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LEISURE LETTER (10/29/2014)

Tickers: MGM, PEB, BX, NCLH

EVENTS

  • Oct 29: 
    • MAR Q3 earnings 10 am  , ID 59390131
    • H Q3 earnings 11:30 am code 95150754
  • Oct 30:
    • HST Q3 earnings 10 am
    • NCLH Q3 earnings 10 am
    • MGM Q3 earnings 11 am , pw 6307991
    • BYD Q3 earnings 5 pm , pw 8021592
  • Oct 31: HLT Q3 earnings 10 am , ID 11936190
  • Nov 3:
    • BEE Q3 earnings 11 am , pw 37266467
    • SHO Q3 earnings 12n , ID 75906336
  • Nov 4: RHP Q3 earnings 10 am
  • Nov 6:
    • PNK Q3 earnings 10 am , code 27759617
    • BEL Q3 earnings 10 am , ID 12457691

COMPANY NEWS

MGM & 2282:HK: Pansy comments – (GGRAsia, Macau Daily Times) Pansy Ho, co-chairperson of MGM China, said the Macau government must lessen restrictions on the hiring of migrant workers.  Otherwise, the city’s new tourism and gaming developments will face staffing problems. Ho also believes that mainland China’s visa restrictions to Hong Kong have had an impact on the tourism flow to Macau too. Early this month, mainland China suspended visas for tour groups heading to Hong Kong, as a huge pro-democracy protest started to take shape in the HKSAR.

Takeaway:  We couldn't agree more. That doesn't mean it will happen anytime soon

 

Macau Legend 577:HK – announced the Director of the Gaming Inspection and Coordination Bureau (the ‘‘DICJ’’) confirmed 35 additional gaming tables will be granted to Macau Legend. Macau Legend expects that the additional gaming tables will increase its gaming capacity and support the current development of Macau Fisherman’s Wharf. 

Takeaway:  CEO David Chow is very well connected politically so this shouldn't be a surprise.

 

PEB – announced an offering of 3.2 million shares plus shoe with approx net proceeds of $127 million.

Takeaway:  While the use of proceeds was listed as "general corporate purposes" most investors believe the company will use the proceeds to purchase a full service hotel in Boston for $261 million. 


BX – the world's largest private equity investor in real estate, is preparing to seek around $13 billion for its next flagship global real estate fund - Blackstone Real Estate Partners VIII, in line with its predecessor fund, according to people familiar with the matter. Its latest fund, Blackstone Real Estate Partners VII, which raised $13.4 billion in 2012, reported a net internal rate of return of 27 percent as of the end of September. Blackstone has sought to moderate expectations, telling potential investors that it will be hard for the new real estate fund to beat the high returns of Blackstone Real Estate Partners VII.

Takeaway:  With approximately $40 billion in levered assets - that's a lot of cash chasing real estate assets. Could be good for hotel asset pricing.  Also, given BX's recent involvement in various Las Vegas assets, could gaming assets be of increased interest? 

 

NCL/GENTING CRUISES – (Seatrade Insider) The new Star Cruises' ship due be delivered in 2016 may be called the Genting World, and may look very similar to the Norwegian Breakaway class of ships, according to an ad run by Star Cruises in Asia.  Genting Hong Kong, which owns and operates Star, continues to be a major shareholder in Norwegian Cruise Line.

Takeaway:  The Genting overhang on NCL shares will not disappear but we think it is not a near-term risk.

 

Hurtigruten(Reuters) Norwegian cruise line operator Hurtigruten has recommended a takeover offer from a group of investors led by several board members, valuing the firm at about 2.94 billion crowns ($444 million).  Investors led by Chairman Trygve Hegnar and board member Petter Stordalen, a wealthy hotel tycoon, offered 7.00 crowns per share for Hurtigruten, which operates scenic cruises along the fjords of the Norwegian coast.

Takeaway:  Scandinavia has done well for the cruise lines the last several years. The offer price is >50% share price premium.

INDUSTRY NEWS

Macau Public Works Director Immediate Retirement(GGRAsia) Macau’s Land, Public Works and Transport Bureau director Jaime Carion will retire on November 1.  Deputy director Chan Pou Ha will step in as acting director, it added.  Macau’s Secretary for Transport and Public Works Lau Si Io gave assurances that the bureau had mechanisms in place to guarantee that the current projects would not face delays.

Takeaway: Despite assurances, it would seem more construction delays are now more likely given the permit delays and new Director transition.

