Galaxy in line with Street and us for Q2. More chatter regarding higher rebates in the QA and while Galaxy wouldn't deny it is happening in the market, they are not participating.




  • Headwinds: soft landing in China, World Cup and poor VIP luck negatively impacted results by HKD225 million
  • Pursuing opportunities beyond Macau
  • Additional special dividend in October 2014 of HKD0.45/share 
  • GGR +16% YoY, market leading VIP +15% revenue growth, hold 2.9%, bad luck HKD225 million
  • Mass +16% YoY
  • Management is focused on balancing margin against achieving the highest possible absolute HKD EBITDA
  • Manage table mix every day

Galaxy Macau

  • EBITDA up due to VIP strength, VIP +40%, hold 3.16%; lower VIP hold given historical property performance had a HK$75m impact on EBITDA
  • Mass +19% despite table shift to VIP
  • Hotel occupancy 98% 
  • 31% US GAAP margin
  • Opened two new VIP rooms in April, will add 2 VIP rooms in October 


  • 5% decrease QoQ due to worst VIP luck in company history
  • VIP revenues -11%, hold 2.53%, if hold adjusted at 2.98% then +HKD150 million higher EBITDA
  • Mass +28% 
  • Hotel occupancy 98%
  • EBTIDA margin 24% US GAAP 
  • Will relaunch new VIP room before year end


  • Cotai Phase 2: on budget and timeline mid 2015
  • CapEx spend HKD7.3 billion of total plan HKD19 billion, spent HKD1.4b in Q2
  • P3 and P4 finalized in late 2014 will double space
  • Grand Waldo: moving forward plans in Q4 2014 and relaunch in 2015
  • Henquin still working on plans, will support Macau and Cotai plans
  • Pursuing opportunities across Asia, respectful of cultures
  • Balance sheet end of Q2: Cash 14.4 billion; Debt 348m



  • VIP Market today, real time - turning around?  Feel growth of VIP business was as expected for GEG, remain confident VIP market will continue to grow at high single digit rate.
  • HKD125 million tax expense was dividend related. Is also a four-year prepayment, will be HKD120-130 million and accrue over four years
  • Accrual for employee bonuses - paid normal wage increases, plus incremental one month, plus share award for staying over three years, then receive three months salary in stock = +/- 10% to 15% of base wage increase.  But cash and non-cash component so 100-150bps impact to margin.  Approx HKD700 million impact per year, so about HKD150 million per quarter, no catch up.
  • Charitable Foundation accounting - HKD 300 million commitment this year and add'l 100m in subsequent years.  Cash would be a charge to P&L.
  • Margins increase due to optimization of segments on the floor
  • VIP business - look to grow with high quality partners; will add before year end
  • Starworld - current reposition of VIP room and new restaurant will be completed before year end 2014. 
  • Grand Waldo relaunch will include gaming tables and will target mass market.  Plans will be presented in Q4, will be a unique offering and very exciting.
  • Operators increasing rebate in premium mass? - Galaxy not involved in driving incentive, rebates or other programs which reduce margin.
  • Smoking ban changes - rules debuted on October 6 and expect their properties will be fully compliant with smoking rooms on mass floors as well as smoking areas in private areas.   Expect marginal impact and not long lasting negative impact.
  • Phase 2 headcount - will need 7,000 to 8,000 additional people. 
  • Mass Market trends - saw a pick up following World Cup, but still seeing a negative economic impact to growth, optimistic for October Golden Week. 

COH - Broken Brand NOT = Broken Stock

Takeaway: Big bifurcation between the brand and stock. This shouldn’t be a public company, and it likely won’t be for long. Can’t short COH anymore.

Conclusion: After being bearish on the name for nearly three-years, we’re taking Coach off our Retail Short List. To be clear, the fundamental story is absolutely broken, and the financial model is not far behind. Our numbers 2-3 years out are 20%+ below consensus, and we truly don’t think that this company will earn $2.00 again until close to 2020.  But as broken as this model may be, the stock, unfortunately, is not. We think that the absolute best-case downside on a short at these levels is about $5, which is hardly enough on a $36 stock. And the truth is that we’d need to see the company face-plant on its recently-announced Brand repositioning, and there are no expectations for any meaningful results for another 1-2 years. Until then, the company probably has a hall pass to be sub-par, and the stock will probably be rewarded if the company hits a quarter even if by accident.


We’ve been struggling with valuation support on Coach given that we expect Gross Margins to cough up another 300bp, and EBIT margins should stay stagnant in the mid-high teens for years to come. But the flip side is that the dividend currently sits at 3.72%, which is reasonably attractive. The key here, unlike other higher yielding retailers is that the dividend is safe – even on our beared-up numbers. In fact, we’d need to see about a 700bp hit to Gross Margins in order to threaten the dividend. That would equate to a 13% EBIT margin. As much as we think that Coach has been relegated to an Outlet brand, it’s extraordinarily unlikely that it will ever see a 13% margin level again. At a 13% margin, we’re looking at about $1.33 in EPS. If we generously give it a 15x multiple, it suggests $20, or a 6.8% yield. That’s probably not going to happen.


In fact, Coach is on the short list (no pun intended) of names we think could, should, and probably will be acquired over the next 1-2 years. The brand just lost the team that took COH from $500mm to $4bn (Krakoff, Stritzke, Tucci, Frankfort) and has as much instability in the executive ranks as it does with its brand. A strategic or financial buyer could shield the management team from the near-term expectations associated with the capital markets, and focus strictly on revitalizing the brand – like it did the last time it grew stale and Sara Lee spun out Coach in 2000.


