The Macau Metro Monitor. January 20th, 2010



  • StarWorld continues to outperform the market with all time record quarterly revenue of $3,455 million
  • StarWorld records six consecutive quarters of revenue growth
  • StarWorld delivers record VIP turnover volumes of $98 billion
  • StarWorld reports a very strong hotel occupancy of 96%
  • Galaxy Macau on schedule to open in the first quarter of 2011
  • Financing of Galaxy Macau progressing on schedule




H1N1 outbreaks have led to the suspension of a Taipa kindergarten and two classes from a special education center this week.  In addition, 5 more inmates at Macao Prison have tested positive for the virus. The Health Bureau confirmed that none of the infected students had been previously inoculated against the H1N1 flu.



In a Reuters interview yesterday, director of Macau's Gaming Inspection and Coordination Bureau, Manuel Joaquim das Neves, stated that "I think the possibility of more concessions is very low."  Genting and Harrah's were sited among hopefuls for new future gaming concessions.



Starting on February 13th, Viva Macau will add a direct Hanoi-Macau route 3x per week, offering off-peak economy fares for just US$25 one way. Viva Macau currently flys between Macau and HCM city.



The Shanghai 2010 World Expo, running between May 1 and Oct 31, is expected to attract more than 70MM visitors to Macau, according to Zhou Hanmin, deputy director of the World Expo 2010 Shanghai Committee.  As of Sunday, more than 18MM tickets had already been sold. The Expo, whose Chinese Pavilion permanent infrastructure has cost RMB$80 billion to construct, will focus on peace, development and the environment.


IGT should beat the Street for the Dec Q but the next two Qs could be tough.



We are projecting a beat by IGT, $0.22 vs. consensus at $0.20, driven by higher unit sales.  Tempering our enthusiasm, however, are lower estimates for the March and June quarters.  Longer term, we think there is potential for IGT and the rest of the suppliers to out earn Wall Street expectations.  The big caveat for IGT is stability in the Wheel line of products.  As wrote about in our 11/27/09 post, “IGT: HOW LONG WILL THE WHEEL KEEP TURNING?”, IGT remains heavily reliant on the Wheel games at the same time recent court decisions have opened the playing field.


FQ1 2010 Earnings Call Preview

We think that IGT will beat the street this quarter but that estimates need to come down for the rest of the year. Longer term we think there could be upside to the numbers provided there is little degradation in the Wheel and the timing of new markets does not slip

  • We’re at $0.22 cents vs. $0.20 cents for FQ1 2010 and $0.82 for FY2010 vs. consensus of $0.89
  • FQ2 (March) at $0.18 vs the Street at $0.20
  • We think the Street’s F2011 estimate of $1.11 could actually be low, again if new markets do not slip and the Wheel is stable


FQ1 Details:

  • Product sales of $267.1MM & gross margin of 51.2%
    • 6.8k North America shipments, comprising of 4k new unit shipments, 0.3k deferred units, and 2.5k replacements.  We have total new & expansion shipments to NA markets of 12.5k units in the Dec quarter.  We assume that IGT gets 40% share excluding Aria, which will be recognized on a deferred basis. We estimate that NA replacements will be 7.5k for the market in the Dec Q
    • ASP of $15.5k in NA:  we expect MLD to become a greater % of AVP sales as IGT has materially expanded the content available on MLD making the $3,000 price difference more compelling
    • International product sales are more of a guess, but we have roughly 8k units

 Gaming operations revenues of $285.2MM and gross margin of 59.0%

    • 250 net new casino participation placements
    • 100 net new racino & leased placements
    • Average win per day of $50.30

 Deferred revenues:

    • IGT procured a 50% share of CityCenter’s 1,940 slots, which will be recognized over the next 8 quarters
    • Systems revenues for CityCenter will remain deferred for 2 years, after which MGM must decide whether to buy the system for a fixed fee or pay based on a variable daily fee model.  CityCenter will take the next 2 years to determine the ROI of IGT’s SB system.
    • Currently there are 8-10 locations with SB banks (including those trialing the product)

 Other assumptions:

    • SG&A:  $95.0MM
    • R&D:  $53.5MM
    • Net Interest expense:  $26.0MM
    • Tax rate:  39.5%

Massachusetts and Number 8

With the odd turn of events into the Massachusetts special election, one of our top 10 ‘probable improbables’ (presented on 1/8/10) is looking even more scary.  Number 8 on our list is, “labor and the threat of unionization become a major issue in 2010”.  The could be a big, big deal for retail.


