Higher direct play, lower "all in" commissions, and hold percentage drives margin and EBITDA upside in Macau.  Estimates need to go higher.



While Vegas was almost exactly in-line, WYNN put up a blockbuster quarter in Macau. A lot of it is sustainable. Net revenues were higher than we projected in Macau but the real story was margins. Part of the higher margins was related to better than expected hold percentage on both VIP and Mass. However, direct play was better and the rebate percentage was lower, both of which skewed our margins. We were using a 44% rate to model “all in commissions” which doesn’t take into account the direct play that gets rebated at a much lower rate – let’s say roughly 30%. If we adjust our model to reflect the direct play rebates, our 2010 Wynn Macau EBITDA estimate could go to a range of $650-700 million.


Here are the details:

  • Our net revenue estimate was $36MM below what Wynn Macau reported – the entire difference was due to the rebate rate being 0.8% vs. our estimate of 0.9%.
    • The rebate rate is meant to be an estimate of the commission rate that actually goes back to players in the form of a rebate versus the part of the commission that goes to junkets.  In 2009, the rebate rate was 88bps. However, it was skewed by a 1.13% rebate rate in 1Q09 that resulted from the huge 3.6% hold that property experienced.
    • Rebates averaged 30.3% of win in 2009 up from 28.5% in 2008 and 27.8% in 2007.
    • Assuming a normal hold rate of 2.85%, rebates should theoretically be 86 bps.
  • RC volumes were $20.2BN vs. our estimate of $20.6BN.  Therefore, our hold percentage estimate was 10 bps light of the Wynn actual hold rate.
    • We estimate RC volumes using our proprietary database and adjust for the historical difference between those numbers and what Wynn reports. Usually all or part of direct VIP play is excluded from the numbers we receive – so there is always some guesswork involved in calculating the correct RC and hold %.
    • The net effect was that we estimated $536MM of gross VIP win and it was closer to $545.
  • Our estimate of Mass win was spot on but the hold percentage was better, hence better flow-through to the bottom line.
  • Most of the upside came from a total commission rate of 40% vs our estimate of 44% - Higher mix of direct play certainly helped, but the bigger picture is that we need to consider going forward that given Wynn’s high percentage of direct play (guessing around 20-25%), that even if they are paying 44% or more on revenue share deals to junkets, the rate on direct play is considerably lower and therefore the blended rate should probably be closer to 40%.
  • The increase in retail, which is almost all cash business (i.e. not comped) also helped EBITDA by a few million.


Hegel was right when he said that we learn from history that man can never learn anything from history.

~George Bernard Shaw


Yesterday, we shorted the SPX as the market rallied back up to our immediate term resistance line.  That being said, in the absence of remarkably negative news, the market continues to show resiliency.  The S&P 500 finished higher for a second straight session on Thursday (up 1.94% last two days).   The interconnected MACRO environment remained the primary driver for sentiment and stocks. 


For the time being, European Sovereign Debt concerns continued to dissipate on heightened expectations that the EU/IMF aid package for Greece will be the panacea the country needs.  At Hedgeye Risk Management, a historical perspective is an important component of how we view the market.  As such, we have a different view of how the Domino Effect of Sovereign Debt will continue to play out. It will not end as well as some may hope.


The waning RISK AVERSION trade helped put the focus back on the earnings season, where the news cannot get much better.  Yesterday, the VIX was down 12.5% and is now only up 12% on the week.  The Hedgeye Risk Management models have levels for the VIX at: buy TRADE (17.27) and sell TRADE (19.42).


This past week initial jobless claims fell 11,000 to 448,000 from 459,000 (revised up 3k), which brought the rolling four-week average higher by 1,500 to 462,000. Our Financials analyst, Josh Steiner wrote yesterday - “As we said last week, there has emerged a clear divergence between the claims trajectory that dominated 2009 and the trajectory that has been in place year-to-date.  We remain concerned that without improvement in claims, a leading indicator, there can be no meaningful improvement in unemployment, a lagging indicator. By extension, without improvement in unemployment it will be difficult for credit costs to return to what are considered "normalized" levels. At a minimum, a return to those normalized levels will be delayed. Remember, for unemployment to fall meaningfully, initial claims need to fall to a sustained level of 375-400k. We remain 50-75k above that level - exactly where we've been for five months now.”


Despite some emerging concerns, the Financials (XLF) was the best performing sector yesterday.  The banking group was a big gainer with the BKX +2.4%, as the investment banks also performed well with GS up 2.1%.  It was rumored that GS may pursue a settlement with the SEC. The asset managers continued to outperform, while Insurance stocks put in a mixed performance. 


Treasuries were stronger yesterday despite the move in stocks as the dollar index declined 0.46%.  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy TRADE (81.56) and sell TRADE (82.51). 


