The Macau Metro Monitor. November 6th, 2009.




The numbers released as part of LVS’ draft IPO prospectus filed with the Hong Kong stock exchange show that Sands China Ltd is in “great shape”.  DM gives a few good points from the prospectus.

  • Macau’s gaming market is the biggest and is getting bigger every day
    • Venetian Macau Limited and Sands China Limited dominate the market in terms of earnings
  • LVS is the most diversified of Macau’s concessionaires, therefore it is well-placed for growth
    • There is room for improvement in many areas of the company’s business – MICE, for instance – and in some cases the improvement seems to be underway.  DM asks, “if the company can do US$228 million a quarter with only one piston firing, imagine what it can do when the rest join in
  • Its non-core assets are “incredible”.  Disposing of these could change everything


In terms of the small print, DM flags the following:

  • The line items in the prospectus on risk should be taken very seriously, especially the section about lawsuits against the company.  Some of the cases are more trivial than others but cases regarding the suspension of Lots 5&6 and the CotaiJets concession could meaningfully impact the company
  • Sands China Limited is operating within the domain of the Macau government and a regulatory environment different from anywhere else in the world.
    • The company has invested US$1.7 billion and still has not secured a land concession
    • Regarding the sub-concession agreement signed with Galaxy, the situation could swiftly change for the worse if the Chief Executive were to grant further sub-concessions.





Under the leadership of the president of MGM Grand Paradise Ltd, Grant Bowie, MGM Grand Macau has markedly improved its performance over the summer.  EBITDA has gone up sharply, from around US$25 million in Q2 to US$75 million in Q3.  Jim Murren’s comments on the conference call reflect his satisfaction with how the business is developing and, in particular, his satisfaction with Grant Bowie’s impact on operations. 





Gaming revenues for October came in at MOP12.7 billion, +42% y-o-y and +18% m-o-m.  However, Macau gaming stocks are still below where they were in September.  A strong month was always imminent after the surge of Golden Week.  SJM was surely helped by the celebrations bringing in mainlanders, who love the Lisboa, and the opening of L’Arc in September.  Its marketshare went up from 26% in September to nearly 31% in October, resulting in MOP3.89 billion in revenues.  LVS gained from 20% to 24%, with revenues at MOP3.05 billion.  November shouldn’t be as strong, according to DM, but the traffic in the casinos does not indicate a bad month, either. 





The Statistics and Census Service indicated yesterday that commercial flight movements at the Macau International Airport for the first nine months of the year fell by 23% y-o-y to 27,813.  Helicopter flights between Macau and Hong Kong also fell by 9% y-o-y to 11, 679 in the same period, whereas those between Macau and the mainland increased by 20% to 2,454.  In the nine months through September, passenger transport by sea between Macau and Hong Kong rose by 29% y-o-y to 82,341 ferry trips and totaled 15,928 between Macau and Mainland China, up by 2% compared with the first nine months of 2008.





Hengqin island, at three times the size of Macau, could add significantly to the tourist attractions in the region, according to the Asia Times.  LVS expressed interest in investing in a resort complex on the island as early as three years ago; the development potential of the island has long been recognized.  The most recent development proposal envisages a family-orientated leisure and resort center for the southern part of the island, and the new University of Macau campus in the east.


Official projections show Hengqin’s current population of 4,000 growing to 200,000 by 2020 and per capita GDP growing to US$29,000 at that time from US$1,200 today.  Chinese officials have lent their support to the project.  The ambitious plan amounts to a new model designed to bring out the best in Guangdong, Macau, and Hong Kong.  


With economic integration comes geographical integration – talks of allowing visa-free access to Hengqin for visitors from Macau and Hong Kong (and for foreigners) shows the direction of thought officials are assuming in their plans for Hengqin.  Through infrastructure (HK-Macau-Zhuhai bridge) and economic integration, there is no shortage of imagination on how to make full use of the “one country, two systems” policy.


