Sentiment remains strong around the Chipotle brand.  We expect continued strength in comps but are watching for any signs of margin contraction.


CMG delivered a strong 1Q and all indications suggest that another strong quarter is possible in 2Q.  1Q comps were 4.3%, almost entirely driven by traffic, and no price has been taken in the past 12 months.  From a topline perspective, the comparisons do not get much more difficult for the remainder of the year; 2Q, 3Q, and 4Q comparisons are 1.7%, 2.7%, and 2% respectively.  Given that marketing spend in 1Q was 1.1% of sales, and management guided to marketing spend of 1.8% for the full year, traffic should remain strong for CMG in 2Q.  However, the company will feel increased pressure on the other operating cost line as it invests in its new marketing campaign.  Any pickup in other drivers of traffic will be incremental but management has stated that they will not be taking price.  The only possibility for that would come in 2H10 when some additional food with integrity will be rolled out in certain markets with “either no or very modest price increases”.  Management did point out, however, that should inflation become more of headwind than expected (guided to a low single digit increase for the full year, primarily in 2H) that they do have the ability to raise prices, but will be patient before rushing into a menu price increase.


CMG: WATCH MARGINS - cmg detail


In terms of efficiency, 1Q results were partly attributable to progress made on throughput.  On the last earnings call, management stated that they had previously taken their “eye off the ball over the last couple of years” with respect to throughput.  Assuming that the initiatives addressing these issues remain in place, store productivity should remain high.


CMG: WATCH MARGINS - EBIT Margins.xlsx 1q10


The favorable commodity cost environment enabled CMG to attain higher margins from 1Q09 onward.  The company is not locked into many of its ingredients and could see margin pressure should inflation begin to impact their commodity basket.   The few items that management has locked in include rice, soy oil, corn, and tortillas.  Traditionally, Chipotle has also kept cheese locked in but decided that the spot market was more attractive and that this enabled them to move towards more pasture-raised dairy.  Holding current cheese prices constant, the Bureau of Labor Statistics’ PPI database is showing average inflation of 7.6% for the first 5 months of 2010. Moving to the spot market, while undoubtedly beneficial during the deflationary period of 2009, could cause more volatility and uncertainty for CMG management if inflation takes hold on their cost line in 2H10 (as they expect).  During the 1Q10 earnings call, management said that the inflation outlook seemed “manageable” but having such a proportion of their basket on the spot market means that their outlook is subject to the volatility of the commodity markets.


During the first quarter, CMG posted an EBIT margin of 15.3%, up over 300 bps YOY.  This YOY growth was impressive given the fact the company was lapping a nearly 300 bp improvement from 1Q09.  Going forward, margin comparisons get increasingly more difficult on a YOY basis, particularly in the second half of the year, as the company laps the extremely favorable food costs from last year.



Howard Penney

Managing Director

Calendar Catalyst: UK Emergency Budget Meeting

Position: Short France (EWQ); Short Italy (EWI)


UK unemployment fell 10bps to 7.9% according to the latest reading from the International Labour Organization (ILO). While directionally the number is positive, the chart below points out that the rate has trended sideways for most of this year. Now PM Cameron and Co. must deliver on campaign promises to return growth to the UK economy, including greater improvements in employment. Already Cameron proposed 6 Billion Pounds in spending cuts for this year. Mark your calendar for next Tuesday, June 22nd, when the new Chancellor of the Exchequer George Osborne outlines the go-forward spending cuts in an emergency budget meeting. 


Today, the Nationwide Building Society published its UK Consumer Confidence Index .  Notably, May’s survey saw significant deterioration (below) which mirrors the slide in German consumer confidence that we saw yesterday in the ZEW survey. We believe this inflection is representative of heightened fears of the next European country to face sovereign debt default risk.


