LEISURE LETTER (10/13/2014)

Tickers: CZR, LVS, VAC

EVENTS

  • Oct 15: LVS Q3 earnings 4:30 pm , pw 12611335
  • Oct 16: Hedgeye cruise pricing survey (mid-October)

COMPANY NEWS

CZR – appointed Keith Causey as chief accounting officer.  Mr. Causey replaced Diane Wilfong, who left the company “to pursue another opportunity”, Caesars said in a press release. Mr Causey will have responsibility over all corporate accounting and internal audit functions for the parent. He joined Caesars from U.S. car maker General Motors Corp, where he served as executive director, global business services – finance.

Takeaway: Accounting personnel changes are rarely a positive but we're not hearing of any accounting issues. 

 

CZR Rio All Suites Hotel & Casino Las Vegas To Close?  rumors are circulating Las Vegas that Caesar's sold the Rio for $400 million.  We do know that Caesar's advised employees in late September of the transition to a new owner and offered current employees opportunities to transfer elsewhere with the Caesar's organization.  However, neither CZR's nor the buyer has advised the Nevada Gaming Commission any ownership changes or closure, nor have WARN letters been received by current Rio employees.

Takeaway: As part of the overall restructuring, something will happen with the Rio. 

 

LVS – outgoing President and Chief Operating Officer, Michael Leven, will become Georgia Aquarium CEO on January 1, 2015.  Mr. Leven previously served as CEO of the Aquarium in 2008-2009.

 

AC.FP(Les Echos) As previously reported, Starwood Capital is attempting to sell Louvre Hotels Group.  Accor estimated the value of Louvre at about 1.2 to 1.5 billion euros based on ten times the operating Louvre Hotels EBITDA (EUR 110 million) - a lower price based on Lourve's exposure to the economy and budget lodging segments. However, Accor could face anti-trust issues. Also, Louvre Hotels partner since 2011, Chinese Jinjiang Inn made ​​an offer which was less than 1 billion euros, but it was rejected by Starwood Capital.

Takeaway: Sounds to us like the call for "last, best and final offers" so expect the winning bid announcement soon.

 

VAC – announced today the completion of a securitization of a pool of approximately $250 million of vacation ownership loans. Two classes of Notes were issued by the Trust: approximately $216 million of Class A Notes and approximately $24 million of Class B Notes. The Class A Notes have an interest rate of 2.25% and the Class B Notes have an interest rate of 2.70%, for an overall weighted average interest rate of 2.29%.

Takeaway: The capital markets remain very favorable for time share securitizations with very low risk premiums - a positive tailwind for HLT and WYN.

INDUSTRY NEWS

Macau Health Officials All Indoor Spaces Smoke Free (GGRAsia)

Macau’s Health Bureau confirmed in a statement that its aim is “totally banning smoking in all enclosed spaces open to the public in the city”. The casino industry has always argued that VIP gambling rooms in Macau are not “open to the public”. As a result such areas have so far been exempted from tobacco restrictions imposed in phases on the main floors of Macau’s casinos since January 2013.  Under the latest rule changes on October 6, smoking on casino main floors is only allowed in enclosed smoking rooms that do not contain any gaming tables or slot machines. Nonetheless, the principle of VIP room smoking in Macau seems to be under increasing pressure. “The Health Bureau will continue to collect data and opinions to enhance policy control,” it said in the statement. It said it will also “collect opinions from the general public, the gaming industry and its staff” before proceeding to revise the law on smoking in 2015. The Health Bureau said that it aims “to achieve the goal of totally banning smoking in all enclosed spaces open to the public in the city.”

Takeaway: During our visit to Macau last week, a few of our contacts indicated it was inevitable that the VIP rooms will ultimately be smoke free.

 

Macau Hotel Occupancy Falls During Golden Week (Macau Business)  The average occupancy rate of Macau’s more expensive hotels during The golden week of National Day holidays was lower this year than last, the Macau Government Tourist Office says. The office’s data show that between October 1 and 7 the average occupancy rate of three-star, four-star and five-star hotels was 87.2%, 1.5% points less than in the corresponding period last year. The data show the average room rate in such hotels fell to MOP1,892 (US$236.80), or 2.2% less than a year earlier.

Takeaway: Golden Week, not so Golden for Macau gaming operators.