“You have a nasty habit of surviving.”
-Kamal Kahn
As far as we know, ex-Galleon employee, Roomy Kahn is not related to the wealthy Afghan prince from Octopussy. That said, there seems to be plenty of metaphors that apply to James Bond spy films in the latest hedge fund round of arrests. The man with the smoking Galleon gun called himself Octopussy.
Ok. So. We know some of these hedgies are really smart, but…
1.      No Man makes up his own nickname

2.      Octopussy is a woman

I couldn’t make this up if I tried. The way by which certain people in this business sought out inside information is both pathetic and sad altogether. We need these people to just strap on a Raj-green sweater vest and some cuffs and go on their merry way to the Big House. It’s time for these Goldfingers to fully admit what it is that they do, leave the US Financial System, and hand over the assets to those fiduciaries who have a legitimate investment process.
Whether it be Madoff, or Stanford, or now Octopussy… for the Burning Buck, it’s all the same. Not only is American Finance land locked with the most politicized monetary policy we have ever seen, the Asset Management side of the business is facing a Credibility Crisis of generational proportions. In the age of YouTube and real-time data feeds, what do you think the Chinese think when they watch these almost fictional missions of espionage and deceit?
As the Credibility Crisis mounts, the Buck continues to Burn. Here are the three main drivers of the US Dollar hitting 2-week lows this morning:
1.      Fed Balance Sheet – after dropping last week, it went straight back up this week to $2.17T (T, as in TRILLION)

2.      G20 Meetings – they’ll play a little golf in Scotland this weekend; Monday’s news-flow will be anti-US Dollar

3.      Octopussy – re-reruns of the 1983 flick will be playing on a cable channel near you this weekend; starring General Orlov Hedgie

As Octopussy fans will remember, the Soviet renegade (Steven Berkoff) was the bag man for Kamal Khan. Russian style geo-political power is making a comeback these days. If you didn’t know that – now you know. It’s one of those unintended consequences of our Fed Heads not getting out of Washington much. The Russians get paid in inflated petrodollars, fyi…
Now that Russia’s stock market is leading the majors of the world for the YTD at +115% (including another +0.44% gain this morning in early European trading), Putin Power is looking to raise some debt. This is big. Understand that the Russians haven’t issued government debt since Pierce Brosnan played Bond in “Tomorrow Never Dies”, circa 97-98’. Remember Russia’s default? The guys at LTCM do. These Russian financial instruments “have a nasty habit of surviving!”
Whether it be Middle Eastern “Sukuk” oriented bond deals or the American LBO train finding her rails on Burlington Northern associated deal speculation again, it’s all born out of one and the same. Government’s have a Greenspan mandate to issue moneys from the heavens. This debtor addiction has indeed gone global.
Octopussy (when Bond was in traction): “I wish you weren’t in such a weakened condition.”
As long as the self perceived heroes of our governments can release themselves from the traction associated with massive debts and passionately kiss Octopussy, what does it matter folks? This is out of our control at this point. This movie is for real.
For those who are telling you that the US Dollar has stabilized, please get them a movie clip of the Slow Moving Train Wreck that has become our currency chart since Nixon abandoned the Gold Standard in 1971. The US Dollar is trading down for the 4th week out of the last five. Since March, its down -16%. That’s a crash.
I know it’s becoming consensus, but so is Bond getting the girl. “I trust that you can handle this contraption” of a dollar DOWN = everything priced in dollars UP correlation. It won’t last forever, but for now you are still getting paid by this “From Russia, With Love.”
Ahead of the employment report, I have done a lot of nothing.  My immediate term support/resistance lines for the SP500 are now 1029 and 1076, respectively.
Have a great weekend. Best of luck out there today,


 EWZ – iShares Brazil President Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt –leading to an investment grade credit rating. Brazil has managed its interest rate to promote stimulus. Brazil is a major producer of commodities. We believe the country’s profile matches up well with our reflation call.

EWT – iShares Taiwan With the introduction of “Panda Diplomacy” Taiwan has found itself growing closer to mainland China. Although the politics remain awkward, the business opportunities are massive and the private sector, now almost fully emerged from state dominance, has rushed to both service “the client” and to make capital investments there.  With an export industry base heavily weighted towards technology and communications equipment, Taiwanese companies are in the right place at the right time to catch the wave of increased consumer spending spurred by Beijing’s massive stimulus package.

XLU – SPDR Utilities We bought low beta Utilities on discount on 10/20. TRADE and TREND bullish.

EWG – iShares Germany Chancellor Angela Merkel won reelection with her pro-business coalition partners the Free Democrats. We expect to see continued leadership from her team with a focus on economic growth, including tax cuts. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; with fundamentals improving in a low CPI/interest rate environment, we expect slow but steady economic improvement from Europe’s largest economy.