LBO: Makes more sense that one might think. The cash flow here is extremely compelling. The public market is getting a 3.72% yield, but a private buyer could take that up to the teens and not miss a beat. The transaction at $36 is on the rich side (a $30 stock with a 20% premium), gets us a 17.2% IRR with 6.9x debt/EBITDA. The leverage is on the high end of deals done to-date. But not out of the realm of what we’d consider doable. Again, this is based on zero margin recovery, and assumes a 10x exit multiple (equal to entry). Let us know if you’d like our LBO model.


Strategic Buyers: We think that the three most likely are Fast Retailing (Japan), Kering  (the former PPR/Gucci -- France), and LVMH (France). These companies could all digest COH in a heartbeat – from a leverage and dilution standpoint – at a price as high as $45. Fast could actually do the deal as high as $60 and it would be accretive. Same goes for Richemont and Inditex, though Coach would be further outside their respective cores.


COH Acquisition Accretion

COH - Broken Brand NOT = Broken Stock - coh1

Source: Hedgeye and Factset


Leverage Pre and Post COH Acquisition

COH - Broken Brand NOT = Broken Stock - coh2

Source: Hedgeye and Factset

Cartoon of the Day: When Doves Cry

Takeaway: All eyes on Janet Yellen in Jackson Hole later this week.

Cartoon of the Day: When Doves Cry - Yellen cartoon 08.18.2014

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Hedgeye In the News: Kinder Morgan, MLPs and the Sell Case

Takeaway: Take a few minutes to read Izabella Kaminska's article on Kinder Morgan and MLPs.

An excellent, must-read piece on Kinder Morgan (KMI) by Izabella Kaminska on FT Alphaville today. She writes:


The $44bn self-acquisition of Kinder Morgan has been heralded by some as a great deal for shareholders.

But is it? Is it really? At least for the ordinary investors?

We’ve already wondered about the motivation for the deal.


Hedgeye In the News: Kinder Morgan, MLPs and the Sell Case - km9


Kaminska goes granular questioning the ongoing spectacle with MLPs, CEO Rich Kinder’s financial alchemy and more.


As you may have already guessed, Hedgeye energy analyst Kevin Kaiser figures prominently in the story.


Hedgeye In the News: Kinder Morgan, MLPs and the Sell Case - kaiser


Click here to read on FT.


Takeaway: Builder confidence hits its highest level in 7 months with "optimism" and the largest MoM increase ever in the Midwest driving the upside.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.




Today's Focus: August NAHB HMI (Builder Confidence Survey)

This month (August), the NAHB’s HMI, which measures builder confidence, rose to 55, a gain of two points from July’s print of 53 (which was not subject to any revision), marking the highest reading in seven months and the second month above the improvement demarcation line of 50 on the Index.

  • Sub-Indices:  All 3 sub-indices increased MoM for a 3rd consecutive month with balanced gains across Current Sales (+2pts), 6M expectations (+2pts) and Current Traffic (+3pts)  
  • Mid-West Mojo: Builder Confidence declined modestly in the West and South while rising modestly in the Northeast.  Notably, the Midwest region saw its largest MoM increase ever, increasing +13 pts from July to August


Prognostic or Pollyanna? Last month’s gain in Builder Confidence was led by rising optimism with the forward expectations component registering a disproportionate increase.  This month saw a commensurate increase in current sales and forward expectations, leaving the “optimism spread” at its highest level since 3Q12.   


Perhaps the modest, ongoing improvement in the labor market is buoying stakeholder confidence in the housing market but, in relation to the preponderance of demand and HPI data (purchase apps, new home sales/start, pending home sales), builder confidence continues to decouple from the reality of actual new construction activity.  


We’ll get the housing starts/permits data for July tomorrow, but with permits running largely flat with flagging Starts figures YTD (& declining in the latest month) the upside for single family construction over 2H appears somewhat constrained.


COMMENTARY:  After recurrent flip-flopping on the chosen spin the last few months, the August commentary was expectedly balanced and largely canned:


NAHB Chairman Kevin Kelly had this to say on the August reading: 


“As the employment picture brightens, builders are seeing a noticeable increase in the number of serious buyers entering the market...However, builders still face a number of challenges, including tight credit conditions for borrowers and shortages of finished lots and labor.”


NAHB's Chief Economist, David Crowe, added this:  


“Each of the three components of the HMI registered consecutive gains for the past three months, which is a positive sign that builder confidence appears to be firming following an uneven spring…Factors contributing to this rise include sustained job growth, historically low mortgage rates and affordable home prices, which are helping to unleash pent-up demand.”

















About the NAHB HMI:

The Housing Market Index (HMI) is based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. The monthly survey has been conducted for 30 years. The survey asks respondents to rate market conditions for the sale of new homes at the present time and in the next 6 months as well as the traffic of prospective buyers of new homes. The HMI is a weighted average of separate diffusion indices for these three key single-family series. The HMI can range from 0 to 100, where a value over 50 implies conditions are, on average, improving, a value below 50 implies conditions are worsening, and an index value of 50 indicates that the housing market is neither improving nor worsening.



Joshua Steiner, CFA


Christian B. Drake


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