As it stands, the Employee Free Choice Act (EFCA) was introduced and championed by the late Senator Ted Kennedy. Today’s candidates are on complete opposite sides of the topic.  Coaklely (D) is a strong advocate of the bill and vows to continue to keep Kennedy’s legacy alive.  Brown (R) strongly opposes the EFCA, and with his lead at the polls, could put the bill into jeopardy.  Regardless of the outcome, there is no question that the idea of increased labor organization is gaining mindshare.  While our original thoughts may be slightly altered with a Republican victory, the key point is worth republishing. 


#8. Unionization Becomes a Major Issue. Regardless of your political view, one thing that is pretty difficult to deny is that after a tough 2009, Obama is backed into a corner as it relates to placating the masses. He’s not doing so with the Economy, and certainly not with Afghanistan. Health Care Reform is likely a bust. So what’s next? Stepping up to vilify the self-proclaimed Wall Street Elite much the same way FDR did in launching the Mellon Tax Trials in 1935 (Andrew Mellon was then the former Treasury Secretary, and the richest man in America). For what it’s worth, Mellon was exonerated, albeit two years after he died. So goes the shallow world of politics.


Massachusetts and Number 8 - Consumer Confidence Chart


Is this possible today? You bet.  But another way to show his support for those that voted for him, Obama could go the Labor route. Tom Tobin, our Health Care Sector hear, said it perfectly…


“Kids and independents elected Obama.  It may be that the 2010 midterm elections do not matter since the likelihood of losing a majority in the House appears slim.  But a political focus would also have to include the 2012 Presidential election as well.  Where Labor was a factor in the 2008 elections, replacing the optimistic kids who were on a messianic mission and the independents will be a tall order.  This is why I have the Employee Free Choice Act on my radar.  I think Obama may have made a mistake in pushing Health Reform I first, but rather should have used his fleeting political capital to secure what will surely be an enduring and growing base of union members should the Bill pass.”


Massachusetts and Number 8 - Vote table


What does this mean for retail? Everything!  Call a retailer and ask them what this means. They’ll probably say something that sounds like “We pay our store employees well and don’t think this is a problem.” C’mon man, are you kidding?  Don’t you realize that you should be monitoring the gap between your pay and work rules and those of your competition? Also, if you’re managing an Abercrombie, your competition for employees is not just American Eagle. It’s also the Nathan’s selling greasy hot dogs in the food court. Retailers should turn to China to see how labor changed the competitive landscape. Why did factory wages rise in China by over 30% in 2006? Because the migrant workers coming in to factories to cut, sew, glue, and generally get treated like dirt by non-compliant factories saw that they could go to a major city like Beijing and work at a KFC instead for more money and a better lifestyle.  This is an extreme example, of course, but if this Employee Free Choice Act gains traction, then it will be a big, big deal for retail.

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Inflationary Compares

With the December 2009 CPI now in the history book, the inflationary pressures following the collapse of oil prices in 2008 has worked its way through the system, leaving annual CPI inflation close to 3%. 


Importantly, what follows in the months ahead will be still higher annual inflation, with the pace picking up in response to the weak dollar policy of the “WE SEE NO BUBBLES” administration.  The 2009 weakening of the U.S. dollar resulted in a spike in oil and energy prices, as a well as in other dollar-denominated commodities.  Our 1Q2010 theme “RATE RUN-UP” is based on inflation stemming from 2009 monetary policy decisions, not from stronger economic demand in the USA.


The increase in the December CPI was primarily due to the Energy index, which rose 18.2% in 2009 after falling 21.3% in 2008.  The December CPI confirms some of the key issues facing the consumer.  The increase in the Energy index was caused by the gasoline index, which rose 53.5% in 2009 after declining 43.1% in 2008. The food index, which rose 5.9% in 2008, fell 0.5% for the 12 months ending December 2009, the first December-to- December decline since 1961.  The December CPI report was the first time since June 2009 that food-at-home prices rose faster than food-away-from home, and both increased for the month.  


Given the underlying reality that the economy is being propped up by the Obama Administration and a more serious inflation problem than is generally expected, the risks to reporting a trend towards higher-than-expected inflation and weaker-than-expected economic growth is growing.


Howard Penney

Managing Director


Inflationary Compares - bb



An analyst jacked up her Q4 estimates to unrealistic levels.