UK Consumer Confidence Index-

Index of Sentiment: 65 in May versus 75 in April

Expectations (6 months ahead): 93 in May versus 105 in April

Current Perception: 23 in May versus 29 in April

Propensity to Spend: held steady at 98


Matthew Hedrick



Calendar Catalyst: UK Emergency Budget Meeting - uk ILO

R3: Footsteps in Asia


June 16, 2010


A couple of interesting observations out of Yue Yuen, the largest global footwear manufacturer, from Q2 results…




Here are a couple of interesting observations out of Yue Yuen, the largest global footwear manufacturer, from Q2 results. While the company reports interim 2010 results on a 6-month basis, our models, which quaterize results, highlight some rather telling trends with broader implications for the industry:


- In addition to continued strength at Retail, Q2 marked a substantial pickup in footwear sales across all categories at wholesale as illustrated in the charts below. The outperformance of Soles, Components, & Others is of particular interest as a indicator of future production suggesting positive demand forecasts across the industry.


- Geographically, Asia continues to stand out as a pillar of strength supporting our belief that Chinese footwear companies (Li Ning included) are increasingly focused on local demand.  This is best evidenced by the continued growth in Yue Yuen’s growth in retail sales as a percentage of total business, which grew to 22% of sales up from 18% last year.


- As demand builds domestically for Asian manufacturers there are potentially negative implications for pricing as capacity becomes tighter – a factor that has benefitted US-based manufacturers over the last 12-18 months.   Recall that excess factory capacity coupled with increased Chinese VAT rebates created a meaningful tailwind for sourcing costs over the past year.

- Longer term, growth in domestic (Chinese) retail by Asian-based manufacturers and brands is likely to add competitive pressure to the incumbent global brands such as Adidas and Nike.   It’s too early to worry but it’s important to note this market is not simply a “free for all”.


 R3: Footsteps in Asia - 1


R3: Footsteps in Asia - 2


R3: Footsteps in Asia - 3


R3: Footsteps in Asia - 4 





- Best Buy noted that employee retention is at an all time high, with turnover coming in under 40% for the first time. In management’s view, turnover has improved as result of employees’ being behind the company’s strategic direction. However, what BBY failed to mention is that employee turnover across all retailers is down, and in most cases at historical lows. Clearly people are staying in their jobs longer given the current state of employment across the country.


- On the heels of Calloway’s disappointing earnings announcement, Dick’s Sporting Goods CEO noted that the company has not seen any slowdown in its golf business and that they remain pleased with what’s going on in the golf area. Recall that Golf Galaxy posted a 12% same store sales increase in its latest quarter. Clearly the benefits of staying power and consolidation are beginning to accrue to one of the few well capitalized survivors.


- In the latest American Apparel soap opera, the company recently responded to allegations about questionable hiring practices for store employees. For those familiar with Abercrombie’s past troubles with only hiring “good looking” employees, this is essentially the same story all over. However, this time American Apparel responded by not only denying its potentially questionable hiring standards, but by posting CEO Dov Charney’s phone number and email for those who want to discuss the company’s hiring practices. Shouldn’t he be more focused on same store sales?




Metropark USA Withdraws IPO Plans - Specialty retailer Metropark USA Inc. has withdrawn its shelf registration for an initial public offering. The original filing was on June 13, 2008. In a Securities and Exchange Commission filing on Friday, the City of Industry, Calif.-based retailer cited “changed circumstances regarding the securities markets” as the reason for the withdrawal. Since opening its first four stores in California in 2004, the 69-unit, mall-based chain has targeted men and women ages 20 to 30. <>

Hedgeye Retail’s Take: Another one bites the dust… as it should.


BBY to Enter Used Video Game Market - Best Buy Co., the world’s largest consumer-electronics retailer, plans to let customers trade in their used video games at more than 1,000 U.S. stores to grab sales from competitors. Shoppers will be able to exchange the games for Best Buy gift cards that can be spent on any merchandise. The program will start late in the summer.  <>

Hedgeye Retail’s Take: This is not the first time retailers other than GME have entered the used game market.  The key here is the consumers’ opportunity to used used games as currency towards anything Best Buy sells.  With that said, GME still has a competitive advantage with core gamers as well as its systems which help to manage the unique inventory dynamics of buying and selling used product.