GLD – SPDR Gold We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.   

CYB – WisdomTree Dreyfus Chinese Yuan The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

TIP – iShares TIPS The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.



XLI – SPDR Industrials Industrials shot up +1.1% on 11/3 because of a monster Berkshire bid. That’s now in the price of XLI. We’ll short expectations for V-shaped recovery. TRADE bullish, TREND bullish.

EWU – iShares UK Despite areas of improvement, broader fundamentals remain shaky in the UK: government debt continues to expand, leadership in critical positions lacks, and the country’s leverage to the banking sector remains glaringly negative.  Q3 saw its GDP contract by -0.4%. Further bank stimulus and the BOE’s increase in its bond purchasing program suggest that this will not end well.

XLY – SPDR Consumer Discretionary We shorted Howard Penney’s view on Consumer Discretionary stocks on 10/30. TRADE and TREND bullish.  

EWJ – iShares Japan While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

UUP – PowerShares US Dollar We re-shorted the US Dollar on strength on 10/20. There continues to be no government plan to support it.

FXB – CurrencyShares British Pound Sterling The Pound is the only major currency that looks remotely as precarious as the US Dollar. We shorted the Pound into strength on 10/16.

SHY – iShares 1-3 Year Treasury Bonds  If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.


Beneath the messy results, the quarter was better than we expected. 2010 guidance looks reasonable.



IGT reported $515MM of revenues and normalized adjusted EPS of $0.19, beating the Street and our expectations.  Beneath the mess of deffered revenue and one-time charges, we think that the quarter was actually pretty good.  Furthermore, visibility on 2010 has improved.  While near term growth is still not in the cards, we like the long-term outlook for the sector.  The opening of new gaming jurisdictions, normalized replacements, and the leaner meaner IGT, could all combine to double EPS for IGT in 3-4 years.


Despite not being able to recognize revenues on 2,000 units shipped to North America, IGT reported much better than expected product revenues.

  • Replacement sales were surprisingly strong, since the September quarter is usually a seasonally slower quarter.  It doesn't appear that sequential replacements were down very much at all.  IGT's share of replacements also increased materially, hitting or exceeding 40% for the first time in over a year.
  • 2,300 new and expansion shipments also implies that IGT got over 60% ship share.
    • We estimate that most of the CityCenter units that were shipped in the quarter were IGT's (~800)
  • ASP's were materially higher than our estimate due to the higher mix of MLD's

International product sales were mostly in line with our expectations.  The FX headwind should reverse itself in FY2010, and therefore ASP's should appear higher.


Gaming operations revenues were a little below our expectations while margins were better due to lower D&A charges given that a higher percentage of IGT's install base is fully depreciated



Other thoughts:

  • The Walker Digital charge off should come as no surprise since the pre-paid poker play at Station's was basically a complete failure
  • We continue to be impressed with Patty and her assurance of focusing on running a lean and ROI focused organization.  For those of you who have followed this space as long as we have, you know that IGT has never been know for being "lean",  "efficient", or "ROI-focused"
  • If IGT can really move to a single platform, that could mean huge capital expenditure savings and higher ROI for it's gaming operations business. In that past they have replaced 20k participation units per year without recycling or redeploying those units given the numerous platforms at IGT


Going forward:

  • Deferred product sales should provide a nice cushion of roughly $4MM for just NA new unit sales and provide a very nice bump in the $20MM range for 1Q2010 international box sales
  • We think management guidance of $0.77-$0.87 is reasonable.  Our revised estimate is $0.83 after factoring in the $0.06 non-cash hit to the P&L from the accounting change related to the convertible note.

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Messy quarter but top line comes in strong.  Should be good enough. 



"Our fiscal 2009 results reflect a challenging operating environment which we believe stabilized during our fiscal third and fourth quarters... While we remain cautious on the timing and extent of the replacement cycle, we have been encouraged by modest upticks in spending by many of our casino operator customers over the past two quarters."




