In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance
- IN-LINE: While EBITDA came in short of our expectation, it was in-line with consensus. We had projected too high of a hold percentage and the hold/junket mix was unfavorable. On a positive note, Q4 is off to a good start.
CITY OF DREAMS PREMIUM MASS/NON-GAMING
- BETTER: This property continues to outperform expectations with premium mass driving the business. 3Q EBITDA beat the Street estimate by 6%. Visitation in 3Q increased 8% YoY to 46,000/day.
- PREVIOUSLY: We're very much focused on one segment, the premium mass, whereby most of our competitors they have (been focusing) between portfolios (of segments)...Non-gaming improvement, really, really help us to improve our length of stay for those customers.
- SAME: Studio City remains on budget and on track to open in mid-2015 with clear progress being made on the main superstructure following the successful completion of the foundation and piling work.
- PREVIOUSLY: Studio City, our unique cinematically themed integrated resort remains on budget and on track to open in mid-2015.
CITY OF DREAMS MANILA
- SAME: MPEL is working hard to meet the opening date of mid-2014.
- PREVIOUSLY: The development of our Philippines project is also moving forward as anticipated with the opening date remaining unchanged at around the middle of 2014.
CITY OF DREAMS 5TH TOWER
- SAME: Tower 5 at CoD will open in late 2016/early 2017. The project will be focused on attracting premium mass and premium direct VIP business
- PREVIOUSLY: We anticipate starting construction on a fifth tower at City of Dreams before the end of 2013. This iconic development will provide another powerful lever to drive our premium mass business and expand our high-end patronage at City of Dreams, in turn enhancing property-wide return on invested capital.
- SAME: Board is crafting a dividend policy. MPEL will update investors in Q4 2013 or Q1 2014.
- PREVIOUSLY: I think the board is committed to look at a regular dividend policy because unlike some of our competitors, I think our board and the management team would prefer if we had stuck to one dividend policy. So we don't want to kind of make the decision like hastily. So anyways, it's going to be some time at the end of this year, early next year that we're going to sit down to discuss.
Solid but only in-line quarter. Q4 off to a good start
"Our committed focus on the mass market segments, particularly at the higher end of the market where we have a significant competitive advantage, continues to drive our Company's overall profitability and outperformance in the mass market table games segment. Our premium mass offerings continue to lead the way in Macau, with City of Dreams further extending its number one position in this increasingly important segment, as is evident in the property's leading mass market table yields....Clear progress is being made on the various and wide-ranging infrastructure programs both in Macau and regionally, which continue to support visitation and the mass market segments in general. The Macau market has delivered impressive growth year-to-date across all gaming segments, showing the market's unique position to cater to the expanding Asian middle class and, in particular, the inevitable shift to a consumer-led economy in China."
- Lawrence Ho, CEO of MPEL
CONF CALL NOTES
- Mass market segment continues to set new records
- Continue to lead in mass table yield
- Visitation to Macau has been robust in the last few months
- Studio City: on track to open mid-2015; upon opening, will significantly increase exposure to mass market
- Tower 5 at CoD: will open in late 2016/early 2017.
- CoD Manila: 365 gaming tables; over 1,680 slots/ETGs
- Will look at Japan opportunity
- Groupwide EBITDA: negatively impacted by win rate (Held higher in revenue share VIPs, held lower in rolling volume VIPs), $10-15MM adverse impact
- 3Q Hold-Adjusted (2.85% hold rate) EBITDA: $315MM
- 4Q guidance: D&A: $95-100MM, corporate expense: $22-24MM, net interest expense: $30-32MM (finance lease interest of $10MM relating to CoD and $10.6MM interest with Studio City--took into account $11MM in capitalized interest related primarily to Studio City
Q & A
- Luck-adjusted margins at Altira: 13%, CoD: 32% (up 200bps)
- VIPs moving towards revenue share (2/3-70% of VIPs)
- Increase in premium mass customers at every property in Macau
- Dealer labor regulations: govt will not change existing policy on local hiring as dealers, govt confident there will be enough people.