After underperforming earlier in the week, the Consumer Discretionary (XLY) outperformed yesterday, rising 2.2%.  The earnings season provided the catalyst for the positive sentiment.  HOT was a big winner in lodging and extended its recent run-up after posting much stronger-than-expected Q1 results.  The Homebuilders, Retail and Restaurants also contributed to the outperformance. 


Dragged down by earnings and a weak Chinese market, the REFLATION trade underperformed yesterday.  XON helped drag down the Energy (XLE), despite crude rising 2.3% on the day.  Natural Gas declined 8.5% following a larger-than-expected inventory build and was a headwind for some of the E&P and coal stocks. The oil services group also came under some pressure with the OSX (1%).  Crude remains in a BULLISH formation and the Hedgeye Risk Management models have the following levels for OIL – Buy TRADE (84.11) and Sell TRADE (85.79).


The Materials (XLB) also underperformed as both copper and gold declined yesterday.  The Hedgeye Risk Management models have the following levels for GOLD – Buy TRADE (1,153) and Sell TRADE (1,176).


Copper traded down another 1% yesterday and is now broken on TRADE and TREND.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy TRADE (3.36) and Sell TRADE (3.52).


In early trading, equity futures are trading above fair value as markets are more focused on the corporate earnings picture.  As we look at today’s set up the range for the S&P 500 is 27 points or 1.4% (1,180) downside and 0.8% (1,217) upside. 


Today’s MACRO events: 

  • Q1 Advanced GDP
  • Personal Consumption
  • Core PCE
  • Employment Cost Index
  • Apr Chicago PMI 
  • Apr Final U. of Michigan Confidence 
  • Apr NAPM Milwaukee

Howard Penney

Managing Director














As we expected, BYI lost ship share in North America but quarter was in-line with pre-announcement.



BYI reported FQ3 largely in line with our expectations.  Equipment revenues were weak, due to lower ASP's that were a result of larger than expected shipments to international markets (which also have some recurring revenue components - i.e. Mexico).  North American shipments were weak as we suspected, and as a result, BYI lost ship share in the NA.  Lost ship share should be temporary due to the introduction of a new cabinet and many new titles will ship over the next 2 quarters. Equipment weakness was somewhat offset by strong margins which the company attributed to manufacturing efficiencies and lower material costs.  We suspect a higher mix of conversion kit sales helped a bit as well.  Gaming operations was surprisingly strong, especially given the impact of Alabama.  As expected, systems sales were weak but margins were strong due to the skew away from hardware sales.


We may have more color post the call. For now, below are our notes from the conference call.



  • Recurring revenue was 47% for the quarter compared to 45%
  • Fewer game sales should be deferred going forward, given the change in software accounting rules
  • North American ship share was 15% for the quarter
    • Partly blamed IGT's discounting
  • Expect effective tax rate between 34-36% due to higher income levels in lower tax rate jurisdictions
  • Expect to record a $18-20MM gain on the sale of Rainbow
  • Well-positioned to accelerate share repurchases under the new $150MM plan
  • Leverage ratio is well under 1x
  • Continue to use working capital prudently to help operators finance purchases
  • Remain optimistic that a replacement uptick will occur in the near future
  • NA replacements: 2,236 were replacement sales
  • Alpha 2 release timing seems to have impacted their ship share
  • International sales were driven by strong sales to Asia and Latin America
    • We suspect Mexico was very strong - they also earn recurring revenue there
  • Italy: 57k games should be deployed over the next 12-18  months. Have executed contracts with 2 distributors for 3,600 games and systems
  • Excited about Class III shipments to Mexico and re-entry into Australia
  • Gaming operations negatively impacted their revenues in Jan & Feb
  • Early indications that Cash Spin will surpass other popular Bally games
    • Most successful launch in their entire history
  • Expecting excellent net new placements in gaming operations this year
  • Expanding their position in Mexico
  • Trial units in Australia are performing well
  • Systems was negatively impacted by delays in several projects (MBS)
  • During the quarter they signed a corporate wide agreement with ISLE (switched from IGT)
  • Have won every Table View contract they have competed for in PA
  • Expect wide implementation of iVIEW DM this year and will release multiple applications to run on iVIEW
  • There will be opportunities in Canada in the near future
  • Will give more thoughts on FY2011 on the next call


