LEISURE LETTER (07/07/2014)

Tickers: ALL.AX, LVS, ISLE, MAR, RCL, CCL

EVENTS

  • July 15-17 Pre-RCL earnings Hedgeye Cruise pricing survey

COMPANY NEWS

ALL: AX  Aristocrat Leisure – announced two acquisitions.

  1. Acquired U.S.-based Paltronics Inc, including intellectual property relating to products. Paltronics is a leading supplier of jackpot managers and display systems for casino games - including applications for in-game media windows and bonusing applications for electronic gaming machines, video poker machines and table games.  Paltronics jackpot controllers have been deployed in Aristocrat’s linked progressive products, including its Hyperlink and Xtreme Mystery.
  2. Acquired Video Gaming Technologies, Inc. for total consideration of US$1,283m in cash, subject to certain adjustments and regulatory approvals.  Privately owned VGT is a provider of gaming machines for the leased tribal gaming market in North America.  VGT had an installed base of approximately 20,200 leased machines at the end of last year.  After the acquisition, Aristocrat will have an estimated market share of 31% in the North American tribal leased machine market versus the current 5% well ahead of second-placed IGT, which has a market share of 22%, according to a presentation from Aristocrat.

Takeaway:  Solid acquisitiona as Aristocrat continues to make ground in the North American market.  Aristocrat is unlikely to be a suitor for IGT.

27:HK Galaxy Entertainment Group – Francis Lui sees revenue growing by 10% or more Macau Business
Galaxy's vice-chairman, Francis Lui Yiu Tung, says he expects annual growth of at least 10% in his company’s gross gaming revenue in Macau this year.  Lui also told reporters that he expected the company’s annual revenue from VIP gaming to increase by less than 10% this year.

Takeaway:  Galaxy has been outstanding, particularly on the VIP side.  YTD, GGR at Galaxy is up 24% YoY.

LVS & 1928:HK – announced a “special award” to over 27,000 full time employees who are manager grade and below. The award, equal to one month’s salary, will be paid July 31. In addition, this benefit will also be paid each year together with the July payroll until 2017.

Takeaway: Adelson's response to Wynn Macau's Employee Ownership Scheme.

ISLE – City of Bettendorf approves ISLE's new land-based casino.  The new casino on-land will be around 70,000 square feet. This is about the same size as the current boat.

Takeaway: Construction is expected to begin within 30 days 

MAR – Atlantis Paradise Island in Nassau, Bahamas, will join the Autograph Collection, Marriott International's portfolio of more than 60 independent hotels.

The 3,400-room Atlantis will be Autograph's first resort in the Bahamas and will be the largest hotel in the collection. Atlantis will have access to Marriott International's global sales and reservation system as well as the Marriott Rewards program. Atlantis, owned by Brookfield Asset Management and independently managed, will join the Autograph Collection this autumn. 

Takeaway: An interesting addition to the Autograph collection. Atlantis has experienced operating challenges giving up ADR to drive higher occupancy since the global financial crisis and recession of 2008.

RCL– Celebrity Cruise Ship Departure Delayed due to Mechanical Issue; Skips Port Stop Cruise Critic

A spokesperson from Celebrity said: "Celebrity Reflection's stay in Civitavecchia, Italy was extended in order to resolve a technical issue. The repairs have been completed and the ship departed Civitavecchia at approximately 3:00 p.m. local time. The ship is currently sailing to Athens (Pireaus), Greece, and is expected to arrive on Monday, July 7, as originally scheduled."  Passengers received an unspecified amount of onboard credit as a gesture of good will from the cruise line

Takeaway:  Another Celebrity incident

Celebrity offers agents the chance to earn a cruise TTG Digital

The “Sell and Sail” promotion will enable any agent who makes five Celebrity Eclipse bookings to earn a future cruise certificate for the line worth £1,000.

Agents who make 10 bookings will enjoy £2,000 worth Celebrity Cruises holidays, with £5,000 up for grabs for those who make a 25 bookings.  The incentive applies to all Celebrity Eclipse 2014 sailings between August 16 and November 8, which is the end of the ship’s Southampton-based season.

