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LEISURE LETTER (08/12/2014)

Tickers: 8198.HK

EVENTS

  •  Aug 12:
    • Stations Casino 430pm:  
    • HMIN 2Q 9pm: , pw HOME INNS
  • Aug 14:
    • GENTING SINGAPORE 2Q earnings
    • Revel Auction Proceedings

COMPANY NEWS

8198:HK – MelcoLot Ltd awarded Lawrence Ho and seven directors share options in the firm.  Ho was awarded 4,384,000 MelcoLot shares at the exercise price of HKD1.14 per share, which was also the closing price of the shares on Monday.  Seven directors shared options on a further 67,744,000 shares. MelcoLot closed at HKD1.14 per share today.  MelcoLot Ltd is a 50/50 investor in a joint venture (BCN Integrated Resorts 2 SA) with Veremonte Espana SL to operate a casino at BCN World.

Takeaway: Laurence Ho's new growth vehicle emerges.  

INDUSTRY NEWS

Japan Gaming Expansion(Bloomberg) USJ Co, the operators of Osaka's Universal Studios Japan is holding partnership discussions with MGM Resorts International, Caesars Entertainment and Genting Bhd for a possible joing bid to operate a casino resort. 

Takeaway: As a Gaijin, if you can't beat 'em, join 'em. 

 

South Korea Gaming Expansion – South Korea's Ministry of Culture, Sports and Tourism South Korea will reduce regulatory barriers for the development of integrated resorts that contain gambling facilities. The country is hoping to defend against potential competition from Japan, which may open to casino gambling by 2020, coinciding with the Summer Olympics in Tokyo.  South Korea may has processes in place by the first half of 2015, including a bidding system for awarding casino licenses. 

Takeaway:  South Korea is trying to capture its fair share of foreigners gaming revenue.

 

Revel Auction Likely – According to Philadelphia's NBC 10, no "qualified bids" were received ahead of Revel's scheduled auction.  As a result, Revel's Board of Directors will meet to determine the next steps and whether or not the property will close.  CZR CEO Gary Loveman also indicated Revel has not received any qualified bidders - even at the minimum price.

Takeaway: Once hailed as the savior and turnaround for Atlantic City, Revel is quickly becoming a white elephant.

 

New Jersey Casino Closures – The New Jersey Casino Control Commission said it cannot force owners (Showboat, Trump Plaza and potentially Revel) to require the casinos to remain open past their expected closing dates. 

Takeaway: Capitalism and Laissez-faire economics at their best.

 

Upstate New York Casinos (NY Times) Criticism is mounting over Governor Cuomo's plan to award up to four additional casino licenses in upstate New York. Despite hopes to increase employment and taxes, critics argue the Governor's plan is 15 years too late as the Northeastern States are already suffering the effects of fierce competition as well as potentially saturation.

Takeaway: Built it and the gamblers may not come.

MACRO

Singapore Economy - during Q2 2014, Singapore GDP unexpectedly increased at a meager 0.1% annualized rate versus -0.8% forecast and +1.8% for Q1 2014. Manufacturing contracted 15.2% in Q2 2014 versus the prior quarter. Services rose 4.5% while construction increased 0.3% also during Q2 2014. 

Takeaway:  Flat growth in 2Q

 

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.


MACAU FLAT AS EXPECTED

Full month GGR projected to be flat to slightly up.

 

 

Flattish growth in average daily table revenues (ADTR) is in line with our expectations. We would note that the ADTR of the first 11 days summed to HK$10,075 million, EXACTLY the total of the first 11 days of last year.  Table revenues averaged HK$916 million per day through the first 11 days of August – flat with the comparable period last year but up seasonally from July’s weak ADTR.

 

 MACAU FLAT AS EXPECTED - 1

 

Sources indicate that Mass revenues are trending in the low-mid 20s mtd and our full month projection stands at 22% mass growth.  The VIP picture remains cloudy with volumes down significantly on normal hold.  For the full month of August, we are projecting gross gaming revenue (GGR) growth of flat to slightly positive.

 

Our sources confirm the competitive pressures on the premium mass market remains a risk going forward, particularly with the Mass slowdown.  While our Mass Decelerating theme, first espoused in June, remains intact, August's likely Mass bounce back should be judged more on the weakness in July rather than a reversal of trend.  We expect high mid to high teens YoY Mass growth beyond August.

 

For the concessionaires, LVS leads the way with high VIP hold driving market share well above recent trend, completely at the expense of SJM.  All other operators are at slightly above trend shares. LVS has consistently been lucky this year while MPEL has been much less fortunate in the past 6 months.  CoD is holding poorly again in August on lower volumes we think. 

