LEISURE LETTER (11/12/2014)

Tickers: MGM, H, HLT, RCL

EVENTS

  • Nov 13-16
    • Macau Grand Prix
    • Hedgeye Cruise Pricing Survey
  • Nov 16-18
    • Quantum of the Seas cruise to nowhere

COMPANY NEWS

880:HK SJM – Chief Executive Officer Ambrose So is bearish about Macau gambling revenue from high rollers over the next six months as Chinese President Xi Jinping escalates his anti-corruption drive. The executive of Asia’s largest casino operator expects industry-wide gaming revenue to be flat or drop slightly this year. So forecast a “high single digit” growth for 2015.

http://www.bloomberg.com/news/2014-11-12/sjm-sees-china-anti-graft-fallout-lasting-6-more-months.html

Takeaway: Mr. So isn't bearish enough - we'll take the under on high single digit growth for 2015.

 

AC:FP – listed for sale the Sofitel Bora Bora Marara Beach Resort, Sofitel Bora Bora Private Island and Sofitel Moorea Ia Ora Beach Resort in a move to focus on investment in Europe.  JLL Hotels & Hospitality Group has been exclusively appointed to offer the resorts for sale.

Takeaway: Such luxury properties are expensive to run and are often targeted for points redemption by its frequent guests and

 

H – filed an SEC Form 8K and disclosed "after the repurchase there are 111,405,463 shares of Class B Common Stock outstanding and 38,763,686 shares of Class A Common Stock outstanding, and the Company has approximately $110 million remaining under its repurchase authorization." 

 

Hyatt disclosed on November 5, the Company repurchased an aggregate of 1,122,000 shares of Class B Common Stock at a price of $60.1987 per share from an affiliate of Daniel Pritzker, which represents the Volume Weighted Average Price for the Class A Common Stock for the three (3) trading-day period ending October 31, 2014 as reported by Bloomberg,

 

HLT – announces the management agreement for Hilton on The Park Melbourne will expire on December 31, 2014 and will not be renewed.  Hilton on the Park Melbourne was the first Hilton hotel in Australia with a 40 year history.

Takeaway: While a unit loss, Hilton is adding 40+ new hotels per quarter to its managed and franchised segment, so the loss is negligible to revenues. Finally, based on the pictures we've viewed, it would appear the hotel is in need of capex to maintain the Hilton brand standards.


RCL – said it will be several years before the Sea Pass wristbands being used for room keys on Quantum of the Seas can be rolled out fleetwide. The radio-frequency identification (RFID) wristbands are simple, but they go hand-in-hand with a new shipboard property management system that takes a fair amount of time to install.

LEISURE LETTER (11/12/2014) - RCL RFID

Takeaway: Ultimately a device which should lower operational expenses. 

 

Insider Transactions:

SHO – COO Marc Andrew Hoffman sold 13,395 shares of stock on Monday, November 10 and at an average price of $15.62 and now owns 165,450 shares.

Takeaway: Another non-options related insider sale in the lodging industry.

INDUSTRY NEWS

Macau Concession Renegotiation Risks Rising? – According to Macau's Chief Executive Fernando Chui Sai, the government will conduct a study to assess the development of the gaming industry, ahead of the negotiations to renew the licenses of the six Macau gaming concessionaires.  The Chief Executive noted, “We have to conduct a study about the gaming industry and take into consideration if the concessionaires have followed the terms set in their contracts. We have to look at all features of their projects, including gaming and non-gaming elements, in order to speed up the economic diversification [of Macau]."

http://www.ggrasia.com/macau-govt-drafts-cautious-budget-on-weaker-ggr-chui/

Takeaway: Looks to us, like the concession renewals could be more contentious than currently expected. 

 

Macau 2015 Government Budget – The Macau government is being cautious about next year’s budget due to the slowdown in casino gross gaming revenue. The government has forecast total public revenue of MOP145 billion for 2015, excluding revenue raised by special bodies such as Macao Foundation. That is up 2.7% from the public revenue tally expected for 2014, but nonetheless a much smaller increase than in forecasts for previous years. In 2015 the government expects to collect MOP125 billion in direct taxes; however, the amount of taxes the administration is expecting from direct taxes on gaming is not disclosed and will be revealed when the Secretary for Economy and Finance discusses the draft budget with legislators.

http://www.ggrasia.com/macau-govt-drafts-cautious-budget-on-weaker-ggr-chui/

Takeaway: Gaming and the associated gaming taxes, once viewed as Macau's salvation are now viewed as too closely tied to the economic welfare of the SAR - thus the calls for increased economic diversification.

