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LVS: UPDATE FROM LAS VEGAS

Here are the LVS notes from our meetings last week in Las Vegas

 

 

Macau:

  • LVS thinks that the mass business will grow in correlation with the GDP/infrastructure
  • VIP will be volatile
  • They are most bullish on Mass business
  • LVS won't be involved with Hengqin island development
  • Beijing wants to see the IPOs get done - pumping the numbers beforehand. The government also wants to see the Cotai strip get developed
  • LVS doesn't think they will loosen visitation restrictions. So basically the government is massaging the numbers to get IPOs and to get Cotai developed.  Guangdong was upset over the visa restrictions and people were getting killed over credit issues. It’s easy enough to come to Macau through a tour group
  • They don’t think that there is a correlation between visitation and gaming revenues for mass/VIP revenues.   90/10 rule - especially for Mass
  • Mass is more correlated to Chinese GDP growth.
  • Sands only has 20k visitors per day and they drop $600mm vs Venetian which does $700-800mm in Mass and has 50-60k visitors per day
  • Slots revenue is more correlated to visitation
  • Beijing just cares about job growth - that's why they want them to open Lots 5+6. They also know that in order for them to open they need to make some money.  Hence the motivation for allowing the selling of condos/selling of retail: LVS can reinvest in the strip
  • IPO will happen by year end - HK listing

 

 

Competitors

  • MGM is trying to get the mass business moving
  • CoD doesn't have the mass play
  • Oceanus - location will be an advantage

 

 

Las Vegas:

  • It’s all about room rates for them
  • MGM is still being very aggressive – they don't want to have a lot of inventory for 2010 - so they can markup City Center rooms
  • Wynn sets the rate. LVS prices right below Wynn, and everyone else falls in line
  • If they can raise rates they will make a ton of money
  • LVS would rather go into 2010 with a lot of inventory
  • It took a while to get the Palazzo "running"
  • If City Center prices above Wynn/Encore - and fill - then it’s great for everyone
  • Room rates are firming but it’s just seasonal
  • They think that, following the Encore addition, Wynn had to go deep to sell their rooms

 

 

Balance Sheet

  • LVS will send back $1.4bn back to the states following IPO – they had $2.2bn of cash at 6/30 at the US subsidiary. 5.2bn, including 3.6bn of cash.
  • Without the Macau IPO there is no equity in the USA

 

 

Capex

  • $50mm of maintenance capex in Las Vegas
  • Venetian looks a little tired – they will need to invest some capital

 

 

Singapore:

  • LVS is trying to have a large credit operation in Singapore in order to operate a direct marketing business
  • Expecting Jakarta, Singapore, Bangkok, Kuala Lumpur - not so much China (less than 5%)
  • LVS can enforce a gambling debt in Singapore
  • They will have some junkets there but it is hard to qualify under Singapore law
  • We believe the lack of junkets will slow the ramp in Singapore
  • They would be surprised if they didn't have the same visitation as Sands although they are not sure that most of them will gamble because of the admissions tax
  • Focused on a February opening - but won't know until November. They will open with 1,000 hotel rooms when they open (February 28) - out of 2,850 rooms.  The remainder of them will open within 90 days of opening.  LVS will open with 50% of the retail, then up to 90% in 90 days and last 10% will slowly roll out
  • LVS thinks that just hotel and retail can do $250MM in EBITDA for a full year (down from 330MM because of a drop in RevPAR).  With respect to retail, they are happy to rent at $300 per foot.  $400 was the peak
  • They thought they could do ADR of $270 with 90% occupancy.  Currently it seems like the performance will be closer to ADR of $200 with 90% occupancy
  • To come into the casino one needs to pay 100 Singapore Dollars ($60) if you are Singaporean. It costs 2,000 Singapore Dollars for the year
  • They are not sure how long gaming will take to ramp.  For Sands Macau they have been building the business for two years
  • They think it will open very strong and keep growing as all the other attractions there open.
  • The cost will be $5.5bn US dollars
  • Genting will open first - will give them something – 2,000 will incentivize them to do only one

PLANET HOLLYWOOD: UPDATE FROM LAS VEGAS

Here are the Planet Hollywood notes from our meetings in Las Vegas last week

 

 

Strip commentary:

  • The bridge connecting both sides of the strip should be completed by Dec 2010
  • They think that the Cosmo will open Dec 2010 in some limited capacity
  • There has been absolutely no activity on the Fontainebleau, and apparently they have shut down their office too – no one is picking up the phones there
    • We heard from a second source that PENN is trying to buy the project for around $100-$150MM, and other potential investors are looking at buying the site for similarly small amounts given the $1.5BN+ of funding the project still needs to open

Business environment:

  • “We’re bumping along the bottom”
  • For September, occupancies are in the 90%’s, but ADR is still very depressed. 
    • The next five nights in Vegas are booked solid with three conventions in town.
  • When we met with Planet Hollywood in April they told us that they were testing increasing rate… apparently they tested it and couldn’t pull it off
    • They are trying different strategies post guest bookings to up sell the customer
      • Selling early arrivals, giving free liquor with room stays, allowing guests to “bid” on a premium room when they are available
  • The lack of business travel is an issue, so the occupancy is lower quality
  • Value restaurants are doing very well, fine dining not so much
  • Summer occupancy was ok, but spend per customer and ADR continued to be weak
  • Groups are still struggling, when they are willing to make future bookings they want to make them at $150 per night, not $200. Leisure is a little better
  • Baccarat play is generally stronger than other segments

 


BYD: UPDATE FROM LAS VEGAS

Here are the BYD notes from our Las Vegas trip last week

 

 

Las Vegas Locals:

  • BYD doesn't think the unemployment level matters as much as consumer confidence
  • People have adjusted
  • They believe that they are at a bottom
  • We were surprised they weren’t more negative on this market given current economic factors

 

 

New supply in LV Locals:

  • M resorts, Cannery East, Red Rock, South Coast, Aliante. (Cannery, Aliante, M resorts)
  • There is little change in the promotional environment other than some more free play.  There has been a rational response to M coming online
  • Going forward, there is not a lot of new stuff coming online

 

 

Blue Chip:

  • It is too early to tell about Firekeepers. It is likely to steal a lot more business from Four Winds as it is within an hour from their property
  • Competition is as rational as they could hope.  Wouldn't want to open the tower in this economy and they aren't getting the return they want

 

 

Borgata/AC:

  • MGM in AC - If MGM has to exit - they may not want to buy the other half of Borgata. They can't buy the other half without causing some covenant issues/amending existing agreement
  • Impact from PA - There is very little impact from Bethlehem.  Table games will probably have an impact on them
  • AC - Revel won't be good for them. They think that the timeline laid out was aggressive
  • There is $20mm of dividend payments from Borgata annually

 

 

Stations:

  • They are very interested in Stations
  • Offered $950 million on the OpCo – can do that under the existing financing
  • Timing is uncertain – they have an exclusivity period of 120 days

 

 

Echelon

  • Pretty buttoned up on capex
  • They had $90mm to payout and it’s mostly done
  • No deadline to do anything there – need an economic recovery and with it, clarity on what is happening on the Strip
  • $700mm was of construction costs incurred on the property

 

 

Capex:

  • They are still buying slots
  • Spending 50mm on maintenance (used to be 120mm) – slots was 50% of that but now it is more than 50%
  • They can maintain the lower level of capex for 2 years
  • Properties are very fresh and there is no need to increase the level of capex at present
  • All cash is going to pay down debt
  • Final payment on Danai Jai Alai – $47m + interest will be made in Q12010

 

 

Credit facility:

  • May 2012 – maturity of bank line
  • Going out beyond 2012 for a bank line is too expensive
  • They will leave the credit facility in place for now

 

 

Acquisitions:

  • No fixed multiple for an asset
  • One problem is that they can't buy anything cheap

 

 

Downtown:

  • Still a good niche operation
  • $700-$1,500 package deal from Hawaii
  • It is difficult to steal from the downtown market because everything is cheaper there - harder to relocate
  • 3Q - will not be an easy comp but 4Q will be
  • For downtown - need to see fuel indices

 

 

Louisiana:

  • Never really participated in the bubble
  • Oil prices are helping. Delta downs - had easy comps due to the hurricane
  • They are doing creative marketing
  • Treasure Chest – there is more competition. Plus Katrina money is leaving. Business is derived almost exclusively on a local basis; there is no hotel at the property

 

 

General commentary:

  • It’s all about spend-per-visitor
  • It’s just a question of confidence
  • Non-rated business got hurt the most - lower priority. They are higher margin customers too

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BYI: UPDATE FROM LAS VEGAS

Here are the BYI notes from our meetings in Las Vegas last week

 