- Have done a good job optimizing rooms and tables
- Macau only has 25k rooms (1/8 of Vegas); need more rooms in the market to keep up with demand
- Greatest visitation has come from the Lotus Bridge
- 3Q VIP market share: 3Q rolling chip volume share dropped because of some shifts from VIP to premium mass. However, they saw RC volume share improving in October.
- Table cap: Until 2022, there will be 1,800 tables for 5 mega resort projects
- CoD Manila: working hard to open around mid-2014
- Tower 5: will be focused on premium mass and premium direct VIP business
- CoD Premium Direct VIP %: 15% (last year) to 20% in 3Q 2013
- Philippines capex: $60MM increase in construction budget ($620MM to $680MM)
- Believes they will grow the Philippines market
- Discussing a dividend policy: will announce in Q4 2013 or Q1 2014. Will take into consideration impact from potential Asia opportunities (Japan, Korea, Taiwan).
- Japan: closest that Japan has ever gotten in liberalizing the gaming market; have received calls for partnerships
- VIP market: gradually picking up relative to 2012; Chinese economy is growing again. Junket liquidity has been stable and getting good funding.
- CoD visitation trend: visitation in 3Q increased 8% YoY to 46,000/day. Did not really impact revenue.
- Gaming taxation in Philippines: PAGCOR has loosened slot caps and table caps. They are working on the tax issue. Hope for a resolution at end of year or early 2014.
- Henquin: may strike agreements with current developers on that island to build more hotels
- Grand Prix in Macau (2 weekends): do not see much impact on visitation; length of stay will be key
- 3 slot parlours closing Nov 26
- VIP/Mass breakout: 135/30 (Altira); 205/250 (CoD)
- Nothing unusual with overhead, debt provisions
- Minimum bet on mass tables: premium mass area min bet are increasing because average bet size have gone up
- Growth in mass business: not because VIP players dropping down into mass
- Premium mass customers are much more sophisticated than junket players who just want to gamble/go to clubs
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Client Talking Points
A big time (read: 16-year high) #GrowthAccelerating data point out of the United Kingdom this morning with a Services Purchasing Manager's Index (PMI) for October of 62.5. Boom. All of the austerity whiners and Keynesians out there who don’t like #StrongPound should feel shame. The Pound Sterling is up +0.5% versus the US Dollar. We remain long of it.
The Dollar is failing at its intermediate-term TREND line of resistance again this morning with no support to the TAIL risk line of $79.21. Meanwhile, Bloomberg is running a ridiculous headline that the Fed’s policy should be “prolonged” to “stoke growth.” Huh? In related news, Rates Down, Dollar Down still means US Growth expectations down. See our chart of the day and US economic history for more information.
One of the stealth leading indicators for the credibility of US Growth’s slope (accelerating or slowing) is the one that is most hostage to domestic supply and demand. Natural Gas got crushed for a -7.8% loss last week. It's down another -1% this morning. It's officially bearish TREND now here at Hedgeye.
|FIXED INCOME||6%||INTL CURRENCIES||26%|
Top Long Ideas
In line with our #EuroBulls Q4 theme, we’re long the German DAX via the etf EWG. With European fundamentals showing improvement off low levels, we expect outperformance from Germany, and in turn for the region’s largest economy to pull the rest of the region higher. ECB policy remains highly accommodative and prepared to aid any of its sovereign members to preserve the Union. Inflation remains moderate and fundamentals are positive: confidence readings and PMIs are up since June, with factory orders trending higher and retail sales inflecting to push the trade balance higher. Finally, the unemployment rate has held steady at the low level of 6.9%, all of which signals to us that Germany’s economic climate is ramping up.
WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.
Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks. T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.
Three for the Road
TWEET OF THE DAY
There is a gaping divide between how Global Macro practitioners view the world and how academic economists view the world...@HedgeyeDDale
QUOTE OF THE DAY
"Man will never be able to build a flying device like a mosquito. I look at nature's complexity and think, man has the intelligence of mold growing on an apple." -Ray Dalio
STAT OF THE DAY
You have a 1 in 2,067,000 chance of dying in a plane crash and a 1 in 423,548 chance of dying from falling out of bed. (cracked.com)
Takeaway: Chain store sales still not picking up speed. GPS merchandising/signage blunder. TGT bets big on NYC. AMZN gets charitable -- sort of.