 

Chinese Mainlanders Spend 70% Less During Golden Week – (Chinese News Services) Consumer spending by mainland tourists on luxury goods in Macau, Hong Kong and Taiwan during the National Day Golden Week recorded a drop of 70%, accounting for only 5% of total expenditure by mainland tourists on high-end products beyond the Chinese border. Total spending by mainland tourists on luxury goods across the border declined by almost 22% year-on-year, amounting to US$3.2 billion from the US$4.1 billion of the same period last year, according to a report by the World Luxury Association.

Takeaway: Slower consumer spending the result of slower economic growth or crackdown on luxury spending?

 

China's Corruption Crackdown Continues

(People's Daily) Three former senior officials in central China's Hubei Province were expelled from the Communist Party of China (CPC) and sacked from their public posts for corruption, said the provincial CPC discipline watchdog on Saturday. The three were Zhang Qinyun, former member of the party committee and general manager of Hubei Daily Media Group, Xing Jinghua, former head of the CPC Publicity Department of Jingzhou City and Wang Hongqiang, former deputy director of the standing committee of the People's Congress of Yichang City. The three were all accused of accepting huge sums in bribes and have seriously violated discipline, said the Hubei Provincial CPC Discipline Commission.

 

(Global Post) Zhao Shaolin, former member of the standing committee of the Communist Party of China (CPC) committee of east China's Jiangsu Province, is being investigated for "suspected severe disciplinary and law violations," according to the top anti-graft body.Zhao was also secretary-general of the provincial Party committee, said a statement released Saturday by the CPC Central Commission for Discipline Inspection on its official website.

 

(Shanghai Daily) Thousands of Party and government officials have been punished for offenses related to gambling since the middle of last year, according to a central government report. The 7,162 officials were from more than 30 cities and provinces, with east China’s Zhejiang and Guangdong in the south reporting the most cases — 1,575 in Zhejiang and 1,127 in Guangdong. Punishments ranged from warnings to administrative punishments but no further details were released. A crackdown on gambling by officials has become a major thrust of the government’s anti-corruption campaign.

Takeaway: No slowdown in corruption campaign although a crackdown on illegal gambling outside of Macau could be a positive for Macau.

 

Universal Parks & Resorts Beijing (channelnewsasia.com) US entertainment firm Universal Parks & Resorts will invest more than US$3 billion (S$3.8b) in a joint venture with Chinese partner Beijing Shouhuan Cultural Tourism Investment Co, to build a 120 hectares (296 acres) movie theme park in Beijing, scheduled to open in 2019. The park, which will feature characters and scenes from Hollywood blockbusters such as Harry Potter and the Transformers franchises, will be located in the city's eastern district of Tongzhou. The project has been approved by the National Development and Reform Commission, China's top economic planner. The Beijing project will become Universal's fifth theme park after Los Angeles, Orlando, Osaka and Singapore. It is expected to rival a Disney park in Shanghai, which has been under construction since 2011 and is scheduled to open next year.

Takeaway: Universal Parks going to Beijing, making an integrated resort bid in Japan increasingly unlikely.

 

Tropical Storm Gonzalo – maximum sustained winds are near 60 mph with higher gust, strengthening is expected during the next 48 hours and Gonzalo is forecast to become a hurricane tonight or Tuesday.  A hurricane watch is in effect for Puerto Rico, Vieques & Culebra, U.S. Virgin Islands, and British Virgin Islands while a tropical storm warning is in effect for Guadeloupe, St. Martin, St. Maartin, St. Barthelemy, Barbuda, Antigua, St. Kitts, and Monserrat.

Takeaway: Expect significant cruise rerouting.

LEISURE LETTER (10/13/2014) - TS Gonzalo

MACRO

China Growth Target (21st Century Business Herald) reported a number of Chinese government officials think 7% is an appropriate target for GDP growth next year. Both a PBoC and MoF officials voiced support for a 7% growth target in GDP at a Chinese Academy of Social Sciences meeting. The paper estimated the M2 growth target would be 11% next year, given a 2% inflation target.

 

Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  We're seeing bottoms up slowing in Europe cruise pricing in our monthly survey. Europe has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely. Following CCL's earnings release, we recently turned negative on those stocks based on the negative European thesis. 

 

Hedgeye Macro Team remains negative on consumer spending and believes in muted inflation, a Quad Four set-up.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is 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.