LIZ taps Media Firm for Juicy Couture and Kate Spade - Independent PGR Media in Boston has been tapped by Liz Claiborne brands Juicy Couture and Kate Spade New York. The brands spend about $20 mm combined annually in measured media, with Juicy backed by close to $15 mm, per Nielsen. The assignment covers media strategy, planning and buying, and fits into the shop's fashion-friendly roster that already includes Tommy Hilfiger, Bulgari, Espirit and Chico's. Kate Spade media was previously handled in-house and Juicy's media was with Laird + Partners in New York. <>

Hedgeye Retail’s Take:   Changes in media/pr/advertising usually mean there is a story to tell.  This also seems like it may be a cost saving measure with the consolidation of the two brands now sharing one resource. 


JCG Claims Madewell is Worth Spending On - With the official launch of its e-commerce site last week, the four-year-old Madewell brand has “arrived” and is ready for a new growth phase. CEO Mickey Drexler stated, "We feel we’ve progressed enough to commit capital and a growth plan to the business. We’ve been through four intense, creative years of putting together something we are very passionate about. The collection is ready and the way we want it to be.” actually quietly made its debut May 27, without any marketing, and since then, Drexler said he’s been watching it “every minute of every day, like a new baby. <>

Hedgeye Retail’s Take:  It was only a matter of time before Madewell became a bigger deal.  This gives J Crew another growth vehicle for sure and adds confidence that the core brand will not overbuild.  Certainly seems like a good time to take advantage of some real estate opportunities while they’re still out there as well. 


Quiksilver Announces Debt-for-Equity Exchange with Rhône - Quiksilver, Inc. has entered into an agreement with Rhône to exchange $75 mm of the outstanding principal amount of Quiksilver's senior secured term loans for an aggregate of approximately 16.7 mm shares of its common stock at an exchange price of $4.50 per share. <>

Hedgeye Retail’s Take:  Another step in the balance sheet clean-up process which gradually continues to change the risk profile of the company.  Recall that the prior clean-up maneuver was to dramatically curtail inventories while at the same time sales picked up.   


Take Aways From Department Store Discussions - The take-home points, emerging through presentations and panel discussions with senior officials from some of the world’s most iconic retailers and brands including Macy’s, Selfridges, Marks & Spencer, Printemps, The Bay and Coach, were: 1) Embrace change, particularly social media, the Internet and mobile technology. “The [personal computer] is dead. It will all be on your wristwatch,” predicted Stuart Rose, executive chairman of Marks and Spencer Group plc. 2) Think small and local with marketing — tailor service and amenities to customers depending on their level of spend. “Developing local marketing plans has been transformational,” Sadove said of the Saks strategy to shift a percent of marketing dollars from national to local campaigns and install local marketing directors. 3) Work hard to “wow” the customer, go younger with the appeal and add sustainability and value-over-price to the formula. “How do we surprise her? How do we surprise her enough so she has a smile on her face and says, ‘That’s great. I really love it,’” said Lauder. 4) Speed to market of new products and trends is critical. “The biggest threat to department stores is fast fashion,” observed Myron E. “Mike” Ullman 3rd, chairman and ceo of J.C. Penney Co. Inc. Forever 21, H&M, Zara, Uniqlo and Mango are taking “a big bite” out of department stores. While Penney’s has significantly cut its product cycle time, it’s also launching Mango shops inside its stores, joining the fast-fashion bandwagon. “Retail has been a bit slow in understanding the customer,” Ullman said. 5) Think young. “The biggest challenge is attracting new, young consumers into the department store channel,” said Lew Frankfort, chairman and ceo of Coach Inc. He advised replicating the “intimacy” of the specialty store experience within the department setting by subdividing it. “Use micro marketing or laser marketing in unorthodox ways to get these young people,” he said. 6) Think local. “This whole localization has got such legs and potential,” said Macy’s chairman, president and ceo Terry Lundgren of the My Macy’s localization organization. Asli Karadeniz, ceo of Boyner in Turkey, stressed the success of her company’s marketing efforts with local cell phone carriers to target young people.  <>

Hedgeye Retail’s Take:  Lots of focus on the younger demographic here from the one of the oldest, most outdated forms of retail.  Unfortunately the young consumer is the most informed and easily influenced consumer, which means department stores will have to embrace “real” change and not token efforts.  Creating a Macy’s Facebook page does not add instant credibility to young consumer base. 