EVENTS TO WATCH OVER THE NEXT 24 HOURS
FOSL - Earnings Call: Tuesday 11/5 4:30 pm
ANF - Analyst Day: Wednesday 11/6 8:30 am
RL - Earnings Call: Wednesday 11/6 9:00 am
ICSC - Chain Store Sales Index
Takeaway: Retail sales decelerated for the second week in a row. Not to a disastrous extent -- but definitely not the rate of change we want to see headed into the start of the holiday shopping season.
GPS - A little confusion at Old Navy these days
Takeaway: Not exactly the message Gap wants to be sending to teens.
DKS, DIS - Dick's Sporting Goods to Run ESPN’s Online Fan Shop
- "Dick's Sporting Goods and ESPN today announced a multi-year agreement in which Dick's will serve as the exclusive e-commerce provider of licensed merchandise and sporting goods on ESPN.com and related digital properties."
- "This is the latest evolution in a growing relationship between ESPN and Dick's Sporting Goods, which also includes sponsorship of ESPN’s Champ Week coverage for college basketball, and content collaborations such as Hell Week, an original documentary produced by Dick's Sporting Goods Films in association with ESPN, which aired on ESPN2 and ESPNU earlier this year."
- As a result of the new agreement, fans will now be able to shop an expanded range of licensed fanwear available at the rebranded ESPN Fan Shop powered by Dick's Sporting Goods, located at dicks.com/espnfanshop.
- "Contextually integrated shopping opportunities will be featured across ESPN platforms in the near future – including ESPN.com, ESPN The Magazine, ESPN Radio and mobile properties like ScoreCenter, GameCast and WatchESPN – allowing fans to easily purchase officially licensed products…"
Takeaway: Definitely a positive move for DKS. But is it material enough to offset the fact that it can't seem to comp in it's own stores?
MW, Allen Edmonds - Allen Edmonds Bought by Private-Equity Firm Brentwood
- "Allen Edmonds Corp., a maker of high-end men's shoes that generated some takeover interest from Men's Wearhouse Inc...has revealed it has agreed to be sold to another buyer."
- "The closely held shoe maker on Monday said it agreed to be acquired by Brentwood Associates, a Los Angeles-based private equity firm. Terms of the deal weren't disclosed."
Takeaway: This is a punch in the jaw to MW, as Allen Edmonds would have been an exceptional fit. Perhaps Allen Edmonds was swayed by the fact that it is building its own retail business in rather high-end locations -- and did not want to be a part of a retailer it perceives to be old and stuffy.
TGT - Target cleans up in NY’s Grand Central
- "Target turned heads at New York’s Grand Central Terminal Monday morning with its newest popup store featuring an exclusive collection of bath and body products by Sonia Kashuk."
Takeaway: Not quite sure how much TGT paid for the real estate -- even though it's temporary. But you can't deny the fact that it picked one of the top foot-traffic locations in the world.
AMZN - Amazon Launches Do-Good Site
- "on Oct. 30, Amazon.com launched AmazonSmile, a separate website that allows shoppers to direct 0.5 percent of their purchase totals toward a charitable organization of their choice."
- "Some products sold on Amazon.com, including Kindle e-books and other digital media products, won't be eligible for the program. But otherwise, the pricing, selection and experience customers receive on AmazonSmile.com will be identical to the regular Amazon site."
Takeaway: Great idea -- from a socially-responsible perspective. But to exclude their highest grossing item -- especially one that is a proprietary product -- seems borderline ridiculous.
LULU - Lululemon Deals with New Round of Complaints about Yoga Pants
- "The new batch of complaints has focused on a couple of styles of pants -- Groove and Wunder Under, according to news reports."
- "A Lululemon spokeswoman said in an email that the problem isn't widespread, and that only a very small number of customers has complained. Her email mentioned only Groove Pants, not Wunder Under."
- "'We've heard from a very small number of guests that they have experienced some piling on their Groove Pants,' spokeswoman Alecia Pulman said in the email Friday. Her email was in response to queries from Reuters and other news organizations. 'The information we have tells us that piling is not a widespread concern and this guest feedback is not indicative of a larger issue,' she said."
