LEISURE LETTER (04/08/2015)


headline news  

April - VIP gaming promoters predict that Macau GGR in April will be less than the MOP20 billion the government is hoping for each month, Macao Daily reports.


The Chinese-language newspaper quotes one unidentified junket operator as saying the prospects for the VIP gaming market are opaque. The source said the slowing of growth in the mainland economy and central government policy were reducing gaming revenue in Macau.


The newspaper quotes another unidentified junket operator as saying the value of the VIP gaming market is now one-third of what it was at its peak.


Takeaway: Less than MOP20 billion suggests a fall of at least 36% YoY for April GGR. Indeed, the weak 1st week in April indicates it may look that way.


MGM - MGM China has agreed in principle with its lenders to amend and restate its Hong Kong Dollar denominated senior credit facilities agreement expanding the facility by $1 billion and extending the maturity by 18 months.  The amended and extended facilities will consist of a US$1.55 billion equivalent term loan, an increase from the previous $550 million term loan and US$1.45 billion equivalent revolving credit facility.  The facilities will amend and restate the existing US$2 billion credit facilities of MGM China Holdings Limited, in their entirety, and extend the term of those facilities to April, 2019.


The amended facilities will bear interest at a fluctuating rate per annum based on HIBOR plus a margin, initially set for a six month period at 1.75% per annum, but thereafter the margin (in the range of 1.375% to 2.50% per annum) will be determined by the company's leverage ratio.


Takeaway: MGM China needed this $1bn expansion of credit to fund its Cotai project amid a deteriorating demand environment.


LVS - A sampan that runs on a canal in the Marina Bay Sands shopping mall tipped over with guests in it on Sunday. It is the first time such an incident has happened since the sampan ride came into operation in 2010.


A spokesman for Marina Bay Sands told The Straits Times that the water in the canal is shallow, and that assistance was "immediately rendered" to the affected guests.



Macau Legend - The New Macau Association (ANM) says that the Land, Public Works and Transport Bureau (DSSOPT) plans to raise the height limit and to relax the density restrictions for new buildings to be built at the Fisherman’s Wharf. The association said that the plan runs counter to the government’s desire to protect world heritage sites.


ANM argues that these decisions are in conflict with the Cultural Institute’s suggestion about the area’s height limit of 60 meters, which was made last year. The association urged the government to extend the public notice period and to revise the Chief Executive’s instructions – which were issued in 2008 – to restrict the heights of buildings in the buffer areas surrounding the Guia Lighthouse. According to this regulation, part of the Fisherman’s Wharf is limited in height to 90 meters, while the other part cannot exceed 60 meters 



China LotSynergy - one of its units has won a bid to supply software to Henan Sports Lottery Administration Centre in mainland China for use in the sale by telephone of lottery tickets. The subsidiary, Beijing Huacai Yingtong Technology Co Ltd, is involved in the research and development of lottery systems and equipment.


The unit will provide “system project planning, software design and development and system testing services” to Henan Sports Lottery. It will also connect the system to the National Sports Lottery Administration Centre.



Paradise- South Korean gaming operator Paradise Co Ltd said sales from its casino business division decreased 11.6% in 1Q 2015 to KRW133.3 billion (US$122.2 million). The drop was caused by sales from table games, which were down 12.9% YoY, to KRW124.6 billion. Sales from machine games jumped 12.2% YoY to KRW 8.8 billion. Table drop decreased by 22.7% YoY in 1Q 2015 to KRW 1.1 trillion. 

Takeaway: Is this a hiccup or are Chinese high rollers starting to move elsewhere?


NCLH - Due to a technical issue with the ship’s ABB-manufactured Azipod propulsion system, Norwegian Star’s 15-day Panama Canal cruise, scheduled to depart on April 12 from Los Angeles, has been canceled. Passengers on the canceled cruise will receive a full refund and a 50% future cruise credit. 



CCL - Costa Cruises is promoting a money-back satisfaction guarantee for passengers who book a cruise by May 31. The concept is novel on the Italian market, though it's been done by sister brand Carnival Cruise Line stateside. 



RCL - is seeking shareholder approval for a delisting of shares on the Oslo Stock Exchange. The election of eight directors, including a newcomer, will also be considered at the company's annual meeting on May 28 in Miami. In addition, the proxy has a shareholder proposal that would require the company to take steps to increase diverse representation, inclusive of gender, race and ethnicity, on the board and assess the effectiveness of these efforts. Currently Royal Caribbean has one woman director; the race and ethnicity of its directors are not specified.



Singapore Visitation - For the 1st two months of 2015, overall visitation to Singapore have declined 5.5% YoY.  Indonesian visitors -largest visitor segment- tumbled 16% YoY in Jan-Feb. Malaysian visitors also fell 7%.. Mainland Chinese visitors dropped 3% in Jan-Feb; due to the CNY shift, a sharp drop in January (-25%) was offset by 17% growth in February.


