Another quarter, another miss. However, January was very strong for the market and MPEL gained share. Catalysts are lined up for February as well. Here is our transcript:




“I am encouraged by our initial results so far this year, and I am confident that 2010 will be a strong year for us.”

- Lawrence Ho

Highlights from the Earnings Release

  • "In the fourth quarter, we successfully transitioned Altira Macau into a more traditional business model where we engage gaming promoters direct and not through an aggregator. This structural shift was precipitated by the introduction of the commission cap legislation in Macau on December 1, and although this legislation is a clear positive for us and the Macau gaming market, it also resulted in a temporary disruption in rolling chip volumes at Altira Macau during the reporting quarter."
  • “I am pleased to report that gaming volume has bounced back in January at Altira Macau to approximately 30 billion MOP for the month which, combined with reduced junket commission rates, is driving much improved profitability at Altira Macau. Additionally, our efforts to accelerate growth in our mass market business at City of Dreams have gained traction over the past two months. Bolstered by a moderate benefit from high rolling chip hold percentage in the past four weeks, our market share in gross gaming revenue terms has improved and our total EBITDA in January 2010 is estimated to be in excess of US$40 million."



  • Market share rebounded in Jan to 16%
  • Managing Altira in new commission environment and growing the Mass market business have been the two main areas of focus this quarter
  • Altira situation: Once the commission caps came in place, it was no longer possible to overpay for AMA. This served as a catalyst to sign direct agreements with all 12 junkets that formerly operated under the AMA umbrella.  Generated $10MM of EBITDA in Jan
  • City of Dreams hold reached almost 18% this quarter.  Generated over $30MM of EBITDA in Jan
  • Full complement of rooms at Hyatt weren't available until end of 09
  • Reconfigured the casino floor at CoD which has yielded benefits 
  • First phase marketing campaign was centered around awareness and the second phase is centered around conversion.  Will convert the second floor to have more entertainment options (Club/etc)
  • 2.85% hold would have meant $58MM of EBITDA
  • First covenant test is at the 9/30/2010. They intend to refinance the bank facility sometime in the 1H2010 ahead of the test date (which they acknowledge will be an issue given the weak current quarter)
  • Will not consider equity now
  • 1Q2010: D&A: $75MM, Net Interest expense: $20MM, Pre-opening expense: $5MM related solo to the Dragone production which will open in 6 months