New Brand in Men's Wellness - New York-based Deer Stags is taking a step into the men’s wellness category. Marketed under the Walkmaster label, the collection of men’s styles carries the tag line, “What Walkmaster does for your body, goes straight to your face.” The company suggests the collection’s benefits, from improving posture to putting a spring in one’s step, will bring a smile to the wearer, communicated through caricature. The shoes will retail for $60. Delivery is slated for October through independents, chains and department stores. <>

Hedgeye Retail’s Take:  More toning, but this time with a male focus.  Less competition here in men’s (at least for now) but also less of a market.   


Aetrex Offers Toning Through Comfort, Pedorthic, and Running Channels - Expanding its reach into the toning sector, Aetrex Worldwide Inc. is introducing its take on wellness with BodyWorks. The series of men’s and women’s styles feature a rocker outsole designed to transfer pressure from the rear and forefoot to the mid-foot, thereby reducing pressure in those areas that absorb the most pounding. The shoes retail for $135 for women’s and $155 for men’s. Set for an early spring ’11 launch, the sneakers will deliver in November. Distribution is targeted to service-oriented comfort, pedorthic and running stores. <>

Hedgeye Retail’s Take:  Hopefully the launch doesn’t come before it’s too late. 


NRF Reports Merchandise Loss Declines - The National Retail Federation on Tuesday released a survey of 75 retailers who collectively reported that merchandise losses, or shrinkage, in 2009 declined to 1.44% of $2.33 trillion in retail sales last year, down from 1.51% in 2008. Retailers lost $33.5 bn to shrinkage last year, down from $36.5 bn in 2008. The majority of the shrinkage was due to employee theft, which accounted for 43%, shoplifting 35%, admin error 14.5%, and vendor fraud 3.8%. <>

Hedgeye Retail’s Take:  On one hand employee turnover is down which helps while on the other the economy is tough which hurts.  Net, net a focus on shrink when times are tough yields some improvement.


Online Advertising Spending Growth Estimates - eMarketer estimates that US online advertising spending will reach $25.1 bn in 2010, representing 10.8% growth over last year. Relatively healthy economic gains, along with the ongoing shift of marketing dollars from traditional to digital media, have contributed to the double-digit increase. Steady gains in online ad spending will mean an additional $11 bn flowing into the space over the next four years, increasing the Internet’s share of total media ad spending from a bit more than 15% in 2010 to over 20% in 2014. In addition, both offline and online ad spending models are being restructured by the shift toward more non-advertising marketing. In the online space, marketers are focusing more on social media and building up their Websites or brand microsites. <>

Hedgeye Retail’s Take:  With TV essentially moving online we wouldn’t be surprised to see adoption of online advertising move even faster.  The ability to marry interactivity and customized offers on an individualized basis is clearly a selling point vs. the old wholesale, push model.


R3: Footsteps in Asia - 5


R3: Footsteps in Asia - 6



Yesterday stocks rallied, sending the Standard & Poor's 500 Index to the highest level since May 18.  The S&P 500 climbed 2.3% to 1,115.  On the MACRO front, there is a general pickup in the appetite for risk as the growth picture continues to improve.  It was reported yesterday, that the Federal Reserve Bank of New York's general economic index showed an 11th consecutive month of growth.


This RISK dynamic seemed to help US equities look past some weaker-than-expected economic data in Europe, along with Monday’s downgrade of Greece to junk by Moody's and continued speculation that Spain will need a bailout facility.  Greek 10-year bond yields jumped 74 basis points to 9.08%.


Treasuries were weaker today with the pickup in risk, as the VIX declined 9.7%.  The DXY declined 0.65% and the Hedgeye Risk Management models have the following levels for the USD – Buy Trade (85.88) and Sell Trade (86.46).  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (24.62) and Sell Trade (32.79).


