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MPEL COULD MISS Q2 BUT WILL PEOPLE CARE?

We think that Melco will miss street expectation when they report this Thursday.  However, the CoD commentary will be positive since the property has ramped nicely, albeit with high hold %. 

 

We’ve been positive on MPEL (see “BUY THE RAMP UP, SELL THE RAMP DOWN”, of 07/16/2009) since right after City of Dreams (CoD) tanked its first two weeks.  The stock is up 43% over the last 3 weeks on the strong CoD rebound.  We would caution investors that while we still feel the property is on a ramp up, the July numbers indicate that a lot of the July revenue bounce was hold related.

 

2Q09:

-For MPEL’s Q2, we’re at $217MM of revenues (4% below consensus) and a loss of $13MM of EBITDA (vs. Street at $2MM) for 2Q09.

-We estimate that Altira will report $172MM of net revenue and $8MM of EBITDA.

  • The drop off in EBITDA is due to low hold, which we estimate to be around 2.5% for the quarter. As a reminder, commissions at this property are based on rolling chip volumes (as opposed to revenue share) so hold will be low but the junket payout is still high.
  • We estimate fixed expenses at Altira are roughly $25MM per quarter

-Our CoD projection is net revenues of $21MM and an EBITDA loss of 16MM

  • We were surprised when the company told investors that fixed costs were $23MM for the month of June, based on the number of employees, we expected a cost of $15MM for the month (using our number the EBITDA loss would be 9MM)
  • Our understanding is that, in June, some of the junket commissions were variable and some were fixed

-We estimate that Mocha Slots will report $24.5MM of revenue and 6.4MM of EBITDA

-We also assume $9MM of overhead.  Excluding pre-opening expenses, we assume a loss a of 16 cents this quarter

 

Thoughts on July #’s and Melco’s pre-release

While CoD demonstrated impressive growth in the month of July, we would note that some of the growth is not sustainable and low “quality”. We estimate that about $37MM of revenues came from abnormally high hold.  Given the “fixed” commission caps at the property, 60% of this revenue directly flows down to EBITDA.

  • While we aren’t going to complain about the growth, we would have been a lot happier if it came on the “Mass” side, after all, City of Dreams is supposed to be a premium mass property. In July, 83% of the revenues came from VIP. 
  • Please see “JULY GOT HOTTER IN MACAU” which we put out yesterday, where we talk about July trends in further detail.

Despite noting that VIP hold was only a little above “normal” in July, hold was not normal at either property

  • CoD held very high, while Altira held pretty poorly
    • At CoD that extra hold drops to the bottom line, ex-taxes given the fixed 1.25% commission rate
    • We would also note that Altira experienced “abnormally” low hold in 6 of the 9 quarters since it opened
      • 4 of the 9 quarters had hold below 2.5%, while 2 had hold in the 2.6-2.7% range, despite this small fact Melco raised the “normal” range to 2.85% from 2.75%

So while trends in July were definitely positive, before we all high–five each other, we’d like to see the “money” in Mass and some sustainable hold data that we can put a multiple on.

 

Outlook

Over the long term we are bullish on Macau, as it is one of the few markets with excess demand.  Beijing will continue to control the market growth, but growth will be positive.  Same store Mass market growth, on the other hand, will be decidedly negative since Beijing’s target mid-single digit market growth will not offset 20%+ Mass table supply growth later this year and into 2010.  However, MPEL added a lot of the supply so they are less susceptible to market share losses.

Once the difficult credit comparisons are lapped in the 3Q09, we think the VIP market will begin to grow as well.  We also believe that there can be substantial upside if the government decides to lower the gaming tax rate and if the Yuan is pegged away from the dollar. 

 

Altira

Until growth resumes in the in VIP market, we believe that Altira’s EBITDA generation will be capped at about $20MM per quarter (subject to hold of course).  When the entire market begins to grow, we think that Altira may be able to eventually get to the $90- $100MM EBITDA range. We do not believe that the property will see $163MM of EBITDA again unless the tax rate gets cut in Macau.