  • Doesn't think that there will be any restrictive policies implemented by the government
  • Hold at Altira was normal and hold at CoD was a little high (by $5MM if you use theo) in Jan
  • Hyatt is now fully open. House of Dancing Water show, Kids Zone (chinese NY), nightclub (Q3), retail (will double from current)... will be the "destination of entertainment in Macau" by 3Q09. 
  • Regarding apartments, they will monitor what their neighbors are doing
  • Oct-Nov was flat for Mass volumes at CoD, and saw a 14% uplift in Dec bringing drop to $150MM. Saw another step up (11%) in Jan to $170MM in Mass drop, and hold has been improving as well. Running at MOP45MM drop per day at CoD
  • Combination of relay of computer floor, new marketing campaign, and full opening of Hyatt
  • Paying junkets at Altira 1.25% or rev share of 44%. They have 17 junkets in total - always had 5 junkets operating outside of Altira
  • Experience of refinancing debt: looking for a tranched facility with 5-8 year term to be completed by 2Q2010
  • Working capital for junkets at Altira?
    • They extended WC support to the junkets that were previously supported by AMA, they extended HK$525MM.  Now have market receiveables of $300MM.  Less chip liability its really $120MM ($20MM with direct, rest is their exposure to junkets).  1.25x monthly commissions at CoD and 1.5x at Altira which they believe is at the low end of WC provided to junkets in Macau
  • What % of commissions are fixed at 1.25% (% of rolling) vs. 44% share (% of revenues)?
    • 70% is as a % of RC (1.25% fixed) and 30% is revenue share and roughly 30% of the total business there is what they consider "direct" (which I suppose is in house junkets not true direct VIP)
  • Shareholder loan repayable mid 2010, would that be extended
    • Yes they will continue to roll it
  • Singapore exposure - direct & non-direct play from SE Asia
    • Think that impact will be minimal- especially from Mass & Chinese VIP. Only impact is "SE Asia" direct play- which shouldn't be material
  • CoD has about 20% of its VIP business done "direct"
    • I came up with a similar number (unlike last quarter where we differed on the calculation)
  • Comment on Harrah's rumors
    • "Total nonsense"
  • RC hold by property?
    • Was about identically low at both properties
  • Who lost substantial market share in Jan?
    • I guess its can only be WYNN or MGM bc we heard that Galaxy had very good growth (through the 3rd week of Jan)
  • Thoughts on costs of new R/C?
    • Current cost is $20MM/ Quarter (including the hedging cost). New facility will have bank debt and a high yield component. Goal is to keep the interest cost flat, given how low the current rates are
  • What happens to the cost base at CoD once the show opens? any cost cutting plans to offset that?
    • Will add about $100k/day of costs but they will be offset by ticket sales (think it will be a wash) but that the property will generate incremental visitation
  • Is this the new marketing campaign that they will have going forward?
    • Moved from a strategic position to tactical position focused on gaming growth.  Towards the last Q of 2010 they will likely adjust the marketing to include entertainment positioning in addition to continued gaming focus
  • Roll at CoD in Jan: 28BN  and 30BN at Altira
  • Why the big cash reduction sequentially?
    • Construction payables reductions ($120MM) and WC (CoD also experienced an increase WC as it grows $20MM or so from Q3 to Q4)
  • Altira - 80% at 1.25% and rest is rev share (has been stable for a long time)
  • Grand towers - 90% occupancy of which 90% is VIP.  Hard Rock - 97% occupancy of which 50% is Mass casino driven rest is retail. Hyatt: still ramping but in Jan 70% occupancy where about 50% are absorbed by casino programs, rest is retail
  • CoD database projectory has doubled to roughly 200,000
  • China's credit tightening measures and how it impacts them?
    • Will likely affect Chinese property market, and have a delayed impact on consumer demand. However, its unclear that it will impact them
  • Is there a reason why they hold low?
    • Atlira has held LTD at 2.7%
    • CoD has held at 2.8%
    • Some of the hold differences between properties can be due to accounting difference
    • There is nothing structurally wrong with their properties
  • CoD 2nd floor reconfiguration?
    • Can't announce them yet.  Several venues will be funded by their various entertainment partners (club style and extension of hardrock cafe)
  • Commission cap changes are not a catalyst for rapid share shifts between properties
  • AMA transition is done so whatever you see in Dec 31 balance sheet wise won't really change in March





Revisionist Research

“If we knew what we were doing, it wouldn’t be called research, would it?”

-Albert Einstein


After listening to Larry Kudlow cajole Hank Paulson last night, I thanked my lucky stars that men of this intellect and foresight were watching over my family between 2003 and 2007. On behalf of all Americans, I suppose they want me to thank them for saving our lives from the crisis they perpetuated.


I guess Kudlow is so caught up in running for the Republican party that he forgets demanding Bernanke provide what he called “shock and awe” liquidity to the system on all stock market down days. At the same time the ex- Goldman CEO reminds us that he “never second guessed my partners at the Fed.”


Kudlow called Paulson’s self serving Revisionist Research a “brilliant account” of saving us from their own compensation depression. They reminisced about Paulson’s Christian Scientist leanings and Kudlow’s prior addictions being saved by prayers to God. The whole thing was just scary, as Perceived Wisdom, combined with abused political and media power, usually is.


Turning the page back to reality this morning, the Chinese obviously watched that interview and had to wonder what in God’s good name they are doing betting the ranch of their currency reserves on a politically and religiously loaded American fraternity of conflicted interests.


Chinese stocks sold off again overnight, leading most of Asia to close lower, despite the CNBC oriented market cheering that’s always met with an American market up day. The Chinese don’t get paid to be willfully blind. Nor do they see any long term risk management in “never second guessing” the thought processes of two highly politicized men like Bernanke and Greenspan.


