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Takeaway: Base mass is the story, and it’s an ugly one



Wow, what a ugly quarter! I’ve felt like I was pushing on a string trying to get people to focus on the single most problematic issue facing the Macau stocks:  Macau base mass business is declining.  We didn’t have hard revenue data to support our thesis, until now.  As it turned out, not only was base mass down, it was down horrifically.  The Street may have been anticipating flattish base mass while Hedgeye was expecting down mid-single digits.  We weren’t bearish enough as base mass plummeted 21% YoY at the Sands China properties in 1Q 2015.  Severe degradation of base mass revenues have huge ramifications for margins as evidenced by Macau property margins that were 400bps below the Street.


The only bright spot was only bright on a relative basis. Marina Bay Sands in Singapore beat expectations but on a hold adjusted basis, EBITDA was slightly below the Street and slightly above Hedgeye’s.  The property played lucky but volumes were down.  USA EBITDA also missed projections.


Our negative Macau thesis was predicated on significantly lower EBITDA estimates owing to negative implicit base mass projections. Remember that base mass carries the highest margins of any gaming segment. Since LVS was most exposed to base mass, the variance between Hedgeye and the Street was most pronounced in this name.  Apparently, the variance was not big enough.


LVS Q1 2015 TAKEAWAYS - base



  • No shares repurchased during the quarter following an aggressive buyback in previous quarters. This is telling - they need to protect the dividend.
  • Macau properties:  given the high fixed cost nature, the decline in base mass was a big blow to margins – operating expenses rose to a record high as a % of net revenues
  • Premium mass table reclass
    • Venetian Macau:  we estimate approximately 50% of the previously reclassed premium mass tables to direct VIP have been reversed.
    • Four Seasons:  also reclassed back some tables in 1Q
    • Sands Cotai Central:  we estimate SCC reclassed ~20% of its premium mass tables in 1Q
  • Disappointing non-gaming revenues as well
    • Each Macau property missed our non-gaming revenue targets. It was broad-based with significant weakness particularly in room revenue and retail.
    • At MBS, every category missed slightly on the non-gaming side
    • Vegas non-gaming (ex rooms) fell for the 1st time since Q4 2012. Room revenue also dropped YoY.
  • MBS under the hood
    • Despite high VIP hold, GGR fell 11% YoY in 1Q 2015 – consistent with the trends seen in the government tax receipts
    • Receivable Reserve % was lowest since 1Q 2014. Quarterly bad debt was lowest since 2012.
  • Vegas
    • Slot business remain hot for LVS with its 4th consecutive quarterly growth
    • Venetian played unlucky on both slots and tables



We will be hosting a flash call at 11:30am today (Thursday) to discuss the quarter and our outlook in more detail.  The focus will be on the base mass segment given the magnitude of the disappointment there, the significant margin implications of lower base mass expectations and the resulting impact on investor sentiment.  Long-term investors own Macau stocks primarily because of the view that base mass is the growth driver.  Will they now capitulate?




Please join us for a quick conference call to discuss the significant ramifications of the poor LVS Q1 earnings release. The call will be held today, April 23rd at 11:30AM ET.    


The focus will be on the base mass segment given the magnitude of the disappointment there, the significant margin implications of lower base mass expectations, and the resulting impact on investor sentiment. Long-term investors own Macau stocks primarily because of the view that base mass is the growth driver. Will they now capitulate?



Attendance on this call is limited. Please note if you are not a current subscriber to our Gaming, Lodging, and Leisure research there will be a fee associated with this research call. Ping for more information.


Takeaway: Grind mass the story, down 21% YoY with significantly bad margin implications in Q1 and going forward




  • Very hard to say whether Macau will get better in Q2
  • As confident as they have ever been in long-term outlook
  • At least 10% in regular dividend growth for next 3 years
  • LVS: leading company for integrated resorts projects
  • LVS: 97% Non-gaming space, 3% gaming space
  • MICE in Macau: 640k people in 2008, 1.8m people in 2014
  • LVS hotels account for 80% of lodging cash flow on Cotai
  • Stay fully invested in Macau in long-term
  • Today company is stronger than it has ever been
  • S'pore: LVS is the profit leader in both mass and VIP markets
  • Decline in VIP and premium mass segments contributed to EBITDA decline
    • What about the 21% decline in base (grind) mass revs?
  • Non-rolling win per day declined 6% QoQ. Base win per day declined 4% QoQ
  • Property visitation and non-gaming both declined 4% YoY in 1Q 2015
  • Hotel guests declined 10% in Feb 2015 vs Feb 2014. Occupancy declined 11% YoY.
  • Mix btw cash and comped customers have changed somewhat due to changes in hotel inventory.
    • Majority of cash-paying hotel customers do some gaming spend
  • MBS:  'surprisingly strong quarter'; hold-adjusted EBITDA was $371m. on a constant-currency basis, hold-adjusted EBITDA was up 3%
    • Highest 1Q mass win per day ever $4.7m ($5.0-5.5m on constant currency)
    • Prudent credit policy
  • Interested in Korea, Japan and Vietnam
  • No repurchase in stock in past quarter. Have $1.76bn available for stock repurchase.