 

City of Dreams

There is some confusion over what the fixed costs should be at this property once Hyatt opens.  Hopefully, management will provide some color on Thursday.  Based on the “$23MM” figure in June, management implied approximately $90MM per quarter in fixed costs once the Hyatt is fully opened.  However, based what we know the fixed costs to be at operating properties in Macau, our guess is that fixed costs will move closer to $60MM per quarter over time.  Based on this assumption, we think that CoD will be able to produce $175MM of EBITDA in 2010, and eventually ramping to the low to mid 200MM range.

MPEL 3Q09:  We’re at $70MM of EBITDA and $492MM of revenues, which is materially higher than the street, which probably hasn’t updated their numbers for high hold and flow-through


Cash For Clangers

"Not everything that is faced can be changed. But nothing can be changed until it is faced."
~ James Baldwin

Although the title of this note implies I may be teeing myself up for another rant about monkeys clanging for bananas, I’ll spare you my attempt at a zookeeper’s humor. I’m going to shift the Washington/Wall Street global macro debate this morning to a much more sophisticated place – a children’s television series.
 
Our subscribers in the UK will need no introduction here, but The Clangers are an iconic musical band of British characters who originated from the series of “Noggin” books. Yes, to all you Mom’s and Dad’s out there – you know Noggin! – it’s the network of Dora The World Peace Explorer and Sheila Bair’s best buds, Go Go Goldman Geithner.
 
Although the US government refuses to face the fiddle on this, the Buck continues to Burn. The US Dollar Index is trading down for the 5th consecutive week, hitting new year-to-date lows yet again this morning. Meanwhile, the Three Willfully Blind mice (Bernanke, Summers, Geithner) say nothing about the common man’s currency.
 
According to Wikipedia, “The Clangers looked similar to mice, anteaters and, from their pink colour, pigs. They wore clothes reminiscent of Roman armour and spoke in whistles”…  Cash for the Compromised and Conflicted Clangers who are debasing our Currency - ah the alliteration…
 
My submission is that our children will look back on this period in American history for what it is – amazing and ridiculous, all at the same time. We wake up to a Treasury Secretary clanging the alarm bells that Sheila Bair needs to fall in line and let the Federal Reserve oversee this entire gong show. We wake up to Larry Summers not saying a word about the currency his economic team is at least supposed to attempt to support. We need to wake up this morning and seriously smell the coffee here.
 
Get your local 200-day Moving Monkey to pull up a 38-year chart of the US Dollar (1971 is when Nixon abandoned the gold standard, officially making the US Dollar the world’s currency reserve whereby bankers have had the almighty powers to create limitless leverage). That clanging monkey will quickly come to realize that there is no support for the US Dollar other than the only reference point that remains – the 38-year LOW that we established last year BEFORE the US stock market crashed.
 
The Clangers would rather spend their time talking about another $2B in socialized aid for clunkers this morning than address this point. At the same time you have Wall Street analysts waiving off one of the bastions of what was once American corporate credibility (General Electric) having to pay $50M for fudging their numbers as a “small sum for GE.” Non-fictional stories do have inconvenient truths…
 
Think about that thing the Rolling Stone dude said was wrapped around the face of humanity for a second and think some more. The Clangers are running around this country accusing the Chinese of “manipulating” their numbers as they continue to crush whatever credibility we have left. Again, history has a hard core way of writing herself long after the impacts of these political decisions have been made. For everything that happens to this country between now and that, the best investment advice I can give you is this – pray.
 
Hope and prayer are a cornerstone of many people’s lives, but hope is not an investment process. If The Clangers think for one more second that the American public is stupid, this is only going to get ugly. This morning’s weekly read on US Consumer confidence (the ABC/Washington Post weekly poll) quantifies this point. As the US stock market makes daily and weekly highs, Obama’s approval ratings and the American consumer confidence that backs it continue to threaten to make new lows.
 
Politicians, Bankers, and Debtors are all under the same short term gun here – if the Clangers don’t Burn The Buck, not one of these three core constituencies gets paid. As those recipients of a crashing currency frolic in their “Roman armours and speak in whistles”, there are two big losers here: America’s Creditor (China) and her Common Man.
 
Part of yesterday’s intraday stock market recovery was based on the US Savings rate dropping from a 14-year high of 6.2% to 4.6%. This launched a squid onto the face of the super duper smart short seller of everything American consumer. Trust me, I shorted the US Consumer Discretionary ETF (XLY) a few days ago – I get the pain trade.
 