China, India, and Australia have an explicitly different view on monetary policy than America, Britain, and Japan. This is new. While 74% of “economists” thought the Reserve Bank of Australia’s Glenn Stevens was going to raise rates again overnight, he didn’t. That’s the point. He doesn’t have a Wall Street or a Washington consensus to pander to.


Countries that are leaning toward the once stated independent Federal Reserve policy (1980s, under Paul Volcker) of fighting inflation and asset price speculation continue to do just that, irrespective of being concerned with what their stock markets might do on any given minute, week, or month.


Australia has already raised rates 3-times in the last 3 months. China and India have both tightened bank reserve requirements, and raised short term lending rates. In the US, rather than manage risk like this proactively, we subscribe to reactive management, setting rate policy based on the blowings of the political wind. That’s what I have been referring to as the Bubble in US Politics.


Can you imagine Michael Bloomberg stepping up this morning and suggesting that New York City’s property prices are speculative? Could you ever imagine any American politician saying anything of the like, ever?


On Monday morning, the Mayor of Shanghai called property prices “too high.” This is AFTER property stocks in China have been getting hammered for the last 6 months. This isn’t about propping up a CNBC market quote folks. This is about learning from research associated with American asset price bubbles.


The China Banking Regulatory Commission warned lenders last night, again, about “hot money” in the property market. These guys are being both consistent in their message and vigilant in their execution of it. This isn’t leftist political rhetoric. This is called meaning what you say.


Now our call for Q1 has been that the Chinese Ox will be in a Box, so this is fine relative to the positioning of our intermediate term investment call. But please, please, do not mistake this for our grandstanding and making this a crash call. That’s what the fire engine chasers are doing AFTER the property bubble in China has already popped.


The Chinese property component of the Shanghai Composite Index closed down another 1% overnight, taking the overall Shanghai stock market index to down -10.5% for the YTD. After the fact, former Morgan Stanley research analyst, Andy Xie, is making headlines saying that the “property bubble is set to burst.”


Now don’t get me wrong, Xie does some great research. He’s by no means a consensus monkey. But calling for something to crash, after it has been crashing is probably a little bit more about selling research than making a long term call from here that you can make money on.


On January 10th, China’s State Council guided to explicit guidelines on property lending. Chinese lenders have to abide by a minimum 40% down-payment for 2nd mortgages, and price home loans 10% above the benchmark lending rate of 5.3%. Sound like an “easy money” bubble economy to you?


If you missed seeing this coming, that’s fine. But please don’t let a man purporting to be a researcher tell you that it’s either new this morning or that it wasn’t foreseeable. That’s what Larry Kudlow and Hank Paulson are telling you about 2008, rather than reminding you of all that they said and did between 2003 and 2007. History doesn’t start on the date they decide.


My immediate term support and resistance levels for the SP500 are now 1062 and 1098, respectively.


Best of luck out there today,





XLV – SPDR Healthcare — We bought back our bullish intermediate term view on Healthcare on 1/22/10.


XLK – SPDR Technology — We bought back Tech after a healthy 2-day pullback on 1/7/10.


UUP – PowerShares US Dollar Index Fund — We bought the USD Fund on 1/4/10 as an explicit way to represent our Q1 2010 Macro Theme that we have labeled Buck Breakout (we were bearish on the USD in ’09).


EWG - iShares Germany —Buying back the bullish intermediate term TREND thesis Matt Hedrick maintains on Germany. We are short Russia and, from a European exposure perspective, like being long the lower beta DAX against the higher beta RTSI as well.  

EWZ - iShares Brazil — As Greece and Dubai were blowing up, we took our Asset Allocation on International Equities to zero.  On 12/8/09 we started buying back exposure via our favorite country, Brazil, with the etf trading down on the day. We remain bullish on Brazil's commodity complex and believe the country's management of its interest rate policy has promoted stimulus.

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 mispriced and that TIPS are a efficient way to own yield on an inflation protected basis.



UNG – United States Natural Gas Fund Macro DJ (Daryl Jones) and I remain bearish on Commodities. Natural Gas had a healthy price pop on 2/1/10, prompting us to short it. 