 

MACAU FLAT AS EXPECTED - 2


BRIGHT SPOT IN INDIA

Client Talking Points

INDIA

BSE Sensex up another +0.8% overnight to +23.3% year-to-date, leading what was a low volatility session for Eastern Equities. We did a full day in Boston yesterday and the bull case for Indian stocks remains under-owned (India passing public REIT legislation this morning too).

DAX

The DAX fails at its first line of resistance (@Hedgeye TRADE resistance of 9232) and has no support to 8848 – this morning’s ZEW reading was one of the worst sequential #GrowthSlowing data points (in the world) of the year – Putin will enjoy that.

OIL

What Vlad (Putin) won’t enjoy is that both Brent and WTI continue to breakdown (both are undergoing bullish-to-bearish TREND reversals @Hedgeye). WTI is down -0.7% this morning vs Gold and Copper in the green (metals continue to diverge bullishly vs Energy commodities).

Asset Allocation

CASH 46% US EQUITIES 0%
INTL EQUITIES 14% COMMODITIES 6%
FIXED INCOME 26% INTL CURRENCIES 8%

Top Long Ideas

Company Ticker Sector Duration
HOLX

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.

OC

Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.

LM

Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.

Three for the Road

TWEET OF THE DAY

EUROPE: every major European Equity market just failed @Hedgeye TRADE lines of resistance (again)

@KeithMcCullough

QUOTE OF THE DAY

Nobody's a natural. You work hard to get good and then work to get better. It's hard to stay on top.

-Paul Coffey

STAT OF THE DAY

Consumption trends in the natural channel remain very strong, growing at approximately 9% in the quarter. Organic wheat prices remain at historically high levels, up around 40%.


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

CHART OF THE DAY: The Comp Table $KMI Didn't Publish

CHART OF THE DAY: The Comp Table $KMI Didn't Publish - COD KMI Comp Table

 

Far be it from us to question someone who yesterday made more money then we will perhaps ever make, but we do think it is important to consider KMI’s risk profile in the context of some basic financial metrics.


The Portals of Discovery

"Mistakes are the portals of discovery."

- James Joyce

 

There is nothing like a mistake to enhance our learning.  At times, defining a mistake can be a nuanced exercise.  For stock market operators, though, a mistake is very easy to define.  Simply: if a stock price goes against you meaningfully and over a sustainable period, you are wrong.

 

The most successful investors are often those investors that are effective at both learning from and minimizing their mistakes.  Many successful portfolio managers implement a stop loss so as to ensure that their mistakes are minimized. Others buy value plays with little perceived downside to minimize mistakes.

 

About a year ago, we introduced Hedgeye’s Best Idea list.  The idea of the list was to focus our research team on developing deep dive investment ideas with asymmetric reward characteristics. Overall, the list has had some really strong performers.  Not surprisingly we’ve also had some stocks that have not performed very well.  Due to a light global macro calendar this morning, we are going to do a deep dive on one of our very public “mistakes”.

 

Back to the Global Macro Grind . . .

 

Yesterday, one of our Best Ideas, Short Kinder Morgan Energy Partners (KMP), went against us and decidedly so.   Rich Kinder, the CEO and Company’s namesake, decided to consolidate the group of companies that existed under the Kinder Morgan umbrella.  In the announced deal, KMI, the C-Corp GP, will acquired its two MLPs, KMP/KMR and EPB in a ~$71B transaction comprised of 56% KMI equity, 38% assumed debt, and 6% cash.  

 

On one hand, it is worth applauding Kinder for this move.  After a long and successful run, we thought he was out of tricks, but he wasn’t. On the other hand, in implementing this dramatic corporate restructuring, Kinder readily acknowledged our thesis, which was that transparency was limited, cost of capital was very high, and growth options were limited for the Kinder Morgan complex.  And by bidding for our favored short of the group, KMP, at premium, he also marked the idea against us by about 15%.