  • Gaming operations continues to feel the impact of a weak economy, although they are starting to see some stabilization in win per day. 
    • $50 win per unit per day
    • Higher sub-segment yielded north of $110 per day
    • Margins benefited from a higher percentage of fully depreciated games
  • Installed base should resume growth as the environment stabilizes.  International saw relative strength
  • Product sales domestic:
    • Domestic replacement units were 3,800 in the quarter 
    • Future unit sales will exceed trough levels seen earlier this year
    • Domestic non-machine revenues were impacted by lower systems revenues and lower conversion kit sales
    • Higher deferred revenues due to bundling
    • ASPs increased as a result of higher mix of MLD products
  • International product sales:
    • Continue to feel the effects of economic weakness - especially in Western Europe
    • Higher systems and conversion kit sales
    • International ASPs were down due to a higher mix of lower price units
  • Product sales gross margins should remain in the 50% range
  • Operating expenses would have decreased 17% ex-non cash charges
  • Cost reduction efforts are becoming more evident.  Previously announced two rounds of $100MM of cuts.  They have completed about $135MM of annualized savings.  2010 plan contemplates the remainder of these initiatives, which will be partially offset by PGIC and inflation
  • SG&A expected to remain at approximately $100MM and R&D to remain in the low $50MM's range
  • Bad debt provision of $9MM stemmed from customers being impacted by the weak economy
  • D&A was $65MM including game operations
  • Beginning in the 1Q2010 they will have to bifurcate the interest expense calculated on the converts impacting them by $30MM or 6 cents a share next year.  (Basically interest expense > cash interest because the convert is at a discount to par and it needs to accrete re: new FASB rules)
  • Quarterly rate rate to trend at 39-40%
  • Have $1.7BN available on their R/C line.  New FASB rules will reduce their debt by roughly $140MM because the converts will be accounted for in equity
  • Capital expenditures were $250MM in 2009 due to lower investments and falling PP&E, expected to trend in the $50-75MM although they continue to trend at the low end of that range



Patty's comments

  • "While we remain cautious, there was continued improvement in operator sentiment"
  • This quarter saw operators cautiously re-enter the market to replace aging product
  • 1,700 MLD's shipped in the quarter and are excited about the 2.0 version which will be showcased at G2E
  • Stabilizing win per days at $51 per day are encouraging
  • Believes that this year's product portfolio will provide better clarity on the direction of the company
    • Game ops - introducing Sex in the City
    • Center stage mega jackpot series - Wheel of Fortune experience
    • They will finally have a common hardware platform  
    • Presenting a package that includes a box and package of games
  • Focusing on getting a better ROI
  • Refocusing sales organization around account management
  • New options exchange program will better align management with shareholders
  • New organization will be more focused on operating efficiencies, ROI, and delivering content driven product
  • Remain cautious on predicting timing and scale of the replacement cycle
  • Want to leverage renewed focus on content in their product sales business
  • Continue cost cutting efforts which will provide them with a leaner business model
  • Significant changes to accounting and capital structure impacting 2010 guidance of $0.77 to $0.87 which includes 6 cents a share of non cash accounting changes