 

Chinese Outbound Tourism –  (China Daily) China is the fastest-growing market of outbound tourism in the world with an annual growth rate of 18.8%, according to Qunar.com. In 2013, the number of outbound Chinese tourists reached 98.2 million.

Takeaway: All tourism industries fighting for their fair share of this growing tourism segment. 

  

Chanos & Kynikos Associates Betting Against Macau – (Reuters) Chanos is betting against Macau. He likened Macau to the overbuilding in Las Vegas and warned that Macau businesses were putting up more capital than ever for less in return.

Takeaway:  We agree in general with Chanos on his negative Macau call although we are more positive long term on Macau and the ultimate ROIs on the new builds.


Atari Launches Social Casino– Classic console games developer Atari unveiled its social casino vertical Atari jackpots, in a move that sees the developer enter the social gambling market. The popular gaming brand will look to merge its iconic console/arcade content with casino slots and games. Atari has partnered with social games engine Flowplay, in order to transform its gaming content into casino led content for social and mobile channels. The Atari Jackpots social casino vertical will offer a collection of single and multiplayer games, including slots, blackjack, video poker and bingo. With the help of Flowplay, Atari has converted retro gaming titles such Asteroids, Missile Command, Tempest and Crystal Castles into social slots and games inventory.

Takeaway: All that is old is new again...

 

Las Vegas Strip Development – the project jointly owned by James Packard and Oaktree Capital Management announced the hiring of Rob Oseland, who was previously President and COO at SLS Las Vegas.  Oseland is leaving to join former Wynn Las Vegas President Andrew Pascal in developing a new hotel-casino project on a 35-acre Strip parcel (across from Encore) on which the New Frontier once stood. Pascal is co-chairman of a company that includes Australian billionaire James Packer and investment firm Oaktree Capital Management.

Takeaway: Packard and Oaktree moving forward with their development.

 

SLS Las Vegas – following Rob Oseland's resignation, announced Scott Kreeger will join SLSLV.  Kreeger was most recently chief operating officer of the since-closed Revel hotel-casino in Atlantic City. Before heading to Atlantic City, Kreeger spent the bulk of his gaming career in Las Vegas at MGM Mirage (now MGM Resorts International) and Station Casinos. Kreeger was the first general manager of Station Casinos’ Red Rock Resort, overseeing the property’s debut in 2006. 

 

The Gramercy Park Hotel Listed For Sale – in an offering likely to test the limits of what investors are willing to pay to get into the business of operating one of the city’s best-known hostelries. Real estate investors Aby Rosen and Michael Fuchs hired brokerage firm Eastdil Secured to market the 186-room Gramercy Park Hotel.  Messrs. Rosen, Fuchs and Schrager purchased the property, at 2 Lexington Ave., in 2003 and invested more than $200 million gut-renovating it. It reopened in 2006. By comparison, earlier this year, another popular boutique hotel, the Standard High Line, in the meatpacking district, sold for about $400 million, or $1.2 million per room.

Takeaway: Another hallmark hotel trade in the making. We look forward to the sale for another NYC comp.  If the Gramercy Park Hotel traded at $1.2 million per key = ~$223 million sale price. 

 

 

MACRO

China real estate market slowing (China Daily)

  • Loans to China's real estate sector slowed in the first three quarters as the housing market cooled. At the end of September, financial institutions in China had lent 16.7 trillion yuan ($2.73 trillion) to the property sector, up 18.2% year on year, 1% slower than the pace at the end of June, according data released by the People's Bank of China.
  • Outstanding loans for real estate development amounted to 5.39 trillion yuan at the end of September, while loans for individual home purchases increased 17.5% to 11.1 trillion yuan, down 0.9% from the end of June.
  • Figures from the National Bureau of Statistics showed that commercial housing sales in term of floor space dropped 8.6% in the first nine months, widening by 0.3% from the first eight months.
  • Prices for new homes in 69 out of 70 major Chinese cities dropped month on month in September, compared with 68 cities in August.

World Bank urges China to cut growth target: the World Bank said China can cut its economic growth target to 7% next year without hurting its labor market, as it urged Beijing to get rid of its growth objectives. The bank warned China against carrying its ambitious 2014 target of 7.5% growth into next year, saying that such a move would detract from the government's reform plans. It also predicted that property prices could fall further in coming months due to an over-supply of homes. 

 

Singapore Property Values – Resale prices fell 0.7% in September from the preceding month, a reversal from August's revised 0.2% increase, according to the Singapore Residential Price Index.

 

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 Quad4 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.


