GC put up another strong quarter last week.  The company finally seems to be executing on what should be a terrific business model.



For its Q2 reported last week, Great Canadian came in line with Street revenue but beat EBITDA expectations.  EBITDA was right in line with our estimate.  Given the subsequent move in the stock, investors clearly liked what they saw.  As we wrote about on June 30th in “TAKEAWAYS FROM A GREAT TRIP TO VANCOUVER” and “GC: GOOD CANADIAN GAMING” on April 4th, we have high hopes for GC heading into 2010.


After a long series of disappointments, this management team has demonstrated a clear ability to adapt to a difficult operating environment.  Over the last two quarters of solid performance, GC management has regained much credibility from an investor’s perspective.  Great Canadian achieved $10.2MM of y-o-y cost reductions in 2Q09 with an incremental $3.6MM of cost savings recognized in the quarter, compared to the $6.6MM of savings achieved in 1Q09.  GC believes that the majority of these cuts will be permanent.  We’ve heard that claim many times in our sectors but, as skeptical as we are generally, we believe that in this case there was a lot of fat to cut.  


The impact of the economic downturn is most visible in lower levels of slot play across the majority of GC’s properties.  GC is looking to refresh their slot product in an attempt to stimulate demand.  As a reminder, the British Columbia Lottery Corporation (BCLC) owns the slots and pays for their replacement.  There are also some new marketing initiatives involving the opening of the Canada Line for River Rock. The completion of the Canada Line, and slot installations at View Royal and Georgian Downs, will eliminate any disruption of construction at those properties.


View Royal will add 120 slots on August 18th and Georgian Downs will add 400 slots on August 26th, followed by an additional 150 slot additions in 2Q2010. Both of these facilities are operating at full capacity on the weekends:

  • We think that View Royal had an average win per day of approx $500
  • Georgian Downs had a win per day in excess of $600 (we think $625)


The Canada Line will begin operating the week of August 17th and GC will complete the parkade in September, and all renovations at its property will be finished by November (2 months ahead of schedule).



Management guided to 32% EBITDA margins going forward, which was above investor expectations. If GC can meet their margin targets they will continue to beat Street estimates, which we think are too low for the rest of the year.


Property level review:

-River Rock Casino revenues were $3.3MM below our estimate and EBITDA was $1.7MM below our estimate, primarily due to low hold on table games

  • Gaming revenues, including FDC funds, were 2.1MM below our projection
    • Table drop was slightly better than we expected, only down 2% y-o-y, however low hold of 18.3% versus normal hold at the property of 22% negatively impacted table win by $5MM
    • Slot coin in was weaker than we expected, down 16% versus our expectation of being down 10%
    • Property level expenses were $1.5MM below our expectations, down 22% y-o-y            

-Boulevard Casino revenues were $0.5MM lower than our expectations; however, EBITDA was a little better than we predicted due to deeper cost cuts

  • Gaming revenues, including FDC funds, were in line with our expectations with weakness in both table drop and slot coin in, offset by high hold on slots which helped win by $0.9MM

-Vancouver Island Casinos’ revenues and EBITDA came in line with our expectations

  • Gaming revenues, including FDC funds, were line with our expectations with weakness in both table drop and slot coin in, offset by high hold on slots which helped win by $0.6MM
  • The View Royal slots aren’t coming in until August vs our estimate of 2Q09

-BC Racinos revenues were in line with our expectations with weak racing revenues offsetting slightly better gaming revenues. EBITDA was $0.6MM higher than our estimate due to lower expenses.

  • Gaming revenues, including FDC funds, were ahead of our expectations by $0.4MM with strength in both table drop and slot coin in driven by the increased gaming capacity at Hastings




Visitor spending per-capita decreased to MOP1,527, a 5% year-over-year change for the second quarter.  Mainland visitors spent the most, spending MOP3,564 per capita, while those from Taiwan, South East Asia, and Hong Kong, spent MOP1,705, MOP1,684, and MOP1,112 respectively per capita. 


Compared with the second quarter of 2008, per-capita spending of tourists dropped by 12% to MOP2,088, while that of same-day visitors rose by 2% to MOP471.

Another AIG Outrage or Bargain? New CEO Gets $7M Salary

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MPEL's City of Dreams beaches a whale.



We're hearing that a jumbo jet belonging to the royal family of the United Arab Emirates was parked in the Macau airport this weekend.  We're pretty sure that a member(s) of the family was staying at MPEL's City of Dreams (CoD).  VIP volumes should look strong again at CoD in August and, hopefully, revenues will as well.


August started out strong and keeps getting stronger. Visitors are pouring into Macau from HK, Venetian may have had its best weekend ever, and the junkets are playing lucky.



Another set of positive nuggets emerging from Macau:

  • Huge weekend in Macau
  • Hong Kong providing a lot of the visitation
  • August has been strong thus far but is getting even stronger
  • Venetian may have had its best weekend ever
  • Junkets holding very high so far in August


Our sources in Macau indicate that visitation this weekend was off the charts, on top of an already strong August.  The casino floors were packed all weekend.  The event calendar was strong - as usual recently - including Linkin Park performing at Venetian.  Venetian may have had its best weekend ever.  It seems that incremental visitation is coming from Hong Kong residents, who don't face visa restrictions, and mainland Chinese tour groups.  Anecdotally, August VIP volume was solid but more importantly, junket hold has been through the ceiling.  Volume may have been boosted by the visit royal family from United Arab Emirates as one of their jumbo jets was parked at the airport.  


Obviously, the recent surge in volume is a big positive for LVS, MPEL, and WYNN.  The August numbers look even better considering that August of 2008 was a very strong month (see chart below).  Comps ease considerably beginning in September which should make it easy for Macau to continue the positive momentum.




The annualized 3.7% Q2 GDP growth level may have lifted the world’s second largest economy out of recession according to technical definitions, but if the resulting 3% Nikkei selloff is any indication domestic investors don’t see any catalyst for growth on the horizon even if a bottom has been reached.  


A quick scan of the Cabinet office data shows that government spending has been a primary, if not the sole, driving factor in the rebound. In the chart below the 4Q moving average of estimated public demand is juxtaposed against the 4Q MA annualized GDP rate: While public spending has not yet reflated to the levels seen at the peak during the start of the decade, the trend is clear. With Public debt reaching nearly 200% of 2008 GDP, any additional spending (and keep in mind that a victory by the opposition Democratic Party at month end is expected to INCREASE government spending programs) adds crushing incremental principal to a balance that is only manageable due its zero rate/domestic creditor construct.




We have remained bearish on future prospects for the Japanese economy since opening our doors, and I have often compared it to a man treading water with a bowling ball in his hands. We are currently short the Japanese equity market via the EWJ ETF, but we reserve the right to opportunistically book profits as we head into the final phase of the election: even in a country with as many problems as Japan, optimistic euphoria can take hold when a new government takes office with a fresh mandate.  If we take history as our guide however, the euphoria won’t last if the new boss can't deliver.



Andrew Barber


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