LEISURE LETTER (07/16/2014)

Tickers: IGT, RLJ, NCLH


  • July 16:  LVS 2Q call (430pm)
  • July 23:  TRIP 2Q call (430pm)
  • July 24:  
    • WYN 2Q call (830am)
    • PNK 2Q call (9am)
    • LHO 2Q call (930am)
    • PENN 2Q call (10am)
    • HOT 2Q call (1030am)
  • July 25:
    • PEB 2Q call (9am)


IGT – announced a definitive merger agreement with GTECH S.p.A. for the acquisition of IGT by GTECH for $6.4 billion, comprised of $4.7 billion in cash and stock and the assumption of $1.7 billion in net debt -- for approximately $18.25/share in cash and stock.  IGT and GTECH will combine under a newly formed holding company organized in the United Kingdom (NewCo).  IGT shareholders will receive an aggregate value of $18.25 per IGT share in a combination of $13.69 in cash plus 0.1819 ordinary shares of NewCo for each share of IGT common stock.  GTECH shareholders will exchange each of their existing GTECH shares for one (1) newly issued NewCo share.  The transaction may close in Q1 2015 or Q2 2015.

Takeaway: Despite a less than stellar history and career at IGT, CEO Patti Hart catches a golden parachute...the $18.25/share is slightly higher than the $18.13/share closing price on December 31, 2013 versus Hedgeye's $18-22/share fair value on a takeout basis. 


102:HK & 200.HK (GGR Asia) Investors in a casino project in Vladivostok, Primorye in the Russian Far East will invest an additional US$137.7 million to the development. The Russian casino resort complex, located near the port city of Vladivostok, is expected to have 119 hotel rooms, 800 slot machines, 25 VIP gaming tables, 15 mass market baccarat tables and 25 mass market tables providing other table games. The casino is targeted to open in the last quarter of this year.  Summit Ascent Russia Ltd, a British Virgin Islands firm wholly owned by Mr Ho’s firm Summit Ascent Holdings Ltd, will invest an additional US$82.6 million. Firich Investment Ltd, a Mauritius-incorporated firm, will pay a further US$27.5 million, while Elegant City Group Ltd, a BVI entity, will pay US$20.7 million, and New Crescent Investments Ltd, a BVI firm that is a wholly-owned subsidiary of Melco International Development Ltd, a Hong Kong-listed firm chaired by Mr Ho and a partner in his Macau casino investments, will pay US$6.9 million 

Takeaway: More competition coming in Q4 2014.


RLJ – acquired the 194-room Hyatt Atlanta Midtown located in Atlanta, GA for a purchase price of $49.5M or approximately $255,000/key and the purchase price represents a forward capitalization rate of abuot 8.0% on the Hotel’s projected 2015 net operating income. 


NCLH(Cruise Critic) Norwegian Cruise Line to announce smoking ban on ship balconies, effective November.


Macau table/slot count in 2Q 2014 – (DICJ) Tables increased to 5,710 in Q2 2014 from 5,700 in Q1 2014.  Slot count fell from 13,232 to 12,895 in Q2.

Takeaway:  Lowest slot count since Q1 2009 


Macau Slot Machine Issues (SCMP) Casinos have reportedly refused 133 gamblers their winnings, claiming that their wins are the result of "mechanical errors" - a practice critics say will deal a blow to Macau's tourism image. The Macau government has brushed off calls for tighter casino controls, amid accusations that operators in the world's gaming capital are unfairly withholding prize money from winners.  Legislator Au Kam-san argued that gamblers could not know if a machine was technically reliable before playing it. Au called for a rewriting of laws governing the circumstances in which casinos could refuse payment.

Takeaway: Based on our read, this story seems overblown, table play is what matters in Macau and total slot count in Macau is now below 13,000 units. 


Macau Grand Prix – Macau junket operator SunCity Group is the official sponsor of this year’s Macau Grand Prix.  The junket operator is also the title sponsor for the Formula 3 Macau Grand Prix, the Macau Motorcycle Grand Prix and the FIA World Touring Car Championship 2014 season finale. Suncity Group is committing MOP16.6 million (US$2.08 million) for the 61st Macau Grand Prix which runs runs between November 13 and 16.

Takeaway: Suncity Group shining brightly in all aspects and leading the way at the Grand Prix.  


Jeju Casino Dispute (follow-up from July 2) – Casino operators on the South Korean island of Jeju are concerned that their image may be tarnished by a case in which the management of one casino appears to have falsely accused four Chinese customers of cheating in order to refuse a payout of 1.1 billion won (US$1.1 million) in May.  On May 15, a Chinese national surnamed Lu and his three friends went to the local police, where they reported that the Seogwipo casino on May 11 had refused to cash out chips worth 1.1 billion won and had also threatened them. The four subsequently brought a civil suit against the casino, which filed a countersuit claiming the group had cheated at gambling with the help of one of its staff. The casino employee concerned, however, later admitted giving false testimony at his manager's instruction and the casino was unable to produce evidence to substantiate its case. 

Takeaway: A negative headline as the country begins to consider a locals gaming expansion.

Saipan Casino License Award – Best Sunshine International was awarded an exclusive 40-year casino license for Saipan and the Company is planning a $2 billion casino with the required 2,000 hotel rooms.  Best Sunshine is a subsidiary of Imperial Pacific, a Hang Sang listed firm. 

Takeaway: We remain very skeptical...With current annual visitation of approximately 450,000 (comprised of 40% from Japan and 20% from China), that's only a small percentage of the total 730,000 room nights at a 2,000 room hotel. We remain skeptical of the casino's profitability and viability given the isolated location.  Additional airlift is required to ensure casino visitation.


Australia Hotel Boom – More than 40 developers are competing to turn two 100-year-old government office buildings into hotel rooms as demand soars. Additionally, developers including China’s Greenland Holding Group Co. and Singapore-based M&L Hospitality Trust plan to add more than 5,300 rooms over the next five years. If they are completed, the city’s supply of rooms will rise by about 20% by the end of the decade, the most since Australia’s largest city hosted the Olympics in 2000, according to broker CBRE Group Inc.’s hotels division. Foreign visitors to Australia are growing at the fastest pace since the Sydney Olympics, sending occupancies in Sydney to a record and the highest in Asia after Hong Kong and Tokyo. Sydney’s average hotel occupancy is set to reach 88.8% by the end of 2016, the highest since at least 2000, according to economics advisory firm Deloitte Access Economics Pty.

Takeaway: Strong Aussie tourism could benefit Aussie casinos.


China GDP – Q2 GDP +7.5% year/year vs consensus +7.4% and +7.4% in Q1


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.

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