LEISURE LETTER (04/08/2015) - 3

Takeaway: Weak Malaysian/Indonesian currencies may have contributed to the decline, which will pressure Singapore mass gaming volumes. 


Singapore Changi Airport visitation - February visitors was up 0.3% YoY. 


LEISURE LETTER (04/08/2015) - 2


LRT - The Transportation Infrastructure Office (GIT) has slammed the contractor responsible for building the depot superstructure of the Taipa section of the Light Rail Transit (LRT), blaming delays in the construction process on the contractor’s apparent inaction.

Takeaway: No point shifting blame. Get this project done.


Package tours - Travel agents are now arranging package tours for mainlanders that take in Macau and places over the border in Guangdong, Business Daily reports. The newspaper quotes the Macau International Chartered Tourist Guide Association and Macau Travel Industry Council as saying this is meant to make up for a decline last month in demand among mainlanders for package tours that take in Macau and Hong Kong.


It quotes the tour guide association’s president, Wu Wai Fong, as saying: “The negative image mainland visitors have of Hong Kong since the recent protests against mainland shoppers and parallel traders have really impacted the package tour business.”

Takeaway: Package tour visitors to Macau have been robust. This initiative may help even more.


March Regional revenues

Illinois: -6%

Ohio SSS: -4%

Detroit: -1%

Takeaway: Illinois and Ohio are coming in-line with our projections for March


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.

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P: Losing the Critical Debate? (Web IV)

Takeaway: All the noise in the CRB filings is clouding the key debate, which is not the royalty rates, but the royalty structure...


  1. THE CRITICAL DEBATE: the royalty structure.  The key difference between the P and SoundExchange (SX) rate proposals is that SX is not distinguishing between ad-supported and subscription royalty rates.  It’s that potential step-up in ad-supported rates that could cripple P’s model.  So the question is whether the CRB believes there should be a distinction between the two.
  2. P MAY BE LOSING THIS DEBATE: We believe there are three main considerations regarding the varying royalty rate structure.  In short, we suspect P doesn’t have much of a leg to stand on in this specific debate because the premise/support behind its arguments have limited legal bearing on the Web IV proceeding.   
  3. WEB IV=POWDER KEG: What we mean is that the viability of P's model is highly sensitive to very small variations in final Web IV rates.  To expound further: If P cannot convince the CRB to distinguish royalty rates by revenue source, then P would likely have to blow up its own business model.  See the below scenario analysis and links to prior notes for supporting detail.



Both P and SX have provided a series of dense divergent arguments to the CRB; each discussing seemingly entirely different topics, which makes hard to tell who is really “winning the argument”.  With all the noise in the CRB filings, we believe the street is losing sight of the key debate, which is the royalty structure.


The key difference between P’s and SX’s rate proposals comes down to the distinction between royalty rates for ad-supported vs. subscription tracks; SX is not distinguishing between the two in its proposal.  It would be that step-up in ad-supported rates that could crush P’s business model.  So the question is whether the CRB believes there should be a distinction between the two.


P: Losing the Critical Debate? (Web IV) - P   Web IV proposals 2


P MAY BE LOSING this debate

We believe there are three main considerations regarding the varying royalty rate structure.  In short, we suspect P doesn’t have much of a leg to stand on in this specific debate because the premise/support behind its arguments have limited legal bearing on the Web IV proceeding.   

  1. Pureplay Settlement is Irrelevant: It’s important to note that the distinction between royalty rates by revenue source (ad-supported vs. subscription) was not the result of any CRB decision through any Webcaster proceeding.  It came from the Pureplay settlement agreement; the terms of which prohibited the associated rates from ever being included as a benchmark in any rate-setting procedure.  P’s current proposal is structured under the same framework as the Pureplay agreement, and potentially existing agreements in the market (see below).
  2. Existing Benchmarks May Not be Relevant: The center of the debate on royalty rates is what willing buyers/sellers would agree to in a competitive market outside the shadow of statutory rates.  Both parties are using different benchmarks as precedent to argue their cases: P is using existing webcasting agreements, while SX is using existing on-demand/interactive agreements.   P’s benchmark appears more logical, but those agreement only cover a small subset of the market (28 of 29 agreements with independent labels).  Further, it would be tough to argue that these rates were determined outside of the shadow of statutory rates (or worse the Pureplay agreement), especially since SX provided witness testimony from involved parties suggesting otherwise.
  3. P’s Financial Positioning is Irrelevant: P has taken the position that it can’t afford a rate increase, let alone current rates.  Sx has taken the position that P’s wounds are self-inflicted because it has focused on gaining market share vs. profitability.  But Sx concludes with a more important point.  P’s financial positioning has no bearing on what the appropriate rate should be, quoting the CRB judges in the Web III Remand final ruling.  “The Act instructs the Judges to use the willing buyer/willing seller construct, assuming no statutory license. The Judges are not to identify the buyers' reasonable other (non- royalty) costs and decide upon a level of return (normal profit) sufficient to attract capital to the buyers.” In short, P's monetization strategy (advertising vs. subscription) has no bearing the statutory royalty rate.  



