The Macau Metro Monitor. October 30th, 2009.





Las Vegas Sands Corp. has won approval from the Hong Kong stock exchange to list shares of the company’s Macau operations.  LVS can now move forward with the Hong Kong IPO which is expected to raise US$2 billion or more to help the company pay off its massive debt and revive their construction plans on Cotai.  The company is seeking a further US$2 billion in financing ahead of the offering.  Potential lenders are biding their time but LVS, ideally, would want the financing before the IPO to reassure investors and earn a better valuation.  The high levels of debt and skepticism over the “fickleness” of regulatory bodies in China have negatively impacted the company’s valuation.





Following the controversy surrounding the government’s decision to allow Galaxy to transfer the tenancy rights for their Cotai property to a third party while it is being developed, some local lawmakers have done a comparable survey of land values in Fai Chi Kei, near the border with Zhuhai.  They believe that the same-sized piece of land as Galaxy’s there is worth around MOP 175 billion.  Fai Chi Kei allows for the building and sale of residential units, whereas Cotai has been – up until now at least – an area where people are supposed to work rather than live. 





The Macau Studio City dispute is coming to a head. eSun Holdings, owned by Jack Lam, is suing New Cotai LLC, run by David Friedman, for HK$17 billion.  The bulk of the claim, HK$16.6 billion, is for “inducing or procuring breaches of fiduciary duties”.  HK$689 million is being sought for breaches in their sales and purchase agreement. 





The Apple Daily has quoted a “source” as saying that the Ho family is considering suing the doctors that have been taking care of Stanley Ho.  This “source” claims that the patient has never regained consciousness since undergoing brain surgery three months ago.  DM believes it would be quite likely that the Ho family could now sue Apple Daily, since the implication of the report is that they have been lying to the media about their father’s health.


Blow out quarter in Macau vs. low hold in LVS. The bulls will win this debate. 



LVS posted a huge quarter in Macau, beating our EBITDA projections which were already well above the Street.  The only "incremental" negative was an extremely low hold percentage in Las Vegas.  I use the term incremental because we still have issues with Las Vegas and are not so optimistic about 2010 as LVS management seemed on their conference call.  However, Macau will and should dominate the discussion and, until the massive table supply kicks in, near-term momentum remains.  Over $500 million in annual cost savings is not too shabby either.


Since consensus was only $133 million, the Street was probably surprised by the $150 million in EBITDA generated at the Venetian Macau during the quarter.  We were not - we projected $147 million - but Sands Macau did surprise us, beating our estimate of $65 million by $13 million.  Fixed cost reduction remains a story at both properties. By our math, Venetian Macau reduced fixed expenses by $16 million year over year and are on an annual run rate of $300 million in total fixed expenses at the property.  At Sands Macau, we estimate that fixed costs declined a whopping 57% and drove most of the variance from our EBITDA estimate.


In Las Vegas, EBITDA was a paltry $34 million.  We estimate the number should've been $65-70 million if not for a horrendously low table hold percentage of 12.2% - but still below our $75 million estimate.  Management was very excited about the group segment where there is more business on the books for 2010 already than was recorded for all of 2009.  This is a big positive but the enthusiasm must be tempered somewhat.  LVS is going off of a very easy comparison into the seasonally strongest convention quarter of the year with 3k more hotel rooms (Palazzo).  We are very encouraged by the cost cutting - 18% or $40 million y-o-y per our estimate.  Q4 EBITDA could surprise on the upside.


LVS looks to be in good shape for the remainder of the year and incremental catalysts are positive.  Just make sure to check your share counts.  When profitability returns in Q4, fully diluted shares should total around 815 million shares and not the 660 million shares recorded in the Q3 per share loss calculation.  Much of the sell side doesn't seem to have this right.


BYI makes FQ1 on lower SG&A. Not a high quality quarter but not that important either. We continue to be bullish on Q4 and the long-term and, indeed, guidance was increased.



While BYI reported an "in-line" EPS number of $0.53, we can't really say that they "met expectations."  If not for the 21% decrease in SG&A, BYI would have missed EPS by a mile.  Higher FY2010 guidance and a bullish outlook is good enough to forgive a weak quarter of equipment sales.


While we were disappointed in the FQ3 top-line, our thesis on BYI never focused on this quarter.  It's about owning the cheapest gaming equipment manufacturer into what we believe will be a huge cyclical rebound in replacements and abundant new market opportunities spurred by governments' need to fund ballooning fiscal deficits.