 

Macau 2015 Tax Rebates – Chief Executive Fernando Chui Sai called for residents’ understanding for their annual cash handout next year remaining unchanged at 9,000 patacas, adding he hoped a 6.75% increase in public servants’ salaries could take effect on January 1 which followed a public servants’ salary raise of 5.71% in May 2014.

http://www.macaunews.com.mo/content/view/3057/3/lang,english/

 

Texas Historical Racing Appeal Likely – In late August, the Texas Racing Commission approved a rule change to allow historical racing at Texas horse and dog tracks, despite objections from several state lawmakers. Two lawsuits were filed — one in Tarrant County by state Rep. Matt Krause, R-Fort Worth, who said commissioners lacked the the authority to allow the race betting machines (which some critics argue closely resemble slot machines), and one in Travis County by a coalition of charitable bingo groups that said the machines might run them out of business. The Fort Worth lawsuit was dismissed. But state District Judge Lora Livingston in Austin ruled the commission exceeded its authority and that such decisions should be left to the Legislature. 

http://www.star-telegram.com/2014/11/11/6280316/texas-fight-over-slot-machinelike.html?rh=1

Takeaway: Texas one of a few remaining growth markets for regional gaming and thus an appeal is likely.

 

Las Vegas F1 Gaining Speed – the driving force behind it is Farid Shidfar, founder of digital meeting service rundavoo.com and pioneer of the Los Angeles media and entertainment practice at consultancy firm Accenture. Mr Shidfar is understood to have been analyzing the opportunity to bring F1 to Vegas since 2011 and has boosted his efforts over the past year. On January 17 he founded the Nevada company P2M Motorsports Management LLC. According to Forbes, Mr. Ecclestone has handed Mr Shidfar a contract for a Vegas Grand Prix

http://www.forbes.com/sites/csylt/2014/11/10/revealed-the-tech-entrepreneur-behind-f1s-las-vegas-grand-prix/

Takeaway: As we wrote on October 20, the city would benefit from the energy, excitement, and significant foreign visitation related to the race and events.

 

Lodging 2015 RevPAR – Even as supply growth accelerates in 2015, PwC predicts that industry-wide occupancy levels will reach 64.9%, the highest levels since 1984. The strong outlook for group demand, combined with continued strong transient travel activity and a positive economic environment, will drive an 8.2% increase in RevPAR for 2014. By comparison for 2015, PwC is projecting that RevPAR growth will moderate to 7.4%, but at the same time ADR growth will tick upward by 150 basis points from 2014 projection of 4.7% to 6.2%, the largest year-over-year gain since 2007. PwC’s outlook expects supply growth to accelerate to 1.4% in 2015, given the increasing momentum of new construction: development was up 40% year-over-year in Q3.

http://www.globest.com/news/12_985/national/hotel/Hotel-Occupancy-Poised-for-20-Year-High-352405.html

Takeaway: Peak occupancy, peak ADR and peak margins and low supply growth - the perfect back drop for strong earnings growth but do investors believe? 

MACRO

China Economic Growth - The China Securities Journal noted that H1 2015 growth will likely fall to 7% before rebounding in H2, highlighting policies to support real estate and infrastructure investments, looser monetary policy, improvement in export environment, and lower commodity prices as supporting the rebound.

 

Japan Economic Growth - The Japan Center for Economic Research released its monthly estimates of GDP and inflation for FY14 and FY15. Real GDP is seen growing at +0.18% y/y in FY14 and +1.31% in FY15, while the nominal growth rates are +2.07% and +2.26%, respectively. GDP is seen growing +2.47% y/y in Q3 and +2.51% in Q4. Core CPI was seen at +3.11% in FY14 and +1.77% in FY15, excluding the effects of the consumption tax +1.10% and +1.11%, respectively.

 

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.


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