LEISURE LETTER (12/08/2014)

Tickers:  CZR, CCL, SHO

EVENTS

  • Dec 8: 10:30 MTN Q1 2015 earnings
  • Dec 9: Hedgeye Client Holiday Cocktails Cellar Bar @ Bryant Park Hotel
  • Dec 14: City of Dreams Manila Soft Opening
  • Dec 17:  Upstate NY Casino Decision
  • Dec 20: Trump Taj Mahal Closing

Today's Headline Story

Macau Transit Visas  – In 2013, the Zhuhai checkpoints recorded a total of 2 million people entering Macau with a Chinese passport who didn’t actually depart for another country. During 2014, CCTV reports that around a million people are estimated to have entered Macau last year using a travel loophole. Travel agencies in Shenzhen and Zhuhai “helped” clients enter Macau and Hong Kong via non-legitimate visas and flight tickets. 
Article HERE

Takeaway:  Official Macau immigration figures show 2.64 million Mainlanders entered Macau in transit in 2013 but only 20.8% actually traveled to an overseas destination.  This is a huge number.  Stricter enforcement of the transit visas could result in a 7% reduction in annual total visitation to Macau.  

company news

CZR – Three months after Horseshoe Casino Baltimore opened to big crowds, its revenues are substantially lower than state consultants projected. The $442 million casino has averaged monthly revenue of $22.8 million, about a third less than forecast in November 2013 by a pair of state-funded consulting firms, which projected it would average about $32 million to $35 million a month in its first 10 months of operation.

Article HERE

Takeaway:  Horseshoe Casino competing in an already saturated greater Baltimore, Philadelphia market.  Maryland Live! is also holding tough despite the competition.   

CZR– plans to convert Caesars's largest unit into a real-estate investment trust is facing resistance from creditors, complicating the casino giant’s efforts to slash the unit’s $18.4 billion debt. The disagreement over the conversion plan for Caesars Entertainment Operating Co. and other terms of the restructuring have so far prevented Caesars from winning support from senior creditors for filing a prearranged bankruptcy plan for the unit.

Article HERE

Takeaway:  As we've repeatedly pointed out, the likely outcome is a large equity issuance to pay down debt or a debt for equity restructuring.

LVS & 1928.HK– Sands China Ltd appointed Melina Leong as chief operating officer of subsidiary Cotai Ferry Co Ltd. Ms Leong, currently serving as Sands China’s senior vice president of public relations and community affairs, will take on the new role from January 1, 2015. Ms Leong has been with the company for almost 10 years. 

Article HERE

Takeaway:  Interestingly, the announcement follows the appointment of Lionel Leong Vai Tac, Ms Leong’s brother, as Macau’s next Secretary for Economy and Finance.

Novomatic – Privately owned, giant Austrian gaming supplier Novomatic has made its second acquisition in two months. It has purchased Spanish gaming equipment supplier GiGames from Conei Group. Last month Novomatic bought Elam Group, the Dutch distributor for Interblock and Aristocrat.

Takeaway:  Novomatic quietly getting bigger.

CCL – The Dawn Princess, currently on a 13-day cruise to New Zealand, is plagued by a recurrent Norovirus outbreak which has sickened many of her 1500 passengers. Yesterday, more than 200 passengers remain restricted to their cabins with severe symptoms. 

Article HERE

Takeaway:  The Princess brand has been on a streak of bad luck recently 

CCL – Carnival Cruise Lines will offer a series of unforgettable 10- to 14-day voyages on six different ships between October 2015 and February 2016 that feature extended calls at magnificent destinations throughout the Caribbean, Bermuda, Mexican Riviera and The Bahamas. Several of the 10- and 11-day voyages can be combined into three-week-long Caribbean adventures providing an unmatched combination of breathtaking ports of call, amazing experiences ashore, and fun-filled sea days, all at an incredible value. These new voyages are in addition to a previously announced series of nine 10- to 14-day departures to the Caribbean and Bermuda offered on Carnival Triumph from Galveston and Carnival Pride from Baltimore in 2015-16.