Despite an in-line EPS number, Bally's $196MM revenue missed our revenue estimate as well as the street's by $8MM and $10MM, respectively.  Excluding the casino operations, which no one really cares about anyway, the miss was driven by weaker gaming equipment sales.  BYI reported $62MM of equipment sales vs our $70MM estimate and $77MM consensus estimate.  The $8MM difference between our estimate and the actual number was evenly split on lower new gaming device revenues and other equipment sales.  New units sales were 3.5% below our estimated 4,079 number and ASP's were 3.6% below our estimated sales price of $14.6k.  BYI missed our North American shipment estimate by 300 units but partially made up the miss by higher international shipments.


Gaming operations was a touch better than Street expectations and a little below our estimate - the September quarter is typically seasonally weak.  We were amused when Haddrill called out Ramesh for sandbagging the systems numbers, because we think that's exactly what he did last quarter when he basically guided to a systems number higher than $47MM reported in June but lower than the mid-50's run rate.  We think that BYI's decision to guide to system's revenue for the year was a smart move since no one really knows how to model that business and therefore the street and buyside continually undervalue it. 


All the detail aside, SG&A really saved the day. While some of the savings were clearly due to lower litigation and auditing spend, we think the vast majority was driven by salary cuts.  BYI did say that SG&A would be higher next quarter.  Of course, so will revenues.  We are quite bullish on FQ2 and think Street estimates need to come up. 





As expected, BYI's outlook on 2010 and beyond was very bullish, and for good reason:

  • Operators signaling willingness to open their wallets a little wider in calendar 2010
  • Opportunities to enter numerous new jurisdictions domestically and internationally beyond FY2010
  • Exciting new games to be previewed at G2E
  • New platform for system gaining traction and the increasing likelihood of being able to install their iVIEW DM "bridge" technology onto IGT and WMS devices
  • Elimination of most of the IGT litigation and getting all the accounting issues behind them



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  • "Pleased to report a very strong start to 2010"
  • 9th quarter in the row of meeting or exceeding analyst estimates
  • Believe that shipshare in NA was in the low 20's%
  • Cost of services are now included in cost of sales for systems business. Maintenance revenues increased 10% to $13.5MM
  • SG&A decreased 18% y-o-y as a result of lower payroll, incentive comp, and lower legal and auditing fees.  Expect SG&A to increase sequentially but to be lower y-o-y due to the successful resolution of legal and auditing issues
  • Since Sept 20th they repurchased 200k shares around $36
  • No Trial date set for the anti-trust case
  • Shipped 2,418 units to NA customers. All but 87 were replacement sales, given the anemic number of new openings.
    • Didn't recognize any City Center shipments
  • Some competitors are discounting
  • Majority of NA shipments were video, and video continues to perform well
  • Think that they can maintain margin in the high 40's for game sales and that 50% is achievable
  • Gaming operations:
    • Increased premium games placed and got higher win per days
    • Just launched Digital Towers which are performing more than 2x house average
    • Commencing in the December quarter, new spinning reel games coming out
    • Backlog is the strongest they've seen in a while
  • Have a new cabinet to replace a 40-50k footprint of aging mechanical spinning reel games
  • Excited about G2E game launches. 188 unique game titles worldwide.  They think that they will blow you away with their showing
    • 90% of what they show will be available by the Spring
    • New Alpha platform - Alpha2, very strong feedback should allow them to compete effectively at G2E
    • Reel Image (transmissive technology) launching
  • Have seen more customer interest in their products over the last few months
  • Domestically focused on all coming gaming markets
  • Re-entering Australia over the next few weeks
  • Systems margin was lower than normal range because of the higher percentage of iVIEW and other hardware and higher services for systems installations.  Expect systems margins to get back to normal
  • Systems revenue should be $220-230MM with maintenance to be $58-62MM (already guided to this last Q)
  • Referred to the systems install at Galaxy this September
  • In Mexico they have 70 systems sites up and running.  The migration to Class III will present a great opportunity for them
  • Pipeline of opportunities allows them to remain bullish on the outlook for their business
  • Running a successful trial of iVIEW DM at Pechanga on 400 units and will grow to 1,200 units
  • The backwards compatibility advantage of their systems is an advantage
    • Basically you can run their "server applications" on legacy machines... so if casinos are strapped they don't need to buy new games to get new apps
  • Based on the solid start to the year, BYI raised the low end of their guidance by 5 cents (better margins and visibility)
  • When the economy / environment improves they should be able to grow EPS meaningfully
  • They have the highest margins in the industry
  • Their R&D effort is very productive, released 2x as many games this year
  • Continue to capitalize on their international growth opportunity