Q & A

  • Why such low Macau margins?  Have incurred more non-gaming costs than competitors. Nothing unusual this quarter. 
  • No phone betting hurt LVS in junket business
  • Rather not go out and borrow money now 
  • Being more judicious with reinvestment to customers and advertising costs
  • Venetian base mass business busiest they have ever seen
  • Chance of Macau visitation cap: no chance whatsoever
  • HK-Macau bridge: one of their contacts thinks it could open in 2016/2017, not 2020
  • Re-examining all capex guidance for Parisian and other projects for cost cutting opportunities. Parisian need a labor boost, right now looking at late summer/Thanksgiving 2016 but could be as early as spring 2016 if they get the necessary labor
  • Falling hotel occupancy:  a lot more operators are now selling rooms rather than comping aggressively
  • S'pore occu fell:  currency issue. High-end suites (renting for $10k/day) had difficulty being filled. Still command the highest ADR in the market
  • Why not buyback any stock in 1Q?  Will be opportunistic in future. Wanted to protect dividends. 
  • Have a good vibe that one of the emerging markets will open up soon. Want to have enough cash for that opportunity.
  • Can't do special dividend growth, regular dividend growth and stock buyback all at same time

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YUM: It's A Win-Win

China is in turnaround mode as Taco Bell and KFC continue to fire on all cylinders.  YUM remains on the Hedgeye Best Ideas list as a long.


Yesterday after the close, YUM reported adjusted 1Q EPS of $0.80, coming in ahead of consensus at $0.71.  In the release, management reiterated its full-year 2015 EPS growth goal of “at least 10%,” with the street currently projecting 12% growth for the year.


We continue to see fair value for YUM between $95-100 per share.


YUM is one of the most conservatively managed restaurant companies in the space today which leads us to believe that our long thesis presents a win-win scenario for investors. 


One way to win is if the recovery in China sputters and the company is pushed to pull a lever or two to enhance shareholder value.  In our view, there are currently three significant levers at management’s disposal, including:

  1. Monetizing assets in China
  2. Leveraging the balance sheet
  3. Spinning off Pizza Hut

The other way to win is if the recovery in China persists and begins building toward normalized same-store sales and margins in China.  We began to see evidence of this in 1Q15 results.


With that being said, the recent sales disappointment from the Pizza Hut business suggests that it would make strategic sense to consider a sale or spin of that business.  We believe this will become more evident when DPZ and PZZA report comparable sales on April 23rd and May 5th, respectively, that we suspect will significantly outpace Pizza Hut’s results.


In the meantime, we remain encouraged with turnaround efforts in China and the strength of the Taco Bell and KFC businesses.


Below, we provide brief updates on each operating Division.


China Division same-store sales fell -12%, better than the consensus estimate of -14.4%.  Restaurant margins of 18.9% surpassed consensus estimates of 16.03%.  KFC and Pizza Hut same-store sales declined -14% and -6%, respectively.  Not only do same-store sales and customer metrics continue to improve, but are doing so while costs are being effectively managed.  Management continues to pursue growth in lower tier 3-6 cities, which remain underpenetrated and deliver superior returns given the low costs and high AUVs.  KFC recently launched its first menu revamp of the year, during which it will introduce eight new products over the course of the next three months.  A second menu revamp is planned for later this year.  The premium coffee rollout, which is in its infancy, has added an incremental weekly sales layer of around $300 per store.  Premium coffee should be in 2,500 stores by year-end.  Pizza Hut Casual Dining continues to rollout breakfast and expand its late night offerings while Home Service is approaching 300 units total.


Taco Bell same-store sales increased +6%, above the consensus estimate of +5.4%.  Restaurant margins of 19.6% surpassed the 16.8% consensus estimate.  Breakfast continues to do well at 6% of sales and restaurant margins approached 20%.  Management reiterated its goal of 8,000 domestic units and also cited strong performance in Latin America and Canada.  International continues to be a significant opportunity for further growth.


KFC same-store sales increased +5%, above the consensus estimate of +3.1%.  Restaurant margins of 15.3% surpassed the 13.6% consensus estimate.  The brand continues to be a global powerhouse with significant growth opportunities ahead.  80% of the 72 new international restaurants in the quarter were opened in emerging markets.


Pizza Hut same-store sales were flat, below the consensus estimate of +1.1%.  Restaurant margins of 11.6% were in-line with the consensus estimate.  The business clearly continues to struggle, particularly domestically where its new pizza platform/campaign has failed to drive the results they expected.  Management has decided to bring Collider Lab (consumer insight driven marketing company that helped rejuvenate Taco Bell) in-house in order to help revamp the domestic Pizza Hut business.  Internationally, Pizza Hut continues to expand rapidly, with plans to develop units at a record pace this year.  Management noted it is making the necessary investments in digital for the entire brand.


YUM: It's A Win-Win - 1


YUM: It's A Win-Win - 444

McCullough to Bartiromo on Fox Business: Here's How We're Playing 'Rates Down'

Hedgeye CEO Keith McCullough joined Fox Business anchor Maria Bartiromo on "Opening Bell" for the hour this morning. Here's a clip of him discussing how he's investing in this current interest rate environment. 


Watch our bi-weekly update on our active Macro Themes and Thematic Investment Conclusions below.


CLICK HERE to download the associated presentation in PDF format (20 slides).


As always, feel free to ping us with questions.


Have a great weekend,




Darius Dale


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