 

It doesn’t matter that we’ve had some great calls on other MLPS, such as Linn Energy (LNCO) and Boardwalk Partners (BWP), on KMP we are now seriously in the red.  As always though, the question is what to do with the stock from here (even if you have been long and taking the other side of our trade it is worth considering).  As my colleague Kevin Kaiser writes:

 

“On 2014 Pro Forma (“PF”) metrics, we have PF KMI valued at 17x EV/EBITDA, 24x EV/EBIT, 27x market cap/pre-tax earnings. If we strip out the E&P segment at a $5.5B valuation ($1.0B of EBITDA x 5.5x multiple), PF KMI Midstream is valued at 19x EV/EBITDA. On an absolute basis, the valuation multiples are very high, in our opinion (19x EBITDA for a capital intensive, fully-taxable, highly-leveraged business), but even relative to peers, PF KMI seems mispriced here. EPD – which is not subject to federal income taxes – is valued at 17x EV/EBITDA, two EBITDA turns below PF KMI Midstream”

 

Combined with this egregious valuation is the more interesting point of KMI’s ability (or inability) to pay out its massive distribution going forward.  As Kevin also writes:

 

“On a cash flow basis, assuming a full tax shield, PF KMI will generate ~$5.3B/year in operating cash flow. Run-rate total CapEx is ~$4.1B/year (excluding Trans Mountain), putting run-rate, pre-tax Free Cash Flow at $1.2B, or $0.56 per PF KMI share. PF KMI is trading at a 1.4% pre-tax FCF yield. Its annual distribution burden will be $4.3B starting in 2015, putting its annual funding gap around $3.1B. These are rough metrics, but a good guide for how much capital PF KMI will need to raise on a go-forward basis.”

 

In the Early Look today, we’ve included two charts.  The first chart is a comp table that Kinder Morgan showed in their presentation yesterday comparing KMI against blue chip companies with growing dividends.  Included in the table are companies like McDonald’s, Cisco, Altria and so on.  The title of the table is quite explicit, “KMI Compares Favorable to its Mid-Stream Energy Peers and S&P 500 High Dividend Companies.”  Since the Company is guiding us to 10% dividend growth and a yield of 4.5%, on these basic metrics, KMI does look great!  But beauty, as always, is in the eye of the beholder. 

The Portals of Discovery - KMI Table

 

In the second chart in today’s note, we’ve included, “The Comp Table KMI Didn’t Publish.”  In this table we look at payout ratios, valuation metrics, and leverage ratios.  Far be it from us to question someone who yesterday made more money then we will perhaps every make, but we do think it is important to consider KMI’s risk profile in the context of some basic financial metrics.

 

The Portals of Discovery - COD KMI Comp Table

 

Now perhaps we’ve lost all credibility because we didn’t see this corporate restructuring coming (we thought Kinder Morgan was in a proverbial box), but if you are contemplating owning KMI here, you do need to take the Company’s advice and look at your options, like S&P 500 high dividend companies. 

 

On a basic level, would you rather own a company like Cisco that grows its dividend at ~7.9%, trades at ~6.0x EBITDA, and has $30 billion in net cash, or a company with the financial profile of KMI that trades ~19.0x EV/EBITDA, has debt/EBITDA at 5.5x, and has a dividend payout ratio of 130 – 200%.  Perhaps we are just simpletons, but to us the answer is obvious.

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research


Retail Callouts (8/12): ICSC Sales, AMZN, WMT, TGT, BBY

Takeaway: ICSC Sales decelerate, but setup through Oct is good as compares ease – IF consumer holds up. AMZN picking the wrong fight w the wrong guy.

EVENTS TO WATCH

 

Tuesday (8/5)

KATE - Earnings Call: 10:00am

FOSL - Earnings Call: 4:30pm

 

Wednesday (8/6)

M - Earnings Call: 10:30am

 

Thursday (8/7)

WMT - Earnings Call: 7:00am

KSS - Earnings Call: 8:30am

JCP - Earnings Call: 4:30pm

JWN - Earnings Call 4:45pm

 

 

ECONOMIC DATA

 

Takeaway: This week's 3.2% is a respectable number in its own right. Unfortunately we're coming off a seven-week run of stellar growth -- with most weeks coming in above 4%. Important to keep in mind that sales growth last year took a notable dive in the back half of August and remained weak through most of October. The point is that assuming all else is equal with the consumer (which might not be a safe bet) we should see respectable readings in this index for the next 10 weeks. If they're not, it won't be a good indicator of the consumer's health.