  • Pricing/discounting?
    • They were referring to a small competitor
  • Booking Aria?
    • I don't know why Bill thinks that companies booked CC in the quarter.  We met with CC slot management in mid-Sept and there were only 800 games on the floor
  • iVIEW DM at Pechanga, how important is this?
    • We wrote a note on this deployment because the release implicitly implies that they will put iVIEW DM on IGT & WMS machines... this is very material.  IGT will tell you that if you open their boxes the warranty lapses. We'll see what really happens though
    • 450 games now, 600 games in the next week then 1,200 in early 2010
  • Will all the iVIEW DMs go on just BYI, IGT, Konami machines?
    • Unclear.... they've already tested it. Expect to get the green light from IGT/ WMS "soon"
  • Tax rate for the year?
    • 36%
  • Mix of hardware and software in systems?
    • Still think that systems margins will be in the low 70's for the year
    • Also reclassified how they account from services/installation expense from SG&A to cost of systems sales.  They had $1.2MM of this cost imbedded in 1Q09 
  • What drove the strong international unit sales
    • 15% of the sales were to Mexico (Class II) -first for sale units into Mexico
    • Asia had a good quarter
    • South Africa kicked off
  • Mexico
    • Don't expect participation to get whacked there
    • They used to sell the games at very low margin and then also make a small participation fee... let's say $10-15/day
  • When will they recognize all that systems implementations that occurred in September?
    • Most was booked in the September quarter, some will be spread over 12 months, others fall into next quarter in line with "go-lives"

Q4 Retail Themes & Key Ideas Call: Tomorrow at 11am


Conference Call Friday October 30th. 11 AM EDT

The Research Edge Retail team, led by Brian McGough, will host a 4Q Retail Themes and Key Ideas call and web presentation along with CEO and Macro strategist Keith McCullough to review key findings on Friday, October 30th 2009.

From Dollar General to NIKE, Inc, the retail sector sits in the crosshairs of the current shifting economy. We'll cover actionable investment ideas over multiple durations. On the Q&A, we'll not only address all questions related to our content, but will also be available to comment on any retail tickers from a TRADE/TREND/TAIL risk management perspective.

The call will be available to subscribers and trialers of Research Edge Retail, and will include:

  • Macro impacts on global consumption patterns
  • Demand and supply interplays regionally & globally
  • The margin cycle in global Retail
  • Shifting Private Equity dynamics, and their role in structural change
  • Retail winners and losers from the Bankers Bonanza
  • Retail names and our Bombed Out Buck

Subscribers please contact to request call and presentation access. 

If you are a qualified institutional investor not currently subscribing to the Retail product, please reply or email our Head of Sales Jen Kane at to request a trial.





DG (Dollar General): IPO Black Book Available

We are proud to announce the availability of our DG (Dollar General) Black Book to subscribers to our exclusive Retail network. The report is available for institutions who are premium subscribers of the Retail team, and on an a la carte basis for all institutional Research Edge subscribers.


About Research Edge's DG Black Book

Dollar General will be one of the companies joining what we call the Banker Bonanza with its IPO. As the private equity / LBO industry moves to get paid for their boom-time excesses, we'll be putting this suspect class of IPOs under the microscope for our subscribers. Research Edge is one of the only research teams not muzzled from covering IPOs by participation in the banking deals. Un-conflicted, Un-constrained, Un-compromised.

Our DG IPO Black Book, which is included in the subscription for Premium subscribers of Brian McGough's Retail segment, is also available a la carte to others.


  • DG went private with stellar timing, just as unit growth halted, and margins compressed
  • We examine how the change in mix and other investments have impacted margins during its 'private period'
  • Given such changes, is the planned acceleration in store growth realistic, and are margins sustainable in that context?
  • Ultimately, what is a realistic price for the equity in light of the current market environment, prospects relative to competitors, and change in financial structure?


For Premium and Exclusive Retail subscribers, please email for your copy of the DG IPO Black Book.

For institutional investors who do not yet subscribe to Research Edge Retail and would like to trial the research or purchase the DG IPO Black Book a la carte, please reply to this email with your request.




DG (Dollar General): IPO Black Book Available - DG BB Cover



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