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Arnold Donald, CEO of CCL - commentary on China

  • Absorbs capacity from Caribbean

Alan B. Buckelew, COO of CCL

  • 90% of trips are to Asian destinations, most of them reachable by sea
    • Out of 98 million outbound trips, 88 million are in Asia.
  • Affluent Chinese growing at ~20% (>US$34K), Upper middle class growth ~22% (US$16-34K) CAGR (2012-2022)
  • Lower Passport Application fee $135 (before 2013); $32 (after 2013)
  • Japan: visa-free entry for Chinese cruisers, started March 2015
  • Korea: Visa-free entry to Jeju for Chinese cruisers started in last 3 years
  • Chinese Govt expects tourism to be 5% of GDP by 2020
  • Ministry of transport of PRC provided a detailed map of available Chinese ports
  • Chinese passenger projected to increase: +34% CAGR by 2020
  • Carnival entered Chinese market in 2006 with Costa. Costa reached profitability in 2013 and Princess reached profitability in 2014.
  • Costa: has 20 offices in China
  • 26,000 travel agents in China
  • 2,700 have outbound travel licenses and can sell cruises. Only Chinese companies can secure an outbound travel license.
  • Carnival strategic partnerships: CSSC, CMG
  • Princess target segment: age 30-40; affluent young adults with previous international travel experience, +150k RMB
  • Costa target segment: age 25-45; +120k RMB
  • Chinese prefer shorter cruises (3-6 nights)
  • Revised casino with baccarat 
  • Market share: Carnival has 43% market share; RCL: 32%; Star: 12%; local Chinese 14% (e.g Skysea)

Q & A


  • Would consider selling older ships... to Ctrip for example
    • Again, this would make a lot of sense for CCL
  • Constantly evaluating taking other brands to China
  • JV MOU - will be a domestic, Chinese brand
    • Very close on finalizing agreement. Hope partnership will be done in 2015. Ship won't be in the water 'for a couple of years'.
  • Will be a while before you get true competition within China
  • "Demand already exceeds supply"
  • Most Chinese cruisers are new cruisers
  • Carnival sell a lot of their Chinese inventory through distribution charters 
    • Do not see that system changing any time soon
    • Pricing integrity: charters pay Carnival and then go market the cruise
  • New Princess ship in China: expect higher double digit ROIC (above fleet average)
  • Carnival's inventory goes through a wholesale/charter model
    • Lots of charters. No one charter has a significant portion of CCL's bookings.
  • Working with Fincantieri on ship-building capacity in China. Could possibly build a ship from China in next 5-7 yrs.
  • China is a margin driver
  • New onboard initiatives: taking discounted cabins and targeting them towards gamblers.  
  • Cuba: still waiting for green light from Cuba govt regarding lifting the ban on leisure travel
  • Japan market: not going to have same growth as China because culture is quite 'cautious regarding travel'
  • Drydock days in 2015: used to put in more efficient fuel technology
  • Trends in Europe: economic malaise and geopolitical tensions pressuring results. Cruise demand concern as well because of popularity of European beaches. Germany is doing well. Europe doing better in 2015 vs 2014. 

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#ConsumerCycle: Retail Sales & Confidence Slide to Close 2Q

Takeaway: Retail Sales slide to close out 2Q. PCE will accelerate QoQ in 2Q but nothing like the bounceback we saw in 2Q14. We remain a 2%+/- economy

Summary Review:   Headline Retail Sales declined -0.3% sequentially and decelerated on both a 1Y and 2Y basis in June.   While the sequential decline in Auto Sales in June telegraphed the Headline deceleration, the magnitude of retreat was disappointing and the trend across the various sub-aggregates was similarly languid.   


Whether aggregate Income growth can maintain its recent ~5% pace and Services and NonDurables consumption can continue to buttress Household Spending growth to the same extent they have in 1H15 remain TBD.  The broader trend is Wage & Salary income and Services consumption (~2/3rds of HH spending) remains positive but the internals in the June employment report were soft and employment & consumption comps steepen in 2H.


Small Business Confidence, meanwhile, declined -4.2 pts in June with the Expectations and Job Openings readings leading the decline.  At 94.1 on the Index, NFIB optimism sits at its lowest levels since March of Last year. Consumer Confidence is a canonical late-cycle indicators and is presently just south of prior cycle peaks. 


In short, middling-to-down is not what Team Janet wants to see - particularly with sirenic hopes of a September lift-off still lingering and a sustained attempt at policy normalization stirring restlessly in the queue.  