The euro strengthened above $1.23 despite the larger-than-expected decline in German analyst and investor sentiment, as the ZEW index fell to 28.7 in June from 45.8 in May, the sharpest pullback since October 2008.  In early trading today, the euro is trading down slightly.  The inverse correlation between the euro and the TED spread weakened, day-over-day, going against the recent trend.  The TED spread narrowed this morning to 0.45.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade ($1.20) and Sell Trade ($1.23).


Oil rallied above $77 a barrel and the Reuters/Jefferies CRB Index of commodities posted a seventh straight gain, the longest stretch of gains since March 2007. The Hedgeye Risk Management models have the following levels for OIL – Buy Trade ($73.59) and Sell Trade ($79.63).


The three best performing sectors were Industrials (XLI) +3.0%, Energy (XLE) + 2.9% and Technology +2.6%, with three sectors underperforming Utilities (XLU) +1.9%, Healthcare (XLV) +1.7% and Consumer Staples +1.0%.   The Hedgeye Risk Management S&P sector models had a positive day with 8 of 9 Sectors moving to positive on the immediate term TRADE, but still have 7 of 9 negative on TREND.


The data flow on US consumer trends and behavior continues to be negative.  After the close, the ABC Consumer Confidence Index declined to -45 from -43 last week.  Also, home builders in the U.S. turned more pessimistic in June; a sign that housing demand may be slowing even more than anticipated after a government tax credit expired. The National Association of Home Builders/Wells Fargo confidence index dropped to 17 from 22 in May, lower than all the estimates on Bloomberg and the biggest decrease since November 2008.  This data point, combined with a collapse in mortgage applications last week, augments our conviction that the housing market is going to struggle in 2H10. 


Outside of the RECOVERY/REFLATION trade, technology was one of the best performing sectors yesterday.  Most of the upside leadership for the XLK came from the semi group, with the SOX +5.5%; UMC +5.5% and TSM +4.3% were both out with positive comments regarding chip demand.   


The Financials (XLF) underperformed the most yesterday, as reform remains an overhang, particularly with talk of growing support for derivatives legislation and the Volcker Rule looking more like a sure thing.  Yesterday, the credit card names posted strong gains following the release of May master trust data, but the rally may be short lived with phase 3 of REG Z on the way.  Our Financials analyst Josh Steiner has a note out detailing what this all means. 


The retail group lagged the Consumer Discretionary Sector (XLY), with the S&P Retail Index +1.3%. Consumer electronics names underperformed with weaker-than-expected fiscal Q1 results out of BBY.


In early trading, copper is trading higher for a seventh day in a row on speculation that the economy remains robust in the U.S.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.88) and Sell Trade (3.05). 


Gold is looking higher in London on concern that Europe’s sovereign-debt crisis will continue to escalate.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,217) and Sell Trade (1,246).   


As we look at today’s set up for the S&P 500, the range is 21 points or 1.3% (1,101) downside and 0.6% (1,122) upside.  Equity futures are trading below fair value ahead of today's economic release which includes May PPI, Housing Starts and Industrial Production. 


Howard Penney













Battling Bulls

“Having nothing, nothing can he lose.”

-William Shakespeare


That quote comes from the battle of all Shakespearean battles. “Henry VI”, Part 3 contains more battles than any other Shakespeare play. Yesterday was a big Bull versus Bear battle. And I lost.


No matter where I go this morning, the War of the Proverbial Roses will carry on. A battle lost doesn’t lose the war that we engaged in on the short side at April’s end. If the bulls think I am going to rollover or point fingers today - think again. I’m accountable for this team’s losses. I’m moving forward.


Before we move forward it’s important to take the time to look back. What risks are embedded in the setup for today’s battle given yesterday’s closing prices? What calendar catalysts are in front of us?


The good news is that we called for our own fall in an intraday note yesterday titled “Squeezy: SP500 Risk Management Levels, Refreshed.” Good news because it’s better to understand why you are losing than living in fear of your process. Have a plan - change the plan as prices change.


