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Las Vegas Sands Corp announced yesterday that it had secured commitments to raise up to US$600 million through the sale of exchangeable bonds.  The bonds will be mandatorily exchangeable into shares when it spins off its Macau operations in an initial public offering in Hong Kong early in 2010, an exercise the company hopes will raise a further US$2.5 billion.

The convertible bonds were offered at interest rates of up to 16%, according to “people who had seen the documents prepared by Goldman Sachs, LVS’ appointed investment bank.  Sheldon Adelson was quoted as saying, “the completion of this financing, which we expect to occur in a matter of days, will enhance our current liquidity position and further our efforts towards reaching long-term financial stability.”

The company owes US$10.8 billion to its banks, including US$3.3 billion of Macau debt largely originating from the construction of the Venetian and Four Seasons resorts in Macau.  Following a recent credit agreement amendment, and this bond sale, the company has bought time to either repay debt or restart lots 5&6. 

MACAU: 18% ON TOP OF 40%

Total table revenue in July grew 18% y-o-y, driven by 21% growth in the Mass and a 17% increase in the VIP market. The growth was even more impressive given the 40% comparison.



Macau is rolling, and not just the Rolling Chip segment.  An 18% table game increase - the best in a year - driven by VIP and Mass, is impressive enough.  Considering the difficulty of the comparison - +40% last year, the August 2009 performance is stunning.  Going forward, the catalysts remain positive:  11 straight easy comparisons beginning in September, high probability of a gaming tax reduction by the summer of 2010, excess demand, and more junket credit availability.  We remain concerned about the significant increase in Mass supply in 2010, but for these stocks that issue is light years away.


Crown, LVS, SJM, and MGM were the clear winners this month, all experiencing table growth in excess of market growth.  Crown gained more share as City of Dreams (CoD) continued its ramp.  SJM and MGM had strong growth despite weaker year-over-year hold comparisons.  LVS benefitted from high hold and growth at FS (although still too tiny to move the needle).  WYNN was the only operator which experienced a decline in table hold this month.




Y-o-Y Property Observations:


LVS table revenues up 19%

  • Sands was up 12%; with the entire increase driven by 24% growth in VIP win
    • VIP RC decreased at Sands (~25%),  however hold comparisons were very favorable
  • Venetian was down 4%; Mass down 6% and VIP down 3.5%
    • VIP RC (Rolling Chip) was down 18%, but hold was favorable
  • Four Seasons had a strong ramp in revenues with estimated table revenues of $50MM compared to an anemic July
    • RC more than doubled compared to July, hold was also very high

Wynn table revenues were down 10%

  • In a reversal from July, Mass was up 6%, offset by a 14% decline in VIP
    • Lower VIP revenues were due to a combination of lower RC volume and lighter hold

Crown table revenue up 33%

  • Altira was down 33%, RC volumes were down 35%
  • While not as strong as July, CoD had another good month, generating an estimated 110MM of revenues
    • Mass ramped to $20MM from $17MM in July
    • VIP RC grew 18% sequentially (so much for sell side reports claiming that Macau properties don't ramp)
    • Hold was above MPEL's "normal" 2.85% at both properties, but not as high as the huge hold % we saw at CoD in July

SJM was up 28%

  • Mass was up 30% and VIP was up 25% despite very weak hold
    • RC increase a whopping 58%

Galaxy table revenue was up 15%, entirely driven by a 19% increase in VIP win

  • Starworld continued to perform well with table revenue up 11%, driven by a 13% increase in VIP revenues despite weaker hold (on a easy comp)

MGM table revenue was up 23%

  • Mass revenues were down 2%, but VIP revenue was up 32%



Market Share:


-LVS share increased to 24% from 21% in July

  • Sands' share declined to 7%
  • Venetian & FS' share increased to 17.1%  from 12.3% in July
    • Most of the increase was driven by VIP up 6.7% to 16.5% from 9.9% in July

-WYNN had its weakest share month since we've been tracking this data (March '08) with share of only 12.6% vs 14.5% last month

-Crown market share wasn't as good as July at 17.8%, but still up materially at 16%

-SJM share was back up this month at 26.4% from 23.8% in July

-Galaxy lost a little share, ending at 10.1% vs 10.6% in July

-MGM's share decreased to 10.5% from 12.4% in July, but the company had one of its best share months since opening


                                                               MACAU: 18% ON TOP OF 40% - Macau Total Bac Marketshare


                                                               MACAU: 18% ON TOP OF 40% - Macau MM Rev Share Aug


                                                               MACAU: 18% ON TOP OF 40% - Macau RC Turnover Marketshare




The per key valuation of recent hotel transactions are starting to look interesting (for buyers).



We've got a pretty extensive database of hotel transactions over the past several years.  We can make that available to interested clients.  The chart below provides a look at the price per key trends.  We've presented it on a rolling basis and have excluded trophy assets to smooth it out.  Included are transactions ranging from economy to upper upscale where prices were disclosed. 


The declining values are instructive.  While clearly not a positive for the sellers, the industry as a whole may benefit from a more liquid transaction market.  Transfers of ownership to buyers with lower costs of capital and better balance sheets is a natural and efficient outcome of a severe demand downturn.



LODGING DEALS - Hotel transactions

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PSS: Numbers Need To Go Higher

Black Book thesis solidly intact. No changes to our estimates on PSS or the view we articulated in our Black Book (let us know if you are interested in a copy) about how and why PSS has $2.00+ in EPS power over 2-years – about 65% ahead of the Street’s expectation.