June Notables:   

  • Gas:  Gas prices were up ~3% in June but that only translated to a +0.8% sequential gain in Gas Station sales
  • Auto’s:  Auto’s & auto parts were down -1.1% MoM.  Vehicle Sales declined -3.5% sequentially to 17.1 mm units in June – down from May’s gangbusters 17.7 mm figure (a 10Y and post-recession high).  This was a known known with the Vehicles Sales figures reported on  7/1.
  • Building/Furniture:  Building Materials and Furniture were down -1.3% and -1.6%, respectively, in June.  The magnitude fo decline is a bit surprising given the strength in the housing data in 2Q to-date.
  • Industry Momo: 11 of 13 Industries reported decelerating MoM growth while 9 of 13 decelerated sequentially on a YoY basis.
  • Inventory-to-Sales:  We’ll get the updated Inventory-to-Sales ratio’s a bit later but the trend remains higher with Inventories continuing to grow at a premium to sales.  Inventory's contribution to GDP is positive, until it isn't. 


Growth Context: 

  • Reported (QoQ Annualized):  In GDP accounting terms (QoQ Annualized; yellow box in Summary Table below) Retail Sales in 2Q are up +3.3% and accelerating relative to 1Q.  In short, household spending on goods will accelerate sequentially in 2Q but we will not see the magnitude of bounce we saw last year off a bad 1Q – Retail sales were up +6.9% QoQ annualized in 2Q last year
  • Year-over-Year:  While May reflected a modest acceleration, June returned to the broader trend of deceleration and, on quarterly basis, 2Q is tracking lower than 1Q and well below the mid-4%’s observed mid-year last year when goods was supporting PCE


…and, of course, the requisite Advance Report caveats.   Monthly Advance Retail Sales are notoriously volatile on a month-to-month basis, subject to significant revision and reported on a nominal basis - making it difficult at times to distinguish whether sales trend changes are due to prices or volumes.  What it offers in terms of timeliness, it lacks in terms of precision and magnitude.


#ConsumerCycle:  Retail Sales & Confidence Slide to Close 2Q - RS Cycle


#ConsumerCycle:  Retail Sales & Confidence Slide to Close 2Q - Retail Sales Headline   Control YoY


#ConsumerCycle:  Retail Sales & Confidence Slide to Close 2Q - Retail Sales vs PCE YoY


#ConsumerCycle:  Retail Sales & Confidence Slide to Close 2Q - Retail Inventory to Sales


#ConsumerCycle:  Retail Sales & Confidence Slide to Close 2Q - RS Summary Table


#ConsumerCycle:  Retail Sales & Confidence Slide to Close 2Q - Confidence Cycle


#ConsumerCycle:  Retail Sales & Confidence Slide to Close 2Q - NFIB LT


#ConsumerCycle:  Retail Sales & Confidence Slide to Close 2Q - Confidence Monitor




Christian B. Drake


LEISURE LETTER (07/14/2015)



July 14 CCL Investor Event

July 23 9am:  PENN 2Q CC

July 24 11am-2pm:  PENN Plainridge tour and investor day


WYNN - Wynn Macau Ltd says it will pay a summer bonus equivalent to one month’s salary to all eligible employees except senior managers. 

  • “Wynn Macau expects that the operating environment will still be challenging during the second half of the year,” the notice quotes company president Ian Michael Coughlan as saying.
  • “We hope our members will understand the difficulties that we may face, control each daily expense carefully and continue to provide excellent services.”


Takeaway: Bonuses continue to be given out despite tough operating environment. No margin relief in sight.


WYNN - City of Boston Says WYNN Reps knew of Mob ties to land in Everett, MA. 

  • Five people interviewed claim that WYNN, knew a mob associate with felony convictions would profit from his stake in the waterfront land where the Las Vegas casino company plans to build a resort.
  • Boston, which is suing the state Gaming Commission over its decision to award Wynn a gambling license, says the witnesses told commission investigators that Wynn representatives were informed of or discussed Charles Lightbody's ownership stake before signing an option on roughly 30 acres on the Everett waterfront across from Boston.



HLT - Hilton announced today its plans to recruit 500 full- and part-time, work-from-home positions to provide inbound reservation support for guests through the Hilton Reservations and Customer Care operation. 


HTHT - China Lodging Group, Limited announced its preliminary results for hotel operations in Q2 2015. Key takeaways from their results. 

  • Occupancy rate - Q2 2015 - 89% vs. Q2 2014 94% (-5%) YoY
  • ADR (in RMB) - Q2 2015 - 185RMB vs. Q2 2014 182RMB +1% YoY
  • RevPAR (in RMB) - Q2 2015 - 171RMB vs Q2 2014 164RMB (4%) YoY


Takeaway: RevPAR continues to decline for the economy scale in China. Not good news for WYN.


CCL - Carnival has taken shore excursions to another level by expanded offerings, adding exclusive new landside experiences and customized private tours, as well as new family-friendly enhancements, including fun complimentary beachside activities, value pricing and free tours in select ports for children under age five. 


Takeaway: CCL's onboard and other segment has seen stronger revenue growth recently. CCL is introducing new initiatives in that area. 