The most important part about yesterday’s price action was that the immediate term TRADE in price momentum and volatility turned positive for US Equities. We use a simple 3-factor model to measure all durations in our model dynamically: Price, Volatility, and Volume. The third leg of this stool (volume) did not confirm price and volatility, but there really are no buts – the closing price of the major indices are what matter most.


From an immediate term TRADE perspective (3-weeks or less), here are the new lines of support:

  1. SP500 = 1101
  2. Dow = 10,299
  3. Nasdaq = 2276

There are some critical strategy points to be made here.

  1. When TRADE lines of resistance become support, you need to change the immediate term plan (stop selling aggressively).
  2. TRADE lines of support can quickly become resistance again, so you need to be patient in watching prices confirm new support.
  3. TRADE lines are not TREND lines. Never confuse the immediate term with intermediate term durations.

This is where the battle becomes the war - when there is Price Momentum Mismatch between durations (i.e. the TRADE goes bullish within a bearish TREND). So the next leg of analyzing yesterday’s losses on the short side becomes looking forward to the forest of where the real risk in staying short can be found.


From an intermediate term TREND perspective (3-months or more), here are the lines of resistance:

  1. SP500 = 1144
  2. Dow = 10,698
  3. Nasdaq = 2369

Once again, no matter where you go this morning there those real-time prices are – sitting right in between a rock and a hard place of bullish TRADE and bearish TREND. I’ll be selling on rallies toward 1144 and buying on selloffs toward 1101.


How about today? What is Thunder Bay Bear who is Battling Bulls to do?

  1. Watch and wait like we did into yesterday’s close.
  2. Don’t run out there and get emotional, flailing your rifle and shooting at any bullish price that moves.
  3. Watch and wait some more…

The way I look at it is that both my fundamental Fiat Fool macro thesis and my quantitative setup continue to confirm one another for both the intermediate and long term. To a degree, some of the wins I’ve had this week (short the US Dollar, long Gold) continue to confirm the same. The US government is inching toward the Road to Perdition that the Europeans have already started to march upon – austerity.


The #2 story on Bloomberg this morning is born out of the same source of every government oriented story that ends up in your inbox – a leak – “Fed May Trim Growth Outlook”…


Make no mistake, no matter where the immediate term TRADE in this market goes, this is where the real intermediate term war between Bulls versus Bears will be decided – will US GDP growth be slower or faster than consensus expects in 2011?


We’ve been saying Bernanke and the Administration’s growth estimates for both Q4 2010 and all of 2011 are way too high. Apparently the bulls in the Fiat Fool camp have been delivered the message. Evolving the government’s forecasting process is progress for America, but that doesn’t mean this bearish TREND in the US stock market ends as a result. After all, the output of Bernanke and Co. lowering their numbers will be marked-to-market, in the end.


My immediate term support and resistance lines for the SP500 are now 1101 and 1122, respectively. Saddle up. Into the brink of Battling Bulls we go. As “Old Blood and Guts” (Patton) said, it’s time to “lead, follow, or get out of the way.”


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Battling Bulls - sp


Sinagapore appears to be off to a strong start for Genting and LVS. Here are our notes.



Overall Market:

  • Currently, VIP/Mass is roughly 50/50.
  • Commissions paid on direct VIP play are based on a percentage of Rolling Chip (RC) buy-in and the number of times the initial buy-in is turned over, plus 0.1% of RC towards expenses (rooms & F&B allowance)
    • Commissions are accounted for as rebates (i.e. contra-revenue deductions against gross gaming revenues)
  • In order to qualify for the lower 5% VIP tax rate, players must:
    • Buy-in with a minimum of S100,000 – which allows the government to document how much and where the cash came from
    • Inform the CRA (Casino Regulatory Authority) one hour before play
    • Follow anti-money laundering rules (unlike in Macau, you can’t just come with a bag of cash and play)
    • Declare win/loss to the government
    • The min S$100,000 initial buy-in qualifies a player as VIP for 12 months – regardless of how much he gambles on repeat visits
  • Marketing for both properties has been very limited thus far.  Marketing of the casino is prohibited in Singapore; however, the properties can market their other attractions but have postponed large marketing efforts pending their respective “grand openings.”
  • Given that a lot of the Singaporean players are “new gamers,” the house advantage may be abnormally high initially
  • Despite a different mix of table games (i.e. more roulette) than Macau, hold rates should be similar.  MBS doesn’t have insurance on its bets, while RWS does.  Insurance increases the house advantage but also slows play so there is a trade off.  Insurance is popular with Southeast Asian players