 

Retail Callouts (8/12): ICSC Sales, AMZN, WMT, TGT, BBY - chart1 8 12 2014

 

Retail Callouts (8/12): ICSC Sales, AMZN, WMT, TGT, BBY - chart2 8 12 2014

 

  

COMPANY NEWS

 

AMZN, WMT, BBY - Disney-Amazon Dispute Concerns More Than Pricing

(http://online.wsj.com/articles/disney-amazon-dispute-concerns-more-than-pricing-1407798288)

 

  • "A particular concern of Amazon, those people noted, is that Wal-Mart Stores Inc., Best Buy Co. and other brick-and-mortar retailers sometimes charge less than the wholesale price for a new disc to lure people into stores so that they will purchase other, more profitable items. Amazon often tries to match those prices, but doesn't reap the benefits of drawing customers into a physical showroom."
  • "As a result, the online retailer has asked studios to help make up for losses in those situations, the people said."
  • "Amazon has engaged in tough negotiations with Hollywood studios in the past, but until the Warner Bros. dust-up, it doesn't appear to have previously impeded consumers' ability to preorder discs."

 

Takeaway: We respect the power of the Amazon business model as much as even the biggest Bull.  But is Bezos serious on this one? He wants margin support (basically markdown money) from studios and publishers simply to offset the fact that WalMart, Target and Best Buy use media as a loss leader to driver traffic into the store, and capitalize on purchases in other categories?  Sorry Jeff, but that's where a brick and mortar business model actually has an advantage versus being 100% virtual. This is like if WalMart were to complain that it has to pay Associate Comp, Rent, and Utilities. Something tells us that AMZN is just going to have to suck it up and live with this one.  

 

 

OTHER NEWS


WWW - Two Million Moms Love Stride Rite®

(http://www.marketwired.com/press-release/two-million-moms-love-stride-riter-nasdaq-www-1937270.htm)

 

  •  "Stride Rite®, the best place to shop for kid's shoes, today announced a significant milestone for Stride Rite® Rewards, hitting the two million member mark in just 18 months."
  • "The latest enhancement to the program is the introduction of the new Stride Rite Rewards App. The app enables customers to better manage their account and leverage all the benefits of the program whether they are in-store or online, just in time for the back-to-school season. The app is now available for download on iTunes and Google play."

 

SHLD, Kmart - Sears Holdings Names Alasdair James As Kmart's President And Chief Member Officer

(http://searsholdings.mediaroom.com/index.php?s=16310&item=137303)

 

  • "Sears Holdings announced today that Alasdair James has joined the company as President and Chief Member Officer for the Kmart business. In this role, Mr. James will be responsible for driving the Kmart format strategy, managing the Kmart P&L and aligning merchandise, marketing, pricing and selling with the needs and wants of Shop Your Way® members."
  • "Since 2007, Mr. James held roles of increasing responsibility with Tesco, where he most recently served as the commercial director for the company's global business unit."

 

Record imports expected in August

(http://www.retailingtoday.com/article/record-imports-expected-august)

 

  • "Import volume at major U.S. container ports is expected to hit an all-time record in August as retailers concerned about the lack of a West Coast longshoremen’s contract rush to bring holiday season merchandise into the country, according to the monthly Global Port Tracker report released today by the National Retail Federation and Hackett Associates."

 

NYC’s first enclosed mall in 40 years officially opens

(http://www.chainstoreage.com/article/nyc%E2%80%99s-first-enclosed-mall-40-years-officially-opens?ad=news)

 

  • "The Mall at Bay Plaza, New York City’s first enclosed fashion mall in over 40 years, officially opens on Aug. 14."
  • "Located on Baychester Avenue in the Bronx, the 780,000-sq.-ft., three-level center will be the largest shopping mall in the city. It will include a new, ground-up Macy’s and an existing J.C. Penney as the anchor tenants. Over 100 retail shops have been constructed, many of which will operate in the Bronx for the first time such as H&M, Michael Kors, Ulta, Victoria Secret, and Kay Jewelers. Four new restaurants, a new gym and AMC Theater will be featured tenants as well."

 

DEST - Anthony Romano Appointed As Destination Maternity's Chief Executive Officer

(http://investor.destinationmaternity.com/phoenix.zhtml?c=72323&p=irol-newsArticle&ID=1957415&highlight=)

 

  • "Destination Maternity Corporation, the world's leading maternity apparel retailer, today announced that Ed Krell is stepping down as the Company's chief executive officer and a member of its board of directors. Anthony M. Romano will become the Company's chief executive officer and be appointed to its Board of Directors, effective immediately."

 

GME - GameStop streamlines trade-in pricing policy

(http://www.retailingtoday.com/article/gamestop-streamlines-trade-pricing-policy)

 

  • "GameStop plans to offer customers more for their pre-owned video games with a new, streamlined trade-in program that will launch nationwide August 18."
  • "The program will feature four price-points depending on whether a customer chooses cash or in-store credit for their items and whether they are a PowerUp Rewards Pro member."

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