XLE – SPDR Energy The Energy ETF was up +1.7% on 1/29/10 and we remain bearish on both oil and commodity prices for the intermediate term. Shorting green.


SPY – SPDR S&P 500 The SP500 broke our intermediate term TREND line earlier this week and remains broken. The 4Q09 GDP report confirms that Bernanke has to raise interest rates. ZERO is not a perpetual policy unless the USA wants to become Japan. We shorted SPY on 1/29/10.


GLD – SPDR Gold SharesWe re-shorted Gold on a bounce on 1/25/10. We remain bullish on the US Dollar and bearish on the intermediate term TREND for the gold price as a result.


IEF – iShares 7-10 Year TreasuryOne of our Macro Themes for Q1 of 2010 is "Rate Run-up". Our bearish view on US Treasuries is implied.
RSX – Market Vectors Russia
We shorted Russia on 12/18/09 after a terrible unemployment report and an intermediate term TREND view of oil’s price that’s bearish. Russia’s GDP fell 7.9% in 2009.


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.


The Macau Metro Monitor.  February 2nd, 2010.





Macau’s trade deficit widened to MOP 2.94 billion in December from MOP 2.78 billion in November, according to the Statistics and Census Service.  One year ago, the trade deficit was MOP 2.36 billion.  Exports from Macau dropped 25.5% year-over-year to MOP 680 million in December.  Imports’ value increased 10.6% year-over-year to MOP 3.62 billion in December. 



Casino gross receipts in January exceeded MOP 13.3 billion (US$ 1.67 billion), according to The Macau Post Daily.  The revenues beat the previous monthly record of MOP 12.6 billion (US$ 1.58 billion)  in October last year.  Compared with the casino sector's gross receipts of MOP 8.6 billion in January 2009, last month receipts were up around 55 percent.  SJM took market share of 30%, with Sands China taking 22% of revenues in January.

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Monday’s political undertone was that the Volcker rules could be significantly watered down in the Senate if not just DOA.  Today, Paul Volcker is scheduled to appear before a Senate hearing, with little expectations of presenting anything new.  Today’s set up in the Senate is for party-line grandstanding, with the possibility of a few fireworks from some of the more vocal members of the Senate. 


Yesterday, the S&P 500 finished higher by 1.43% on a 34% day-over-day decline is volume.  The upward move was helped by the weakening RISK AVERSION trade, as both the Dollar index and the VIX declined.  The VIX declined 7.9%, to 22.59 and is very close to the TRADE line of 22.51.  The Hedgeye Risk Management models have the following levels for VIX – buy Trade (20.56) and Sell Trade (28.12).


On the MACRO front, upbeat manufacturing data out of the US and China helped to underpin the RECOVERY trade.  Yesterday, the ISM manufacturing jumped to 58.4 in January from 54.9 in December, marking the highest level since mid-2004. The production component was a big contributor to the January increase, rising to 66.2 from 59.7. While the orders component only saw a slight improvement to 65.9 from 64.9, it remained firmly in expansionary territory.  Importantly Employment continued to improve, moving up to 53.3 from 50.2 in December.  


Nearly every up move in the S&P 500 in 2010 has been associated with very light volume and as I said earlier yesterday, was no exception.  The best performing sectors yesterday were the sectors that have decline the most year-to-date - XLB, XLE and XLF. 


Rebounding from an oversold condition, the Materials (XLB) was the best performing sector, rising 4%.  The XLB benefited from its leverage to the ISM manufacturing data and the support provided by the RECOVERY trade. 


The second best performing sector was Energy (XLE), up 3.3%.  While all the major commodities were strong yesterday, natural gas prices led the way with t 5.9% increase.  The integrated group snapped a four-day losing streak with help from the better-than-expected Q4 results out of XOM +2.7%. The coal stocks were also very strong following last week’s selloff.


The one sector that continues to underperform is Technology (XLK).  While there was some upside leadership coming from the semi space, with the SOX +3.1%, the balance of the group can’t get out of its own way despite the continued trend of better-than-expected December quarter earnings. 