Replacement demand:

  • Casino budgets were set by corporate in October/November- so calendar 2009 will remain lackluster
  • They are not expecting big improvements in 2H09
  • They think normal replacement is 7-10 years. So 70-100k is "normal"
  • Ohio, IL and Italy are all centrally determined markets and BYI claims that WMS can't really participate in those markets

 

 

New casinos/markets:

  • BYI attained 20% market share at City Center, IGT got 50%, WMS got 22%
  • Illinois - They are meeting with a distributor in Chicago.  Video poker pays back 98% so you need a multi-pack offering. They don’t think that IGT gets more than a third. Systems is another big opportunity.  With respect to timing, they will have a better idea on timing Thursday
  • PA - doesn't think VLTs will happen

 

 

Participation:

  • They only have a few products in the WAP category. They have 700 digital towers in the queue - lap or fixed fee
  • BYI differentiates their participation games by performance solely
  • They have 14 test banks to see what works.  Licenses are tough to get and expensive. They are launching new games in the WAP business, which is a very tough segment to penetrate
  • WMS is doing a great job in WAPs and community gaming. WMS is being very aggressive

 

 

Mix:

  • Steppers: strongest space
  • Video: think that this will be their strongest G2E
  • V32 video is performing very well for them. They don't have great video for cinevision. They will do a bunch of wheel games too

 

International:

  • The international market is a huge opportunity for them - 16% of revenues and 22% shipped
  • Europe is 70% Novamatic
  • Australia - ALL owns that market 60-70% but is 3rd in terms of ship share. BYI is about 20% there
  • BYI has very good relationships in some European markets/Australia
  • They are re-launching in Australia this month.  A monopoly expires in Victoria in 2012 - so that's a big opportunity consisting almost entirely of video machines
  • They are working on South America/Europe. They are getting bombed by distributor type deals

 

 

General commentary:

  • They don't think the economy is recovering - just bouncing along the bottom
  • No question that new units will be way down next year

 

 

Products:

  • They have 40k S6000k’s in the field
  • They have 46 titles on the big spinning reel games. Digital towers.  V32 (tower like - similar to “Deal or No Deal”).  Have 7 new titles vs just one
  • Dual vision is like a wheel of fortune game - 2 people can play together.  The performance has been very strong - couples play it. Daily fee or participation
  • Fireball - it’s their hottest title. Digital tower series
  • Power strike - very strong - cinevision
  • Reel money - V32 really cool. Cash meteors - can spin - touch screen
  • Cash wheel - spinner on cinevision

ASCA: UPDATE FROM LAS VEGAS

Here are our notes from meetings in Las Vegas last week

 

 

Costs:

  • It looks like they have some more room to cut costs, unlike most regional operators
  • They have room to cut/close food outlets – too many amenities
  • It wouldn't take long to implement cuts
  • We think this could be the focus of the Q3 earnings call

 

 

General commentary:

  • Last year Labor Day weekend fell in August so it’s a tough comp. September will be better - look at August and September combined to see a real trend. Labor Day is a big weekend
  • Unemployment first, then gas are the major economic inputs
  • They think that the agriculture business is going to be down 38% and the effects of this will hit them
  • Jackpot is having a record year
  • No chatter of Nebraska legalizing gaming
  • Business isn't really improving - bumping along the bottom.  It’s just not employment rate but also that people are working less hours and, therefore, receiving less pay. 17.5% is the real unemployment rate
  • Win per admission has gone up but the admissions are down. They have lost the bottom end - so the number is inflated because it’s also not an apple-to-apple customer
  • ASCA is the only operator that has seen win per admission increase – because they are just not marketing to the bottom customer

 

 

Missouri:

  • They think that table games would have been 10% better in Missouri – buoyed by the loss limit removal - if not for the economy

 

 

Colorado:

  • Black Hawk- July was a substantial boost, August not as strong (holiday weekend)
  • The hotel will open September 29th

 

 

Capex:

  • Colorado was the last of the big capex
  • Construction costs haven't really decreased. Labor has decreased slightly
  • Council bluffs and East Chicago were the only other projects they ever spoke about - but based on HET results - there is no way they would do it (Chicago).  In Council Bluffs they would spend 100mm but they can't construct anything for that little
  • $50-$60mm in maintenance capex for 2009
  • 2010 will include a little deferred maintenance so capex is expected to be somewhat more substantial that year

 

 

Credit facility:

  • They still need to extend the agreement
  • Penn was lower than they thought. So they will pursue one shortly

 

 

East Chicago:

  • The 10th license in IL is 45 miles away from ASCA’s nearest property. They think it will be an immaterial event to them
  • IL unemployment increased there much more than in their other markets
  • They think that the Horseshoe impact has already been felt

 

 

Investment opportunities

  • Kansas - they already have $400mm invested in the Kansas City market so they are not interested
  • The tax rate is too high in other new jurisdictions
  • There are a few local assets in Vegas that are interesting but not cheap enough
  • Fontainebleau doesn't make sense and will cost 1.5bn to finish. It’s also in the worst location on the strip.  No walk traffic (across from Circus Circus)
  • ASCA would only buy something that's immediately accretive
  • They don't buy into the cross marketing benefit so much (look at Harrah’s)
  • They also wouldn't do anything until City Center opens
  • ASCA took a look at Ohio - taxes and license fee too high
  • They wouldn't be building new projects now (à la PNK). Banks don't like lending south of 5x-ish. They need the multiple to increase to create money. Their problem is the issue of losing the license
  • ASCA would pay 6x EBITDA for an asset if they could improve that EBITDA

 

 

Balance Sheet:

  • ASCA can add $6 of value in debt reduction alone over the next few years.
  • Would like to get to 3.5x leverage - no sooner than end of 2011.

 

 

River City (PNK) impact:

  • Very few customers come to ASCA from South County – ASCA is the most isolated
  • ASCA thinks that River City will do only $25mm in EBITDA - pay a few hundred million at most for that opportunity, not $250 million. 

IGT: UPDATE FROM LAS VEGAS

Here are our company notes from our Las Vegas trip last week

 

 

Replacements?

  • The 5 cent window in their guidance is related to the uncertainty around replacement demand
  • Sentiment has improved meaningfully - but they haven't seen any real pick up in orders. Taking a “wait and see” approach
  • In 2009, most of the casino capex budgets were very conservative and many weren’t really followed as things continued to get worse throughout 4Q08
  • 2010 should be better because you have a budget you will follow. They didn’t really want to quantify any expected increase

 

 

Hot Products:

  • Multi Layer Display (MLD) – selling for $19k.  Approximately 900 were shipped last quarter. One of their hottest products.

 

 

Discounting:

  • Claim that they aren’t really doing it - and that you can see that in the numbers and the margins that they report. 
  • We are hearing that a lot of discounting and deal-making is occurring.

 

 

Consolidating platforms & Cost Cuts:

  • Some of the different platforms are due to different geographies – for instance, Australia has their own platform, a lot through acquisitions (wager works/PGIC/Barcrest). Transitioning people to the same platform is a challenge and something that Chris Sachels (Microsoft former exec) is focused on integrating
  • Reducing material and design costs.
  • Game ops: trying to be more efficient on developed, more stream-lined boxes. SBG concept – they showed us the new MLD boxes that have about 100 different titles on the box (reels/ poker/ video) etc…
  • R&D is at the right level - but need better control about how those games get allocated. Better spend management.

 

 

R&D

  • Shift in focus towards content away from systems (SBG). 12-18 months title to go soup to nuts. But can compress that by going into vertical development.
  • Outsourcing content? They have a group of people that regularly develop content for them externally. 
  • We’ve heard from reliable sources that IGT plans on outsourcing much more content

 

 

M&A:

  • They are not interested in large scale M&A, but would be stupid not to be thinking about online. Unclear how they will approach it: white label/content/operator?
  • Patti has been telling people that they plan to look outside of gaming. This scares us at Research Edge.

 

 

Other:

  • SBG purchase? Imperial Palace in Biloxi has signed ($6-10 per day per device) on 60 units.
  • Patty’s Comp: 2010 is tied to EPS growth. But will be TBD going forward – wants a more “soft” formula
  • Pre-G2E show with BYI this year - Sunday Nov 15th.
  • Reel/video: no changes in the mix.

 

 

Argentina:

  • Casino Club Rosario will open over Sept/Oct 2009 and IGT got 70% of the floor share
  • IGT provided Casino Clubs Argentina with a $100MM line of credit for development and $40MM line towards floor financing; $93MM was funded as of June 30th
  • Company told me that casinos will have 3,500 units (website says 2,000 so getting a clarification on that)
  • Since IGT also provided the system, they will account for it either in this coming quarter or the following quarter

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