Hurricane Arthur 

CCL - Forces Cruise Ship Itinerary Change Cruise Critic

Hurricane Arthur has forced Carnival Splendor to call in at Bermuda rather than St. John. 

 

RCL - canceled stops at CocoCay Cruise Critic

Royal Caribbean canceled stops at its private island of CocoCay, affecting Majesty of the Seas, Enchantment of the Seas, and Grandeur of the Seas. 

 Takeaway:  Doesn't look like Arthur made much impact

INDUSTRY NEWS

Macau VIP Gaming & Smoking Ban (Macau Business Daily) The DICJ has defined the characteristics that a VIP gaming room should have if a casino operator wishes to allow smoking in a VIP gaming room including: 1) “separate areas” or isolate them with “physical or architectural barriers” from the main casino; 2) gamblers using VIP rooms where smoking is allowed must have special passes issued by the casino, and 3) the chips used in such rooms must be different from the chips used elsewhere in the casino.

Takeaway: New regulator pronouncements aimed at "clearing the air".

Egypt Fiscal Reforms, Negative for Cruise Industry – Egypt raised taxes on many consumer products over the weekend, including cigarettes, alcohol, natural gas and gasoline as part of a series of measures to curb the budget deficit and reform the economy as Egypt is trying to reduce its deficit to 10% of gross domestic product in the next fiscal year, from an expected shortfall of 12% in 2013/14.  A Ministry of Tourism official predicts a 100% price rise for cruise services due to the diesel price hike, raised Friday night from EGP 1.10 to EGP 1.8 per liter. The tourism industry consumes 22% of total diesel output in Egypt, amounting to 12.4m tonnes per year, according to a study by the Federation of Egyptian Industries.

Takeaway:  Higher prices for the wrong reason.

Russia Gaming Expansion – Russia’s State Duma passed a new law on Friday, July 4, allowing the establishment of gambling zones in Crimea and Sochi, Russian. Russian legislators inserted a clause into the bill during its second reading that allows for the creation of gambling facilities in Sochi. The bill stipulates gambling venues can only be established in Olympic facilities that were financed by private investors while the bill gives Crimean authorities full jurisdiction over defining the location and boundaries of gambling areas. Russia currently has one gambling zone in operation – on the border between Krasnodar Territory and Rostov region – and three more are being built in Kaliningrad, Altai and Primorsky regions.

Takeaway: Potentially more competition for European gamblers.


Japan Gaming Expansion (Kyoto News) The operator of Universal Studios Japan in Osaka is considering bidding for a license to operate a casino complex in the western Japanese city once gambling regulations are relaxed.  USJ Co., which operates the theme park featuring popular Hollywood movies, is likely to team up with other parties interested in the new business and lead a consortium.  An amusement complex with a casino and a theme park may be placed on an artificial island known as Yumeshima, some 3 kilometers away from USJ, according to a blueprint set by local authorities.

Takeaway: A new and previously unannounced competitor with a strong understanding of local market demographics.

Atlantic City's Gaming Promotions (Chicago Daily Herald) Promotions such as free stays and meals aren't translating into the spending boom that Atlantic City needs, 20 months from the five-year deadline that Governor Chris Christie set for a turnaround. Freebies totaled 26% of gross revenue for casino owners last year as compared to other North American gambling operators averaged 6%.

Takeaway: Operators are attempting to "buy" the business but even the high rate of promotions is not sufficient life support for GGR.

New Jersey Gaming – New Jersey Senate President Steve Sweeney wants a November 2015 referendum asking New Jersey voters to expand gaming beyond Atlantic City.  Recently, Sen. Paul Sarno introduced a bill to allow a casino at the Meadowlands near New York City with a tax on Meadowlands GGR to support the Casino Reinvestment Development Authority.

Takeaway: Finally some rationality from New Jersey and the realization that the expansion of gaming across the northeast is a permanent headwind to Atlantic City and New Jersey GGR. 

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.