As we look at today’s set up, the range for the S&P 500 is 36 points or 2.4% (1,062) downside and 0.8% (1,098) upside.  Equity futures are trading mixed to fair value following yesterday's strong gains with concerns over potential tightening in China, the US housing numbers due out today offset by recent economic data and the fact that most 4Q10 earnings continue to beat estimates.  


The Dollar Index decline 0.1% yesterday and the Hedgeye Risk Management models have the following levels for DXY – buy Trade (78.66) and Sell Trade (79.51). 


Copper rose for a second day in London on speculation that a weaker dollar will spur demand.  The Hedgeye Risk Management Quant models have the following levels for COPPER – buy Trade (2.99) and Sell Trade (3.13).


Gold remained almost unchanged over the past week, though a strong dollar is a negative for gold.  The Hedgeye Risk Management models have the following levels for GOLD – buy Trade (1,077) and Sell Trade (1,113).


Crude oil climbed for a second day on speculation that recovering demand in the U.S. is causing fuel supplies to drop.  The Hedgeye Risk Management models have the following levels for OIL – buy Trade (72.03) and Sell Trade (77.13).


Howard Penney

Managing Director















ASCA reports Q4 EPS on Wednesday and we are below the Street at $0.11. Below we’ve got a recap of management’s forward looking comments from the Q3 earnings release and conference call.



We are projecting Q4 EBITDA and EPS of $72.3 million and $0.11 versus the Street at $74.1 million and $0.13.  For 2010, we are only slightly behind the Street estimate, $1.02 versus $1.05.  ASCA is the only regional gamer where our 2010 estimate is close to the Street.


While lacking a catalyst, ASCA is unique in that it carries a significant free cash flow yield on net free cash flow, not just cash flow before discretionary capex.  This company is a cash cow.  We calculate a 13% net FCF yield, even after today’s big 4% stock move.  It is conceivable ASCA could grow it’s free cash flow by at least 3% over the next several years.  Management’s cash flow outlook will be an important topic of discussion on the call.





Property level commentary

  • Blackhawk: “We've had a substantial improvement in net revenues during October and an even more substantial improvement on adjusted EBITDA.”
  • “But at least during the month of October, the first month of the hotel being opening, the characteristics of the occupancy and the cash demand and cash ADRs are generally more of what we would see on a mature hotel instead of a brand-new one”
  • “We're starting to see some signs of impact from an intensive management effort including in Vicksburg.”
  • “Well, I think part of the issue with Vicksburg is the general economy. The Mississippi economy has never been the strongest that we operate in and with the current recession, there's been significant impact there. And there is additional competition, there's more gaming supply in the market which has affected our market share. I think we're seeing a little bit of light at the end of the tunnel in relationship to operating our new facility very efficiently and maximizing the customer satisfaction of coming to the new facility now…We're starting to see some margin improvement down there.”
  • “The changes we're making at Vicksburg will actually be completed during the fourth quarter. I don't know how much benefit we're going to really see in the fourth quarter that's demonstrable from that. I think we'll hopefully see some focus on margins down there irrespective of the changes.”


General Trends & Outlook

  • “We're seeing a little bit less spending per trip by patrons.”
  • “I do think it's going to be a longer and slower trajectory in terms of recovery from that in consumer spending but I think it's going to happen.”
  • “I think in East Chicago, we're looking a little bit more at the global issue with the economy and starting to see unemployment come back down. And I think in that particular market, unemployment is going to continue to go up for another quarter or two, no matter what your economist say.”


Balance Sheet/ Cash Flow and other

  • “We obviously don't anticipate borrowing any money in the fourth quarter.”
  • “We expect our leverage ratio will continue to improve. However, our fix charged coverage ratio is expected to decline slightly due to the increase in interest payments resulting from the unsecured notes offering.”
  • 2010 Capex: “What we're looking at for the coming year is somewhere in the neighborhood of say $75 million to $80 million.”
  • 2010 Capitalized Interest: “It's going to be very, very minimal. Nothing that you wouldn't want to take into account and booking at EPS.”
  • 2010 tax rate: “Next year, it should still be 42%, 43% on an annual basis.”

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