LEISURE LETTER (11/04/2014)

Tickers: LVS, MGM, SGMS, HLT, RCL

EVENTS

  • Nov 4:
    • Gaming Referendums:
      • Massachusetts Question 3 (repeal casino law)
      • Colorado Amendment 68 (allow casinos in Mes, Pueblo and Arapahoe counties)
      • California Proposition 48 (veto gaming compact with North Fork Rancheria for off-reservation casino in Madera)
      • Rhode Island Question 1/2 (operate table games at Newport Grand)
    • RHP Q3 earnings 10am .
    • HPT Q3 earnings 1pm
    • AWAY Q3 earnings 5pm
  • Nov 6:
    • MPEL Q3 earnings 8:30am , pw MPEL
    • PNK Q3 earnings 10am , code 27759617
    • BEL Q3 earnings 10am , ID 12457691
    • DIS Q3 earnings 5pm , pin 38177041
  • Nov 10:
    • CZR Q3 earnings 4:30pm , pin 20797507
    • SNOW FYQ1 earnings 5pm
    • SJM Q3 earnings
  • Nov 11
    • Genting Singapore Q3 earnings

COMPANY NEWS

DON:AU – signed an exclusive term sheet to acquire “a significant gaming and hospitality business in Cambodia” Donaco said it would fund the deal via existing cash reserves and new debt facilities, together with an equity component for the vendor. The final acquisition price has not yet been set. Donaco International operates the recently-opened, Aristo International casino hotel in Vietnam which is a brand new 5 star hotel with 428 rooms, up to 50 gaming tables, 62 slots (max 150), and max 150 electronic table games.  As background, Donaco International was founded in 2001 by MD Joey Lim Keong Yew and his late grandfather, Tan Sri Lim Goh Tong (founder and chairman of the Genting Group)

Takeaway: Joey Lim Keong Yew and Benjamin Lim Keong Hoe appear to be emulating their uncle, Genting Chairman and CEO Tans Sri Lim Kok Thay, but thus far on a smaller scale.  A new Asian regional competitor for NagaCorp?

 

LVS – filed a mixed securities shelf of indeterminate size with Use of Proceeds " General corporate purposes may include future construction and development projects, additions to working capital, capital expenditures, repayment of debt, the financing of possible acquisitions and investments or stock repurchases."  The filing can be viewed here 

 Takeaway:  Raising money but for what? Tender offer coming?


MGM (LVRJ) The National Finals Rodeo plans to stay at UNLV’s Thomas & Mack Center for another decade rather than move to the MGM Resorts International/AEG arena.  The 10-year agreement is expected to be signed before the 10-day rodeo opens on Dec. 4. One of the key reasons for remaining at Thomas & Mack was reportedly because Thomas & Mack has two symmetrical tunnels, which allows Thomas & Mack to efficiently handle timed rodeo events such as steer wrestling and team roping.  

 

SGMS – announced it has signed a new contract to continue as the exclusive provider of instant games and related services for the Tennessee Education Lottery Corporation.  The new contract, which was awarded through a competitive procurement process, continues the successful relationship Scientific Games and the Lottery have shared since 2003.  The contract will begin January 1, 2015 with an initial term of seven years plus seven one-year extension options.

Takeaway: A strong renewal for SGMS and its lottery business.

 

GTECH - sharesholders approved cross-border merger of GTECH into Georgia Worldwide ("NewCo").  The court-convened shareholders’ meeting of NewCo to approve the Merger will be held on December 15, 2014.  Furthermore, here is the Q/A document: http://www.gtech.com/sites/default/files/Q%26A%20ENG.pdf

 

HLT – investment banks on behalf of Blackstone placed 90 million shares (103.5 million with the green shoe) at $25/share.

Takeaway: Modestly higher than HLT's September 30 closing price of $24.63/share.

 

RCL – repurchased 3.5 million shares of common stock held by Awilhelmsen AS (Awilhelmsen).  The repurchase price per share will be$67.45, which is equal to the price paid by a financial institution to Awilhelmsen in connection with its sale of 3.5 million shares conducted yesterday November 3, 2014 pursuant to Rule 144 of the Securities Act.  The repurchase is expected to close on November 6, 2014.

Takeaway:  While the sale is only 1.6% of RCL's outstanding shares and has a positive penny impact on 2014 EPS, it was a surprise and we wonder if Awilhelmsen will continue to unwind its 16% RCL ownership in the months ahead.  Awilhelmsen doesn't seem to imply that in its 'diversification purposes' comment but why would they admit its intention to completely unwinde? This also raises speculation that RCL and its Board may put in an official share repurchase program soon.

 

RCL (CruiseLawNews)  Royal Caribbean Explorer of the Seas was hit with rough weather. The cruise ship is sailing on its 14 night re-positioning cruise to Port Canaveral.  Two lifeboats on deck 4 were reportedly dislodged and water crashed through glass doors and flooded the interior of the ship. Allegedly the water temporarily disabled the aft elevators. 

INDUSTRY NEWS

Macau October GGR & Market Share (DICJ & GGRAsia) totaled HKD27.209 billion, a decrease of 23.17% YoY and up 9.63% sequentially.  According to sources, the market shares are as follows:

  • Sand China 23.7% 
  • SJM 23.4% 
  • Galaxy 21.4%
  • Melco 14.3%
  • Wynn Macau 8.9% 
  • MGM China 8.2%.

Takeaway:  MGM and WYNN were the clear laggards in October, probably due to low VIP hold. We will have the October details later this week. 

 

Japan (DailyMail) According to sources, Japanese lawmakers are set to indefinitely postpone legalizing casinos as Prime Minister Shinzo Abe, whose cabinet has been hit by a series of scandals, lacks the political leverage to pass a bill this year, sources directly involved in the process said.

 

Pro-casino lawmakers intend to push back a vote on the bill instead of trying to pass it in the current parliamentary session ending this month, three people directly involved in pushing the casino bill said.  Although they aim to keep the bill on the table, the sources said there was a considerable chance it would not come up for discussion even in 2015.  Higher-priority bills, including those related to national defense, are likely to take up debate time in the next parliament session, they said.  "If they can't pass it now, I doubt whether they'll ever be able to pass it," one of the sources said.

 

Another source said there was a chance legislation could be delayed by three or four years, meaning actual casino development may have to wait until around 2024.  Toru Mihara, who teaches at the Osaka University of Commerce and was one of the architects of the casino bill, said failure to pass the bill in this session would be a "total loss of face" for Abe's cabinet.  He also said the bill will be difficult to pass next year, as newer topics come up in parliament. 

Takeaway:  After all the hoopla, this happens. This year had the best chance for passage.  Now the outlook for Japan gaming is much more murky. A big potential catalyst for LVS, WYNN, and MGM is likely gone.

 

Chinese Corruption Crackdown(Xinhua) China will establish a new anti-graft body to further strengthen pressure on "unprecedentedly serious" corruption issues, deputy Procurator-General Qiu Xueqiang has said. Qiu said that the plan for a new anti-graft agency was put forward by the Party committee of the Supreme People's Procuratorate (SPP) and was approved by the central authority.

Takeaway: Corruption to remain the focus of Mainland Government enforcement - a persistent headwind for Macau.

MACRO

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.