  • Interest income was $15.8, $36.8MM of interest expense
  • Conducting pre-G2E meetings with customers and the feedback has been very positive.  Like the MLD technology and greater balance between participation and for sale games
  • Guidance doesn't include revenues from new jurisdiction
  • Replacement assumption ranges from 2009 like to something better
  • Japan sales?
    • Continues to be a challenging environment.  Introduced 3 games in 2009 that performed at market level
    • Shipped 775 units this Q
  • Gaming operations for 2010 assumptions
    • Slight improvement in play levels and also a slight increase in install base
  • Walk through the deferred revenue accounting
    • The majority of the replacement units were recognized
    • As they sell more and more bundles it puts them into the world of the software accounting (a la BYI)
    • Two new accounting pronouncements that will let them more easily separate the boxes from the downloaded games
    • In Aria they will need to recognize those revenues over time
    • Apparently Rosario (Argentina) was also deferred, due to the bundle, despite company telling us otherwise
  • CityCenter and SBG color on other manufacturers
    • Inter-operability testing had to cease in October so that the opening can be flawless
    • So SB-system will be on all IGT machines and some WMS machines.  Everyone else will use Nex-Gen as a bridge 
  • Guidance implications - are they sandbagging?
    • Low end is fairly conservative around the replacement cycle, yields, and install base.  Top end assumes 4Q like replacements, slightly better yields and small increase in install base
    • IL:  just focused on matching product functionality to the market regulations
    • OH:  Still some political and litigation risk, gaming commission needs to be formed, expect some litigation.  Not likely to ship there in FY2010
    • We don't think the high end is sand bagging - 3,800 replacement units is way above recent quarters, new and expansion unit shipments will be down, and their install base hasn't seen much growth in years.  New markets probably won't ship in the next 12 months
  • ASP increase has been driven by 85% AVP mix and MLD units
  • ASP guidance?  Will it be like 16,000 or 14,000 next year. Will they lower MLD pricing?
    • They don't think the MLD pricing is an issue - save on conversion costs for steppers.  Are getting more creative on bundling the MLD with other products in their arsenal to get more on the floor
    • ASP's over time are moving up
  • Non-machine sales, very hard to model? International units shipped... how do we think about that?
    • Non-machine revenues is most susceptible to deferred revenues (systems piece - again, this is just like BYI)
    • UK pretty stable, continental Europe should improve in FY2010, seeing continued improvement in Latin & South America and Mexico can also provide growth
  • 45.6k units in game operations install base was domestic
  • Deferred units:  CityCenter and Rosario were the vast majority
    • Rosario will be a FQ1 revenue recognition event
    • Aria is a 2 year revenue recognition event
    • Washington 1,200 units recognized over 2 years (split btw this and last quarter)
  • What market share are they assuming in their range of guidance?
    • 40-45% for 2010
  • 6,900 were shipped last quarter and 6,700 recognized
  • International, what drove sequential improvement?
    • Improvement in non-box
    • PGIC assets are starting to nicely contribute to international
    • New box launched for Australian markets
    • UK also was up
    • ASP increase was also due to higher priced platforms



Positive takeaways following my initial read through of 4Q09 results:


Earnings came in at $0.24 per share, higher than both my $0.22 EPS estimate and the street at $0.21.


U.S. same-store sales growth improved to -1% from -6% in Q3, better than my -3% estimate.  Trends continued to improve on a 2-year average basis as well.


Consolidated same-store sales came in -1% relative to -5% in Q3.


SBUX raised its fiscal 2010 EPS guidance range to up 15%-20% from its prior range of 13%-18%.


This guidance assumes “modestly positive comparable store sales.”  As I outlined yesterday in my earnings preview, I thought guidance above -1% would be a positive catalyst for the stock.


Management also raised its margin growth guidance for the U.S. to up 200-250 bps, from its initial expectation of 150-200 bps of improvement.


SBUX expects to generate free cash flow of $900 million in fiscal 2010, in line with its fiscal 2009 level (came in above the company ‘s free cash flow goal of $500 million).


The company exceeded its Q4 cost savings initiatives of $180 million in the quarter by $30 million.


U.S. operating margins of 12% in Q4 were in line with my expectations, up 760 bps YOY.


International operating margins grew 470 bps YOY to 8.8%.



WEN stated on its earnings call that Wendy’s October same-store sales declined 4%.  Although management stated that 2-year average trends are still up 1% as the company is lapping a difficult 5%-plus comparison from October 2008, this -4% number is a significant sequential step down from the +0.1% result in 3Q09 (-1.4% on a reported basis, which includes the negative impact of 300 fewer units YOY serving breakfast, as shown in the chart below).  Management commented that this -4% excludes the impact of removing breakfast so this number is even lower on a reported basis.


When asked specifically whether BKC’s $1 double cheeseburger could be somewhat responsible for the sequential fall off in trends, management attributed the softer result to both a tougher comparison and marketing in early October that focused on more thematic, brand repositioning “You Know When It's Real" advertising rather than value/price point advertising.


Based on MCD’s guidance for October U.S. same-store sales of flat to negative, both MCD and Wendy’s experienced a sequential slowdown.  Again, BKC did not provide any specific color around October trends, but it did say the $1 double cheeseburger had provided a lift to traffic trends in the markets where it had already been launched in fiscal Q1, and it was launched nationally on October 19.  If this product’s success continues, October will not experience the full benefit as a result of the mid-month launch, but I would expect to see some sequential improvement and then see trends move higher for the balance of the year.  My expectation mirrors TAST’s recent comments about its Burger King comparable sales trends.  Earlier this week, TAST said that it expects its Burger King same-store sales to turn positive following a -5% result in October.  Even this -5% number already showed marginal improvement from TAST’s reported -6.1% comparable sales growth result in 3Q09.



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