  • Don't plan on discounting, it's not a great strategy and short-sighted
  • Launch of Alpha 2 ProSeries cabinet - exact timing? 
    • Ship a few by end of June quarter.  Book of business for June Q is better than last quarter
    • Think that by next year most of their shipments will be Alpha 2
    • ASPs will be higher too and help margins
  • Gaming operations saw in increase in centrally determined games despite removal of Alabama
    • Saw growth in Washington
  • Also saw growth in premium products
  • What was the Alabama impact  (2-3 cents/ quarter)
    • less in the 3Q since all the games were not offline the entire Q
    • Country Crossing was removed - the ones that are operating are in the system
  • In Italy some of those units are for sale, some are for participation.. there are also system recurring revenues.  The daily rates are lower than normal but they are locked for a long period of time allowing them to recoup their investment handsomely. They also get small daily system hook up fees.
  • Added more daily fee than participation games to their premium games
  • Canada:  Expect 4-6 of the provinces make systems procurements over the next two years.  They are also going to make large VLT purchases anywhere from 6-14k games per province
  • WAP / LAP breakout: Have million dollar link and quarter million link coming out - so 2 over the next 12 months. 985 WAP/ 25 LAP
  • $6.5MM of maintenance capex in the quarter


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Great quarter but call wasn't as entertaining as recent earnings conference calls.




  • Cotai timing/positioning: Wynn Encore Macau--has " extended space" as biggest asset;  we will build on Cotai "if we are encouraged to do so... and we will be encouraged..... won't happen until early 2014"
  • LV room rates trends in 2Q: not really seeing any improvement...very stable; growing capacity impacting rates
    • comps in LV was tough; beach club construction closed down the front of Encore; construction will finish in 4 weeks.
  • Wynn Macau strong 1Q: higher mix of direct vip; non-gaming revs up significantly; hold % was "a little below normal" (historical hold is 2.85%)
  • Thinks government deficits will continue to adversely impact US economy
  • Sustainability of high growth rates in Macau/China: Chinese people's "good life is going through Macau"--not just gambling, but also shopping and dining.
    • Asian markets are very aware of "top brands". Wynn needs to meet that demand
    • Government pulled back on visas to discourage people who can't afford to gamble.
    • "We increased Chinese ownership in our company by listing on HK Exchange"
    • Steve believes market share should be derived from fair share ratio
  • Cost of living in Macau is not improving.  Wynn increased Macau workers' wages by 10%.  Infrastructure contribution is 4% of revenues
  • Macau government limiting of licenses/construction activity in Cotai; construction will be done at a slower pace for resorts.
  • While checking out regional casinos, Steve impressed by River City Casino (PNK);
  • Next project will be in China unless there is a Massachusetts opportunity.
  • Reception on Macau Encore: "Nicest property in Macau. Good supply in the market helps everyone"
  • Wynn Encore: wants to attract customers who are willing to dish out $350 per night for hotel luxury living.
    • Encore fulfills "non-gaming" customer requests, learning from customers--Steve calls it "organic growth."
  • Zero impact from MBS's opening.
  • "It is appropriate for us to spend more time and focus on Macau"
  • Philly renewal license: yes, Steve would be interested if opportunity pops up.
  • LV Baccarat trends: YOY change should be up but not at levels seen during peak of US economy.

Results from the Macro Survey of the Day

At 3:10pm today, we sent out a survey regarding to Mark Mobius' shirt. Below are a few of the responses:


"I think this is what Goldman Sachs would call 'a shirty deal'."


"Bearish if he is wearing a thong"




"Squeamish… Or if that's not okay, then bearish."


"Pukish, perhaps?"


"It made me want to wrap a big turban on his head and give him a crystal ball.

I think I am going find a company that makes golden genie lamps……"


"Mr. Clean never looked so good…"






“Tigerish – Snoopy’s calling the shots”


“I could get to c)tiger by connecting the same dots but I am going to offer the Krute.  Mobius looks like Yul Brynner in the King and I.  The National emblem of Thailand (Siam in the King and I)is the Krute.  There are also a lot of Tigers in Thailand also.  Nevertheless, "The Krute is believed to appear whenever the country's in turmoil, in its greatest form, Aroonsuck, Thai for the beginning or Alpha, to serve its role as defender of Thailand."  So...Mobius, a value investor looks for Alpha(Aroonsuck)when prices are lowest (turmoil).”


“[In the] what was he thinking category!”


"Extremely Bearish… Dude, seriously? Laid back"


"I’d say Tigerish, but I am haunted by the photo of Putin standing on top of the Siberian Tiger that he popped a cap into… Maybe that’s where Moby got his shirt."


"Bullish, aliens contributing to macro"


"Spain Rallied on huge volume when the shirt hit the tape"


"Bullish on retail, this will be the new apparel style! I like it"


“Gonna have to go with Tigerish. WOW that's a bit much...”


"Definitely tigerish"


Results from the Macro Survey of the Day - Pic of the Day


Thanks for participating, everyone.


Your Macro Team

Hedgeye Risk Management

Macro Survey Of The Day

Did the sheen of Templeton’s Mark Mobius’ shirt make you: 

  1. Bullish
  2. Bearish
  3. Tigerish 

We will post all replies relating to this Macro Man’s influence in driving your global equity view today.


Anonymously, of course,


Your Macro Team 


Macro Survey Of The Day - Pic of the Day

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.