We were fans of WYNN and its Q4 outlook.  Expectations were creeping up along with the stock price and today Bernstein dropped a bomb.  Their Revenue and EPS estimates went to $878 million and $0.46 up from $771 million and $0.13, respectively.  Consensus is $0.10 and $781 million.  That’s quite an outlier.  Why they still have a market perform rating and a $64 price target on the stock with those estimates is a another issue.


In our 1/8/09 note we discussed higher numbers for WYNN.  While there could be upside to our $818 million revenue estimate and our $204 million EBITDA estimate, we think Bernstein is over the top, potentially setting the stage for a disappointment come earnings day.  EPS is less important for WYNN but our projection there is $0.17. 


Now that Q4 expectations have been ratcheted up the focus should be on the forward numbers.  The Baccarat business in Vegas and Macau has been off the charts.  Is it sustainable?  We worry about the sequential slowdown in the Chinese economy, the waning federal stimulus, and the Chinese stock market.  These macro variables could deflate the baccarat VIP “bubbles” in both Las Vegas and Macau.


MCD is scheduled to report December same-store sales numbers in conjunction with its 4Q09 earnings results before the market opens on Friday.  Contrary to the last two months, there should not be any significant calendar shift/trading day adjustment as December 2009 included the same number of weekends as the prior year; though Christmas did fall on a Friday in 2009 versus a Thursday in 2008.  It is important to remember that the reported numbers in December 2008 did include a calendar shift, which negatively impacted comparable sales growth by 0.5% to 3.2%, varying by area of the world.   


Taking that into consideration, I wanted to provide comparable sales ranges for each geographic segment as a benchmark of what I think would be GOOD, NEUTRAL, or BAD results based largely on 2-year average trends. 


U.S. (facing +5.0% comparison from last year; calendar shift hurt result by 0.5% to 3.2%): 

MCD removed the Double Cheeseburger from the Dollar Menu in December 2008 and raised the price to $1.19 (the Double Cheeseburger was replaced by the McDouble on the Dollar Menu). The YOY pricing favorability associated with this menu change went away in December 2009.

GOOD: Any positive result would reverse the prior two months of declines.  Looking at the October and November results together to normalize the impact of the calendar shift in both months, a positive result in December would signal a slight acceleration in 2-year average trends.  For reference, a 0.5% or better would point to a return to 3.0%-plus 2-year average trends on an underlying basis.  Although 3%+ 2-year average trends are not that impressive for MCD, it would imply a pick-up in trends relative to October and November.


NEUTRAL:  -1% to flat implies 2-year average trends that are in line with what we saw in October and November on a normalized basis.  Like last month, this range of results, though neutral from an investor sentiment perspective as it relates to expectations, is not a favorable sign for current trends.  Before October, MCD had not reported a decline in U.S. same-store sales growth since March 2008 so three consecutive months of declines would not be good.  Prior to November, MCD had not reported consecutive monthly declines since early 2003. 


BAD: Below -1% would signal a slight deceleration in 2-year average trends from October and November.  MCD has not reported a monthly comparable sales decline of greater than 1% since March 2003.


Europe (facing a relatively easy +5.4% comparison from last year; calendar shift hurt result by 0.5% to 3.2%):

GOOD: Better than +6% would signal a sequential acceleration in 2-year average trends from November.  To recall, November sales trends in Europe were not good as 2-year average trends decelerated rather significantly on a sequential basis from October (even after adjusting for the calendar shift).  MCD attributed the slowdown to continued weakness in Germany and more broadly, to the sluggish economy.  A +7% or better is needed to show that the November weakness was only a 1-month occurrence.


NEUTRAL: +5% to +6% would imply that 2-year average trends are about even with November levels.  Like in the U.S., this range is neutral relative to expectations, but would point to continued softness in top-line trends in Europe relative to results for the better part of 2009.


BAD: Below +5% would highlight that trends have not improved in Europe, but instead, have actually decelerated on a 2-year average basis from the already depressed November level.


APMEA (facing a relatively easy +5.7% comparison from last year; calendar shift hurt result by 0.5% to 3.2%):

GOOD: Better than +4.5% would signal that 2-year average trends have remained strong and actually accelerated sequentially from October and November on a normalized basis.


NEUTRAL: +3% to +4.5% would imply underlying 2-year average trends that are about even with what we saw in October and November on a normalized basis.


BAD: Below +3% would point to 2-year average trends that have slowed somewhat from the prior 2 months and would likely be a sign of continued weakness in Japan and China.


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