*Short CHUY Call Today @11AM

Takeaway: We recently added CHUY to our Best Ideas list as a short. We'll be hosting a call today @11AM EST to review our thesis and field questions.

Call Details:

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 974734#
  • Materials: CLICK HERE

 

*Short CHUY Call Today @11AM - 10 29 2014 7 50 07 AM


Our short thesis focuses on the following:

  • Disappointing new unit productivity
  • Cash burn necessitates the current new unit growth rate
  • Rampant support from the biased bulls (read: high expectations, aggressive estimates)
  • Significant insider selling
  • Strong sell-side sentiment and unjustified premium multiple
  • Significant food inflation (dairy, beef, avocados, produce)
  • Overly optimistic consensus food and labor cost assumptions in 2H14
  • A lack of leverage in the business model considering higher year-over-year G&A, D&A and pre-opening spend
  • Aggressive 2H14 and 2015 EPS estimates
  • Approximately 30-40% downside to the name

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


WYNN - LUCKY Q3 BUT UNLUCKY OUTLOOK

Takeaway: Not a bad Q3 - luck helped - but management tone confirms our thesis that estimates need to come down

Our suspicions were correct on Q3 but that doesn't change the outlook

 

 

Please see our note:  http://docs.hedgeye.com/HE_WYNN_Review_10.29.14.pdf


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Japan, Europe and U.S. Small Caps

Client Talking Points

JAPAN

The Nikkei is +1.5% to -3.1% year-to-date and signals immediate-term TRADE overbought – we’ve been waiting to add this and more European equity shorts to Real Time Alerts and we’re going to see those selling opportunities now.

EUROPE

The DAX is +0.6%, but Italy, Spain, and Russia have all turned red, which is weird, because we thought ECB President Mario Draghi said he has banned deflation. As Europe’s economy slows, we think gravity wins this time – sell European Equities.

RUSSELL 2000

Big bounce in the Russell 2000 to immediate-term TRADE overbought within its bearish TREND. The Russell 2000 would have to close > 1181 to recapture intermediate-term TREND support; still -5% from her all-time #bubble high and no support to 1067.

Asset Allocation

CASH 65% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 4%
FIXED INCOME 27% INTL CURRENCIES 4%

Top Long Ideas

Company Ticker Sector Duration
EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). U.S. real GDP growth is unlikely to come in anywhere in the area code of consensus projections of 3-plus percent. And it is becoming clear to us that market participants are interpreting the Fed’s dovish shift as signaling cause for concern with respect to the growth outlook. We remain on other side of Consensus Macro positions (bearish on Oil, bullish on Treasuries, bearish on SPX) and still have high conviction in our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.

TLT

We continue to think long-term interest rates are headed in the direction of both reported growth and growth expectations – i.e. lower. In light of that, we encourage you to remain long of the long bond. The performance divergence between Treasuries, stocks and commodities should continue to widen over the next two to three months. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove. We certainly hope you had the Long Bond (TLT) on versus the Russell 2000 (short side) as the performance divergence in being long #GrowthSlowing hit its widest for 2014 YTD (ex-reinvesting interest).

RH

Restoration Hardware remains our Retail Team’s highest-conviction long idea. We think that most parts of the thesis are at least acknowledged by the market (category growth, real estate expansion), but people are absolutely missing how all the pieces are coming together to drive such outsized earnings growth over an extremely long duration. The punchline of our real estate analysis is that a) RH stores could get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. The consensus is looking for long-term earnings growth of 28% -- we’re looking for 45%.  

Three for the Road

TWEET OF THE DAY

COPPER: bangs the top-end of her 2.95-3.10 immediate-term risk range #sell

@KeithMcCullough

QUOTE OF THE DAY

Are you gonna bark all day, little doggy, or are you gonna bite?

-Reservoir Dogs

STAT OF THE DAY

864 million,  the number of daily active Facebook users as reported by the company Tuesday night. That represents a 19% increase compared to the prior year.


THE HEDGEYE MARO PLAYBOOK

Takeaway: Our Macro Playbook is a daily 1-page summary of our core ETF recommendations, investment themes and proprietary quantitative market context

CLICK HERE to view the document. In today’s edition, we highlight:

 

  1. The continued breakdown in Commodities as a primary asset class and what we view as the directional drivers from here
  2. Sell the news on Ebola? That's certainly what the cocoa market is telling us; this crowded trade (i.e. net long of cocoa) is screening as a short across our compendium of quant signals

 

Best of luck out there,

 

Darius Dale

Associate: Macro Team



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