What we mean is that the viability of P's model is highly sensitive to very small variations in final Web IV rates.  To expound further: If P cannot convince the CRB to distinguish royalty rates by revenue source, P would likely have to blow up its own business model.  


We had previously run a series of scenario analyses projecting P's EBITDA under various potential Web IV outcomes (see first link below).  Below is an additional scenario: P's proposed subscription rates applied to ALL of its listener hours.  For context, P has only $355 million in cash.  


P: Losing the Critical Debate? (Web IV) - P   Web IV Scen P Sub rates 2


We're highlighting this scenario because this might be P's best case scenario for Web IV if the CRB judges do not distinguish between ad-supported and subscription rates.  That is unless the webcasters can convince the CRB that statutory royalty rates should be reset below those rates established in Web III, which seems like a stretch.


For more detail on the impact of Web IV on P's business model, see the two notes below.  Let us know if you have any questions, or would like to discuss in more detail.  


P: Worst-Case Scenario? (Web IV)

03/23/15 09:30 AM EDT

[click here]


P: Webcaster IV = Powder Keg

01/13/15 02:49 PM EST

[click here]



Hesham Shaaban, CFA


Euro, Oil, Rates

Client Talking Points


Down -1% vs USD yes, +0.5% this morning to $1.08 with a tighter risk range of $1.07-1.09 (vs. 1.04-1.10 two weeks ago) and plenty of bearish intermediate-term TREND resistance overhead.


After another hopeful headline ramp yesterday is met with a -2.5% this morning for WTI, taking it right back into the red for the YTD with an immediate-term risk range of $46.48-53.39 – lots of short selling opportunities again in everything Energy from the top-end of respective risk ranges.


Lower-For-Longer? Yep. German and Dutch 10YR yields falling to 0.17 and 0.34%, respectively, as UST 10YR yield falls back to 1.88% with Fed Fund Futures pushed to DEC 2015 – those shorting these sovereign bonds on “valuation” have no catalyst unless global growth and inflation accelerate.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Manitowoc (MTW) is splitting the business into two companies. Given the valuation differential between the sum-of-the-parts and the current enterprise value of the company, the break-up should be a substantial positive. Recent nonresidential and nonbuilding construction data remains firm for 2015, which suggests that MTW’s crane sales should see a pickup in the first half of the year. The Architecture Billings Index (a survey of architects) typically leads nonresidential and residential construction spending by approximately 9-12 months. More importantly, the ABI Index leads MTW Crane Orders by 2 quarters.


iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call, U.S. #HousingAccelerating remains 1 of the Top 3 Global Macro Themes in the Hedgeye Institutional Themes deck right now. Builder Confidence retreated for a 3rd consecutive month in March and New Home Starts in February saw their biggest month-over-month decline since January 2007.  We think the underlying reality is more sanguine with the preponderance of the weakness in the reported February data largely attributable to weather.  


                                           While labor supply constraints may serve as a drag to builder confidence, presumably it is rising demand trends that are driving tighter conditions in the resi employment market.  All else equal, we’d view improving demand as a net positive.  On the New Construction side, while the sharp drop in Housing Starts captured most of the headlines, we believe the real story was in the 3% gain in permits. We'd expect to see a big rebound in the next two months in housing starts as the data plays catch-up to the thaw.


Low-volatility Long Bonds (TLT) have plenty of room to run. Late-Cycle Economic Indicators are still deteriorating on a TRENDING Basis (Manufacturing, CapEX, inflation) while consumption driven numbers have improved. Most of the #Deflation trades bounced to something less-than-terrible (both absolute and relative) for 2015, whereas the real alpha trending in macro markets continues to play to the lower-rates-for-longer camp’s advantage.

Three for the Road


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“Expect problems and eat them for breakfast.”

-Alfred A. Montapert


Purchase Applications re-captured the 200-level on the index, rising +6.8% week-over-week  following +5.7% and +4.9% sequential gains in the prior two weeks, respectively.  On a year-over-basis growth in purchase demand was up +11.9%, marking a 3rd consecutive week of acceleration and the fastest rate of growth in 22 months.  


Daily table revenues for the 1st week of April came in only at HK$569m, down 34% YoY. This is worse than the low HK$600s we had been seeing in March. The Chingming festival (April 5) may have played a role in the lower numbers.


Last year, revenues fell 21% in the Chingming festival week versus the previous week. For 2013, the difference between the weeks was 2%. So there could be some impact but it varies. 


However, if the current run rate persists, we could be seeing a monthly decline closer to -40% for April, which would be another disappointment.


We will have more details in our Macau monthly presentation/conference call this Friday at 11am.





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