LEISURE LETTER (06/04/2014)

Tickers: IKGH, SJM, MPEL, SGMS, HLT ,SHO, CCL

EVENTS TO WATCH

  • Wed June 4 - Thurs June 5: REITWeek, New York, NY
  • Wed June 4 - Thurs June 5: Russian Gaming Week 2014
  • Thurs June 5 - Todd in Vegas for slot suppliers mgmt meetings
  • Thurs June 5 - 4:30 pm MTN earnings
  • Mon June 9 - HTZ earnings
  • Tues June 10 - HLT lock-up expiration
  • Tues June 10 - Thurs June 12: Bally Systems User Conference
    Mohegan Sun
  • Thurs June 12 - Blackstone Investor Day 8:00 am

COMPANY NEWS

IKGH - junket announced rolling chip volume of $1.59 billion, -4% YoY.  The hold rate was 2.32%.  The company blamed the results on severe rainstorms for nearly 10 days in mid-May in both Hong Kong and the Canton Province.

Takeaway:  At least one junket held low in May.  More weather excuses coming?

SJM - (Macau Daily Times) "Too early to tell" the impact of smoking ban

SJM CEO Ambrose So has revealed that SJM has completed the design of their mass area smoking rooms and the preparations will be finished in October.  The Macau government will enforce the smoking ban on casino mass areas on October 6.

So claims that there are no signs suggesting that the mass area smoking ban, and other government monitoring measures, will slow down the investment of gambling operators.  Conversely, he believes that operators will wish to hasten the completion of their projects, because the gaming concessions are going to end soon.  Moreover, he has rejected the suggestion to lower the minimum betting sum in the VIP area, so gamblers can smoke and gamble at the same time.  “The investment into the existing design of the VIP rooms is very high. There are also partitions inside the rooms,” Ambrose said, claiming that to implement that strategy would not be advisable in terms of business.

Takeaway:  Relatively speaking, SJM has been under more pressure to abide by Macau's smoking regulations.  

Aruze (GGRAsia) looking to increase its portfolio of products for Asian gaming markets, Aruze Gaming America is refocusing its research and development efforts on games and products with higher volatility for potentially larger jackpots - a key factor for Asian and VIP gaming participation.  Aruze is developing the new products and games in Japan for distribution into the Philippines, Macau and hopefully Japan.

Takeaway:  Everyone wants a piece of the action in Asia, where Aristocrat, Ainsworth, and Shuffle Master control the market. 

MPEL – provided an update on its Macau Studio City development, increased the total budget by $300 million to $2.3 billion, and reaffirmed a mid-2015 opening. 

Takeaway:  Rising development costs

SGMS – announced a ten-year contract with the Independent Gaming Corporation Limited of South Australia to supply the Company's latest central monitoring and control system, the SGVideoTM system which will monitor approximately 12,500 gaming machines in more than 550 locations throughout South Australia. 

Takeaway: Good system win for SGMS. 

Dynam Japan Holdings (6889:JP) (Macau Business Daily) The Japanese pachinko hall operator plans on placing 100 of its ‘next generation’ machines in a Macau hotel (Macau Legend Development's Fisherman's Wharf) scheduled to open in September.  

Takeaway:  We look forward to seeing how these games perform in a previously non-pachinko gaming market.

 

HLT – Blackstone and the Blackstone Real Estate Partners VI Fund announced the development of a new 418-unit vacation ownership tower at Hilton Hawaiian Village Waikiki Beach Resort slated for completion in early 2017.  Interval sales of The Grand Islander by Hilton Grand Vacations Club are anticipated to begin in fall 2014 and nightly rental reservations may be requested in early 2016 for stays in 2017. The Fund will provide $400 million in development capital to the project. Blackstone appointed Hilton Grand Vacations, the vacation ownership division of Hilton Worldwide, to provide vacation ownership sales and marketing services, resort operations, timeshare homeowners’ association management and loan servicing

Takeaway: The timeshare development was previously disclosed by HLT on their Q1 2014 earnings call, but it would seem this project could provide an upside to the HLT's timeshare business in 2H 2014.

 

Insider Transactions:

SHO – CEO Ken Cruse sold 153,553 shares on Friday, May 30th at an average price of $14.67, the chief executive officer now owns 667,430 shares of the company’s stock.

CCL – Micky Meir Arison sold 248,720 shares of stock on Monday, June 2nd at an average price of $40.11.

INDUSTRY NEWS

Dragon Boat Festival visitors increase 17.9 pct (Macau Business)
Macau had 419,120 visitors over the Dragon Boat Festival long weekend, +17.9% YoY. 

Takeaway:  Decent visitation numbers


Macau ETGs to be studied – (GGRAsia) Gaming industry participants are cautious on the future growth of the ETG segment in Macau, as they noted the Macau government is looking closely at the issue of the velocity and size of betting – even at low minimums – that is possible on ETG machines and on traditional slot machines, thanks to electronic betting.  The issue for the government, is the risk of low-income people losing a large amount of money in a short space of time via ETGs and slots.

Takeaway:  ETG machines haven't really played a signficant role in Macau yet.

Macau Border Crossing Incidents – During last week's Dragon Boat Festival, more visitors entered Macau through the Hengqin border than last year.  Additionally, mainland authorities found several travelers attempting to enter Macau with damaged or counterfeit identification documents. Authorities said that they also found some visitors who were using invalid IDs or had overstayed their visa, and will launch legal actions against those involved.

Takeaway: More immigration issues.

Macau Junket to be Sold(Macau Business Daily) Eternity Investment Ltd, a Hong Kong-listed real estate developer, is discontinuing its Macau gaming-related business by disposing of its entire equity interest in Rich Daily Group Ltd.
Rich Daily manages the services of Ocho, a gaming promoter (junket operators)  appointed by a casino here. According to a company filing with the Hong Kong Stock Exchange, the purchaser, Ng Cheuk Fai, is a ‘third party independent of the company.’ The shares will be sold for a total of HK$2 million, an amount which the company describes in the filing as ‘fair and reasonable.’ At the end of last year, Ocho adopted a tightening credit policy towards its mainland Chinese VIP customers in response to the slowdown in mainland China’s economy.

Takeaway: A sign of junket challenges. 

Macau Airlift – Civil aviation regulators from Macau and the Philippines have set air talks for June 17 and 18t to expand passenger traffic among between the countries.  The existing air service agreement between the Philippines and Macau was signed in 1997, with the last negotiation for increased passenger traffic held in June 2013, when both countries agreed to increase seat entitlement to 4,500 seats a week from 3,500.

Takeaway: A positive for the mass segment as well as the many Philippino workers who travel between Macau and their homeland/families. 

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.