Takeaway: Great example of how a company that had one PR blunder now has to deal with the press making a mountain out of a molehill. If the Luon debacle never happened, this would be a non-event.
J Crew, AEO, WSM - J Crew eyes share of Britain's retail bonanza with new Regent Street store
- "When...J Crew, opens its first major British outlet on Regent Street in London this week it will be just the latest foray from a battalion of US retailers levelling their sights on the competitive UK market."
- "Hot on the heels of the...fashion retailer could be American Eagle, a casual clothing chain, which is thought to be looking to sign its first outlets in London, probably at the Westfield shopping centres in Stratford and White City."
- "Meanwhile, homewares group Williams-Sonoma is set to open its first store in the UK, a branch of its upmarket West Elm brand, on Tottenham Court Road in central London on 5 December. It is understood to be looking for at least five more London stores and may take its Pottery Barn fascia there next year."
Takeaway: Makes perfect sense. In fact, it's a bit surprising that J Crew doesn’t have a bigger presence in the UK already. It's not exactly a brand-new early-cycle brand.
M - Bloomingdale's Glendale Store Sets New Focus
- "Bloomingdale’s is back on the expansion path, with a 115,000-square-foot unit in the Glendale Galleria in Los Angeles set to open Friday."
- "The Glendale site advances Bloomingdale’s strategy for opening scaled-down department stores and for trading up. It also marks the retailer’s first department store opening in three years."
Takeaway: We're not a fan of M by a long shot. But a massive redeeming factor that always makes us double check our thesis is the fact that it owns Bloomies. It's beyond debate that it is one of the best retailers in the apparel/accessories business. That said, it's not big enough to offset our view that Macy's Inc is nearing an ungrowable level of sales/square foot, margins are near peak, capital intensity is increasing, and expectations are high.
PVH, GIII - PVH Corp. and G-III Apparel Group, Ltd. Complete Sale of G.H. Bass & Co. Business
- "PVH Corp. and G-III Apparel Group, Ltd. announced today that they have completed the previously announced sale of substantially all of the assets of PVH’s G.H. Bass & Co. division to a subsidiary of G-III. Gross proceeds from the transaction were approximately $50 million, paid in cash."
Takeaway: Good riddance. Between Calvin and Tommy -- PVH has its hand full with two quality brands with global relevance. The last thing it needs is Bass.
Bangladesh Wage Board Finally Makes Recommendation; Gazipur Overrun By Violent Protests
- "A special ad hoc panel convened by the government has decided to increase the minimum wage to about 5,300 takas ($66) per month, a 77 percent increase from the previous benchmark of 3,000 takas ($38)."
- "The Ministry of Labor still has to approve what only amounts to a non-binding recommendation. Kalpona Akter, the executive director of the Bangladesh Center for Worker Solidarity, a non-governmental activist group that represents workers, has already voiced complaints that the wages will still be the lowest in the world. Also, Atiqul Islam, president of the Bangladesh Garment Manufacturers and Exporters Association, also made clear that his organization has yet to accept the wage increase."
- "Riots have roiled Gazipur, closing down fifteen factories. Throngs of angry workers have reportedly broken the windows in at least twenty buildings, also vandalizing cars. Apparently, they are demanding a wage hike to at least 8,000 takas (about $103)."
Indian Factory Fire Kills Six
- "A fire erupted in a textile factory in New Dehli, India, killing at least six workers, including four women….A fire department official said, 'The initial investigation suggests that a short circuit was the cause of the fire, but a definitive conclusion has still not been reached.'”
Charts & Bullets: Some trends from Singapore gaming in Q3
- Singapore gross gaming revenues rose 28% YoY in Q3 2013 to S$2.0 BN. Adjusted for high hold in both periods, GGR still gained 12%.
- Market VIP rolling chip volume grew 34% YoY in 3Q, 4th consecutive quarter of high double digit gains - Genting did particularly well in this segment, exploding 52% higher YoY, while MBS RC volume gained a respectable 19%.
- Because of the huge VIP quarter, Genting is inching closer to market share parity with MBS on overall gaming revenues
- As for the mass segment, MBS widened its share lead over Genting to 56%. Flat market mass volumes were disappointing in the midst of continued government restrictions on local players and players with political influence.
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