Article HERE

Takeaway:  More longer-dated voyages for the Carnival brand

CCL – officially shut down its Spanish cruise line Iberocruceros this week, after the sale of its last remaining ship to an undisclosed buyer. Plans for the ship, Grand Celebration, to go to sister company Costa Cruises were scrapped last month. However, Costa, which absorbed the Iberocruceros' market, still remains committed to serving Carnival Corp.'s Spanish demographic.

Article HERE

CCL – Holland America Line's new ReadySetSail promotion has upgrades, reduced deposits and, for suite passengers, on-board credit and other perks. The promotion applies to select 2015 summer sailings. Travelers who book cruises or an Alaska Land+Sea Journey (offers on cruise portion only) will get a free stateroom upgrade from an inside to ocean-view or ocean-view to veranda stateroom, up to 10% savings on select shore excursions when booked before March 15, free or reduced third and fourth fares, and 50% off the normal deposit rate. Eligible destinations include Alaska cruises and Land+Sea Journeys, Bermuda, Canada/New England and Europe.

Article HERE

Takeaway:  HAL's Wave promotion is for most sailing regions

RCL - Michael Bayley named CEO of Royal Caribbean International. Bayley was previously the President and CEO of Celebrity Cruises. Lisa Lutoff-Perlo has been appointed the new CEO of Celebrity Cruises.  

Takeaway:  These changes were made to fill the vacant position by Adam Goldstein, who was recently promoted to President and COO of RCL.

Insider Transactions:

RCL – Royal Caribbean President and COO Adam Goldstein discloses sale of 90K shares on Friday, December 5th.

  • 60K shares were sold for $77.3128
  • 30K shares were sold for $77.2947 were for trusts for certain members of the Goldstein family
  • Goldstein beneficially owns 310.7K shares (all direct) following the transaction. 

SHO – CEO Kenneth Edward Cruse sold 31,296 shares of SHO stock on Friday, December 5th, at an average price of $16.10, and now directly owns 605,985 shares in the company. The sale was not options related nor part of a 10b5-1 plan. 

INDUSTRY NEWS

Macau Government Expected Gaming Slowdown – Chief Executive Chui Sai On has said he expects gross gaming revenue in Macau’s casinos to fall to MOP27.5 billion (US$3.45 billion) per month during 2015, and that his government is prepared for this. Mr Chui told reporters that the government had foreseen the slump and taken contingent measures and made appropriate financial arrangements beforehand. 

Article HERE

Takeaway: 2015 forecasted to be down -7% versus 2014 by the Chief Executive - better than the Hedgeye forecast of down 5-10%.

Mainland China Closely Watching Macau – China's top legislator Zhang Dejiang urged Macao's new government to continue fully implementing the "one country, two systems" principle. Zhang, chairman of the Standing Committee of the National People's Congress (NPC), made the remarks at a meeting with Chui Sai On, chief executive of Macao Special Administrative Region (SAR).

Article HERE

Takeaway: China keeping Macau close to the motherland.


Macau International Airport Expansion Planned – Macau International Airport is focused on increasing its capacity to 7.5 million passengers per year with the extension of the Passenger Terminal Building north side.

Article HERE

China's Banks Pressure PBoC to Lower RRR – China’s big banks are pressing the central bank to let them lend out more of their deposits. Currently big banks have to pledge 20% of deposits to the central bank. Reducing it by half a percentage point would boost banks’ liquidity by around 500 billion yuan, or about $81 billion.

Article HERE

 

Taj Mahal Closing Postponed – The owners of Atlantic City's Trump Taj Mahal casino have pushed back its scheduled closing date until Dec. 20. Trump Entertainment Resorts tells The Associated Press it decided to move the closing date back eight days while talks remain ongoing to try to save the casino and its 3,000 jobs.

Article HERE

Virginia Gaming Legislation – Virginia Senate BIll 19 was introduced.  The bill proposes a casino only in cities where more than 40% of the land is tax exempt - a condition under which only Portsmouth Virginia would qualify and includes a proposed 10% tax on GGR. Portsmouth is located to the west of Norfolk in eastern Virginia near the Atlantic coast.

Takeaway: A potential competitor to MGM's National Harbor casino located near Washington DC but the road is a long one to passage. 

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:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015. Following CCL's F3Q 2014 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.