America’s New Reality remains: if the Clangers are going to give away cash and keep interest rates at this fictional storytelling level of ZERO, guess what? People won’t save!
 
If you always keep in mind who gets paid, your macro conclusions will be far less trivial than Go Go Geithner and Burning Buck Bernanke’s current Depression paralysis. The Bank of England’s chief, Mervyn King, is signaling to the global macro crowd that he is done with Quantitative Easing. This comes on the heels of the world’s most competent central banker, Glenn Stevens at the Reserve Bank of Australia, signaling that his next move is to take interest rates up.
 
This Noggin Horse has left the barn folks. Reflation’s Rotation is in motion. Come Q4, reported inflation will be upon us here in the USA, as will Ben Bernanke chasing his own Clanger tail right up the slope of the yield curve that continues up into the right.
 
My immediate term TRADE target for the SP500 is 1,006 and my downside support moves to a higher-high at 986.
 
Best of luck out there today,
KM


LONG ETFS

XLV– SPDR Healthcare Healthcare has really struggled over the course of the last four days giving us a reasonable re-entry point. Buying red.  

CAF – Morgan Stanley China Fund A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the wave of returning confidence among domestic Chinese investors fed by the stimulus package. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth.

QQQQ – PowerShares NASDAQ 100 With a pullback in the best looking US stock market index (Nasdaq) on 7/24, we bought Qs. The index includes companies with better balance sheets that don’t need as much financial leverage.

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.

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.

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

XLP – SPDR Consumer StaplesWith the US dollar looking to put in an immediate term low, this sector’s recent “theme” of being a weak USD beneficiary should dampen.

XLI – SPDR IndustrialsWe don’t want to be long financial leverage, which is baked into Industrials.

EWI – iShares ItalyItalian 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 and 8/3, which is finally overbought.

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 As Reflation morphs into inflation, the US Consumer Discretionary rally will run out of its short squeeze steam. We shorted XLY on 7/9, 7/22, and 8/3.

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

STANLEY HO IN INTENSIVE CARE AFTER BRAIN SURGERY scmp.com

Stanley Ho is being treated in intensive care following surgery to remove a blood clot.  A “business associate” is cited as saying that Mr. Ho had an accident at home and injured his head, but this has not been confirmed.  Family members continued to arrive at the hospital yesterday while the news also sent shares in his two flagship companies down.  Shun Tak Holdings fell 2.81% to HK$5.88 and SJM Holdings dropped by 4.54% to HK$3.15.

 


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Restaurants - The EARNINGS Surge

Everybody and their brother know that restaurants are facing very easy comparisons in 4Q09 and that the stocks should react favorably in that environment.  This is consensus thinking at its best.

 

To see the magnitude of the improvement in profitability, we added together the bottoms up reported/expected earnings for the FSR sector and charted the sequential quarterly improvement.  As seen in the chart below, earnings have gotten better each quarter since 3Q08 on a YOY basis with the declines moderating through 2Q09.  Based on current street estimates, investors are expecting nearly 10% EPS growth for the FSR group in 3Q09 and about 38% growth in 4Q09.

 

Restaurants - The EARNINGS Surge - FSR Quarterly Earnings

 

As I pointed out in an earlier post, investors are reacting differently to 2Q09 earnings reports relative to what we saw following 1Q09 results.  In both quarters, we have seen continued sales weakness combined with significant cost cutting translate into big earnings surprises.  Following 1Q09 earnings reports, we saw a big positive move in most restaurant stocks whereas post 2Q results, we have seen stocks move lower (please refer to my July 24 post titled “Restaurants – Earnings Fatigue” for more details).  

 

Part of this varying stock performance can be attributed to the changing trend in top-line numbers from 1Q09 to 2Q09.  In 1Q09, most of the FSR companies experienced a significant improvement in comparable sales growth from 4Q08. In 2Q09, although earnings continued to get sequentially better, sales deteriorated somewhat from the prior quarter and on a 2-year average basis did not look much better than 4Q08.