Macau Tourist Price Index - TPI for Q2 2015 increased by 0.82% YoY to 134.61, attributable to rising charges for restaurant services and dearer prices of local food products. Notable increase was observed in the price index of Entertainment & Cultural Activities +5.74%; Restaurant Services +5.13%; and Food, Alcoholic Beverages & Tobacco +4.50%. On the contrary, price index of Accommodation decreased by (2.82%) YoY due to lower room rates for three-and four-star hotels.  



Macau Luxury Retail Sales - The Macau Importers and Exporters Association expects that retail sales of luxuries in the city will turn out to be 30%-50% lower in 1H 2015 vs 1H 2014. 


Takeaway: Weak luxury sales is expected given mass deceleration.


Las Vegas Luxury Retail Sales - According to a report commissioned by the Las Vegas Convention and Visitors Authority, the average expenditure in 2014 among visitors who reported shopping during their trip was $246.12, up significantly from $192.34 in 2010, though down slightly from a recent peak in 2014. 

  • Senior Vice President of Retail at WYNN LV Hedy Woodrow said, "Luxury is definitely back.  We’ve had tremendous growth. [In 2014,] we actually beat the numbers from pre-recession.” In the last year, Woodrow said, she’s seen spending from domestic customers pick up, with guests coming from California and Texas to shop on the Strip.
  • Crystals Senior Vice President and General Manager Farid Matraki said, “We’ve never had one month where we did worse than the month before or the year before. Every quarter we have a record quarter. With Chinese customer numbers down, domestic business is now much stronger — and while Americans may not have the buying power of the Asian whales, they’re likely to visit Las Vegas more frequently."


Takeaway: Luxury retail may be considered strong, sales are still down from last year. Moreover, RevPAR growth was sluggish in Q2 (and likely for the summer) and Las Vegas is still dependent on the Chinese whales. 


Coloane CasinoSecretary for Economy and Finance Lionel Leong Vai Tac said on Monday that he would consider amending the law to keep Coloane free of casinos – if the public wishes.   



Philippine Gaming -  Philippine casino stocks surged after the nation’s regulator said gaming revenue could increase 20% this year even as China’s anti-corruption crackdown has weakened revenue in other parts of Asia.

  • First-half gaming revenue at the country’s casinos grew 16% to $1.4 billion, Philippine Amusement & Gaming Corp. Chairman Cristino Naguiat said in a telephone interview.  There’s a “good chance” it will reach $3 billion this year as he has predicted before, he added.
  • Tourist arrivals in the Philippines increased 8.2% to 2.23 million in the first five months of the year, with most coming from South Korea, who accounted for 24.5% of the total, followed by the U.S. and Japan, according to government data. China is the fourth largest source of tourists, with a 7.1% share.


Takeaway: Good news for MPEL Philippines  


U.S. Hotel Industry - Some of the largest hotel brands are reporting strong group business growth this year, signaling that businesses and organizations are continuing to feel more confident about the post-recession economy. 

  • Joseph Bates, VP of research for the Global Business Travel Association, estimates group meeting volume declined by 1.9% in 2014. Bates said much of the decline was as the result of a cyclical snapback from 2013, which saw an 8.6% growth. 
  • The foundation estimates that group business will increase this year by 1.6% and another 2.5% in 2016. Most of the growth is coming from the corporate sector. 


Takeaway: This is consistent with our meeting planner survey from late last year.


Iran Oil Embargo - Iran and six global powers reached a nuclear deal that could result in the easing of sanctions against Tehran and a gradual increase in its oil exports just as Asian economies showed further signs of weakness.  The deal will grant Tehran sanctions relief in exchange for curbs on its nuclear program, an Iranian diplomat said on Tuesday.


Takeaway: Lower oil impact has been a tailwind for cruisers and regional gaming.


China - new loans (June) 1.28T RMB vs. consensus 1T RMB and 900.8B RMB in May. 

  • Loan growth +13.4% YoY, vs. +14.0% YoY in May 
  • Deposits +10.7% YoY vs. +10.8% YoY in May

Takeaway: Loan data above expectations.


Singapore Economy - Numbers based on advance estimates:

  • Singapore economy grew by 1.7% on a YoY basis in the second quarter of 2015, lower than the 2.8 YoY growth in the previous quarter.
  • On a quarter-on-quarter seasonally-adjusted annualized basis, the economy contracted by 4.6%, a reversal from the 4.2% expansion in the preceding quarter.


Takeaway: Though these numbers will be revised, it's not a positive sign for Singapore.

Hedgeye Macro Team is incrementally bearish on U.S. consumption growth, based on the consumer's continued efforts to deleverage their household balance sheet combined with the peaking of consumer confidence and stagnating labor productivity.   

Takeaway:  For now, US regional gaming slowed in June but North American cruise pricing still doing well.

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