The quarter in itself was kind of a yawn. Probably more puts than takes – which is one thing we outlined in our Black Book, but it was definitely not anywhere near as bad as it could have been given the circumstances and the sentiment. Comp was right in line (but still weak at -7.3%), GM a 100bps worse than we had in our model.  SG&A in line.  Tax rate helped, but will be a benefit on an ongoing basis. Working capital and cash flow was really solid – the CF trajectory was better than I modeled, and inventories are in check.


As for the outlook, the only thing that was new to me was that mgmt quantified a 20%+ decline in rent on leases being renegotiated during the course of business. This is above the mid-teens rate I had in my model (you do the math – rent is 15% of COGS, and 20% of stores up for renewal per year at 20% price cut).


Rubell probably kept earnings in check for 3Q by noting that product costs (68% of COGS by my math) will be down only low-single-digits in 3Q and then will accelerate to 10%+ in 4Q.  I think the 3Q is a low-ball number. Even with better meat on the bone from PSS on financials, my sense is that numbers won’t go up anywhere near as much as they should.


As for other items that lead to my 6% margin and $2.00 in EPS power number… nothing really changed. Own out of the print, not into it.  This continues to be a BIG idea.


 PSS: Numbers Need To Go Higher - PSS S 9 09

Europe: When Boring is Good

There are a number of European Data points out this week worthy of mention. While most of the figures below are decidedly rear-view, they underscore the sequential improvements in the region’s fundamentals. We’re currently not invested in Europe.


Eurozone Data-


Q2 GDP down 0.1% quarter-on-quarter   (after -2.5% in Q1)

Q2 Household expenditure up 0.2% Q/Q   (after -0.5% in previous quarter)

Q2 Exports decreased by 1.1% Q/Q   (from -8.8% in Q1)

Q2 Imports down 2.8% Q/Q   (after -7.8% in the previous quarter)


  • Bullish data, especially with a positive external balance (surplus) of 19 Billion EUR for the Eurozone in Q2.

(source: first estimates from Eurostat)


CPI down 0.2% in August Y/Y (-0.7% in July Y/Y)


  • The new data is in line with our thesis that the strong economies of the Eurozone are importing deflation. This deflationary level is stable in the near term with interest rates low and growth slowly returning; we expect to see annual inflation compares shift towards the positive in Q4 due in part to energy prices a year earlier.  Eurostat issued just its initial CPI estimates for August so we don’t have component stats yet but, as an example, Germany, the Eurozone’s largest economy, saw food prices fall between 0.9%-1.7% in August M/M, a clear benefit for the consumer.

Industrial Producer Prices down by 0.8% in July M/M (or -8.5% Y/Y)


  • Producers are also benefitting from deflationary energy costs sequentially. On an annual basis, prices in industry fell 4%; in the energy sector alone prices fell 20.2%. 

Unemployment rose 10bps to 9.5% in August


  • We expect this number will rise (esp. as cash for clunkers winds down (Germany, today) and stimulus packages fade). As unemployment pushes up look for confidence numbers to erode, ending months of sequential improvement.  Retail sales continue to be a poor gauge of economic health, however as unemployment rises look for the consumer to pull back in spending. 

PMI Manufacturing rose to 48.2 from 46.3. Final PMI Services comes out tomorrow, but initial estimates showed improvement and composite PMI reached the 50.0 mark in August, the line dividing contraction from growth.


Business and consumer confidence improved for the fifth straight month in August


Industrial Orders jumped +3.1% in June M/M


As we prepare to reinvest in Europe if attractive entry points arrive we’ll have our Eye on both country and regional performance. For now, the data above, though rear-view, clearly shows improvement across a number of metrics. As noted, a rising unemployment rate and dwindling stimulus packages may create a stumbling block in market performance on the TREND duration.  Sometimes the best thing an investor can do is do nothing. That’s where we are at, for now. Stay tuned.



Matthew Hedrick



The “grass roots” survey, which represents a geographic mix of stores across the U.S., indicates that July same-stores sales growth continued to improve from June levels with 76% of respondents reporting a sequential improvement.  In fiscal 3Q09, U.S. reported comparable sales declined 6% (better than the 8% decline in 2Q09) and management stated that the numbers got stronger throughout the quarter.  Based on that statement, it is reasonable to assume that June same-stores sales were about -5% or better, and July looks to have improved from that level. 


Over 75% of respondents reported flat to positive same-store sales growth.  Overall, the survey indicates that same-stores sales growth was flat to +1%, which like in past months seems too good to be true.  Providing a haircut to the numbers would put comparable sales growth at -2% to -3%, which at first look also seems aggressive, but it is important to remember that SBUX is lapping a -8% number in the U.S. from 4Q08 so comparisons definitely get easier.  A 3% decline in U.S. same-store sales for 4Q09 would represent a 2-year average trend similar to that of 3Q09. I continue to think that it is more important to focus on the numbers on a directional basis, rather than looking at the absolute numbers, and directionally, the respondents are seeing better results in July than they did in June.


As we stated following SBUX’s 3Q09 results, MCD’s McCafe does not appear to be negatively impacting SBUX’s sales.  The survey’s findings actually seem to mimic CEO Howard Schultz’s comment that the increased level of advertising around the QSR coffee segment seems to be benefiting SBUX by increasing trial with more respondents saying that MCD’s premium coffee initiative is having a positive impact than those experiencing a negative impact.  



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