 

Restaurants - The EARNINGS Surge - SSS 2 year average

 

Even with most FSR stocks declining on the day following their reporting 2Q09 numbers, FSR stocks, on average, are up 13% in the last month and 2% in the last week.  As we get through 2Q earnings, investors are looking past recent sales trends to 2H09 and consensus has built in significant sequential improvement in profitability for the FSR sector.  My guess would be that most analysts have “positive” same-store sales growth built into their earnings models for 4Q09.

 

What if that does not happen?  We will learn more as we hear more from the companies that have yet to report 2Q earnings but the early read on 3Q is less than positive.  For most companies thus far, sales slowed sequentially through the second quarter and have remained soft into the early part of 3Q.  In 2Q, some companies blamed sales weakness in May and June on the fact that we were lapping the stimulus money from 2008.  This stimulus impact decreases going forward.  For reference, same-store sales growth for the FSR group as measured by Malcolm Knapp was +0.6% in May 2008, -1.9% in June 2008 and -3.9% in July 2008.  The current comparable sales outlook for July is similar to that of June and that is on easier comparisons, which points to continued deterioration in 2-year average trends. 

 

Based on recent company commentary about July, positive comparable sales growth in 4Q09 is not a given.  In this type of environment, easy comparisons are no longer meaningful so current earnings expectations may be aggressive.  That being said, the significant cost cutting initiatives for the FSR group were implemented largely in 1Q09 and will benefit earnings for the balance of the year.  This combined with the expected commodity deflation will help to offset sales misses.  But, as we are seeing following 2Q09’s better than expected earnings, restaurant stocks will react also to top-line trends as comparable sales growth is a significant indicator of a concept’s health.  And, I am not sure positive same-store sales growth is in the cards for the balance of the year. 

 

Also, I’m going out on a limb and saying that the “cash for clunkers” car program is a net negative for the restaurant industry.  If consumers are taking on more debt to buy a new car than there is less money for them to spend elsewhere like eating out.


Monkey Bars: SP500 Levels, Refreshed...

Make no mistake, I can swing from these bars as willingly as the next monkey. As long as the Buck Burns, you’re going to see plenty other primates chase one another right on top of this high wire however. It’s getting crowded up here. If the US Dollar flinches to the upside, everything priced in those dollars will fall down.

 

Across durations, this market is bullish – but bullish is as bullish does, and for the first time in 12 trading days I can quantify a slowdown in price momentum within a 25-50 basis point range. Remember, tops are processes, not points – all we can do is monitor the math, real-time, in order to give us signals.

 

This morning, my macro model was spitting out an immediate term resistance level of 1,004. After today’s fits and starts, the rally monkeys can’t get me to go much higher. In the chart below I have outlined 1,005 as my new line if immediate term TRADE resistance (dotted red line).

 

Immediate term TRADE support bumps up to 985 (dotted green line). When/if we selloff, that’s your new yellow banana.

 

Keith R. McCullough
Chief Executive Officer

 

Monkey Bars: SP500 Levels, Refreshed...  - monkey12

 


Picture of The Week: Timmy!

Poor Timmy is being re-regulated by the laws of his own gravity. He is who he is – a squirrel hunter on a mission to protect the legacy of De Investment Banking Club.

 

It’s not new news anymore, but the context of yesterday’s news that Timmy blew up on the ladies (Sheila Bair and Mary Shapiro) for not cooperating with the proposed rules of De Club is rather striking. Bair, in particular, doesn’t believe the Fed should have the almighty powers of everything oversight/risk management. Meanwhile Geithner wants to hurry through some reactive reforms and say he accomplished something before he gets fired.

 

Yes Timmy, President Obama is watching you – his approval ratings aren’t hitting new lows as the market hits new highs solely because of him.

 

The New Reality is that we have a Secretary of the US Treasury who has no qualms watching the Buck Burn (the US Dollar is hitting new lows again today). The long term credibility issues of the US Financial System continue to manifest in a currency price that’s marked-to-market every day. Market’s don’t lie; but some of these people really do.

 

Shame on you Timmy. You could learn a lot from Sheila Bair if you had it in you to listen while you hear.

KM

 

Keith R. McCullough
Chief Executive Officer
 

(picture courtesy of Getty Images)

Picture of The Week: Timmy! - timmy


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