existing 3 flights per week services between Manila and Macau, to 7 flights per week.

TAKEAWAY: Can't hurt.

MACRO 

China Lending - Nonperforming loans rose by 54 billion yuan ($8.7 billion) in the three months through March to 646.1 billion yuan, the highest level since September 2008, based on data released by the China Banking Regulatory.  Non-performing loans accounted for 1.04% of total lending, up from 1% three months earlier.  The 10th straight quarterly increase in defaults adds to concern banks’ profitability may slip as they build buffers to cover loan losses.

TAKEAWAY: Chinese banks had the biggest quarterly increase in bad loans since 2005 as a slowdown in the world’s second-largest economy causes defaults to rise. Not yet a worry for Macau but we're starting to get a little concerned.

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.