Junket operations:

  • There are no licensed junkets at the moment but currently there are around 30 junket operators that have submitted with the CRA.  Likely that half a dozen junket operators will get licensed by the end of July.
  • In order to operate at either RWS or MBS, the properties must sponsor the junket’s license application.
    • MBS is not sponsoring any of the junkets applications at this time and will take a wait and see approach for now
    • Genting is sponsoring several of the junket applications and is happy to do business with junket operators
  • Some of the junket operator applications are from Singaporean-based junkets and have already been sourcing and providing credit to Singaporean customers who play at Genting’s Highlands Malaysian property Malaysia and Star Cruises ships operating in the vicinity.  Most of these junket operators already have strong ties with Genting, and hence it makes sense that Genting is welcoming their business and sponsoring their applications.
  • We have heard that Genting currently has “junkets” currently buying in millions of rolling chips and distributing them to their clients in the form of credit
  • We think that the government may over time loosen licensing requirements for junket operators, but that will take time
  • We think that the rolling chips generated by junkets will be a relatively small percentage of the VIP market given the licensing hurdles



  •  State of the property & completion schedule
    • Casino:
      • Started with 70 VIP and 442 mass tables
      • Have the ability to operate up to 139 VIP tables and up to 650 Mass tables
      • Currently operating 127 VIP tables and have 28 private salons on the 3rd and 4th floors
      • Started with 1,450 slots and can get to 1,650.  They are also adding over 300 electronic tables games (roulette)
      • 3rd floor is premium mass play and 4th floor is VIP play
      • RC programs start with buy ins of S$50k
    • Hotel:
      • Currently 963 rooms are open (up to the 22nd floor), with the remaining rooms opening just after the opening party on June 23rd
      • Will likely comp between 20-30% of the rooms but it remains to be seen
    • Retail:
      • Approximately 90% of the retail space is currently leased and 20% of the space is currently open
      • They hope to have 70% of the space open by September, 95% by December and grand opening of the Louis Vuitton space by 1Q2011
    • Other:
      • Museum should open by Dec 2010
      • Sky park will be partly open by the grand opening and complete by August
    • Spending:
      • As of March 31st, they had $1.4bn in cash left to spend, $1bn to be spent in 2010, and $400mm in 2011
  • Commissions & VIP play:
    • For the first month of operations, MBS offered very low commissions ranging from 0.3% to 1% of RC plus 0.1% toward expenses
    • Subsequently, commissions were raised to 0.6% to 1.4% of RC plus 0.1% toward expenses
    • Despite very low commissions, the first month of operations produced strong volumes, which subsequently dropped and then resumed growth once commission levels were raised to market levels
    • Roughly 60% of the VIP players are currently Singaporean but that number is a bit misleading since there are many Malaysians and Indonesians who are permanent residents in Singapore
    • While an initial minimum buy-in of S$100,000 qualifies a player as VIP (i.e. 5% tax rate), all the programs have 30 days lives which require fresh buy-ins.  Almost all the VIP players at MBS buy in to various commission programs.
  • Visitation:
    • Have a bus terminal with 60 buses, but it isn’t fully up and running yet
    • Current visitation mix is roughly 30% Singaporean, 40% Malaysian, and 30% Indonesian
    • Currently have more than 20,000 average daily visitors coming through the casino and believe that they will get to 60-100k on weekends when they are fully open
    • Vast majority of Singaporeans just pay the daily S$100 fee rather than the S$2,000 annual fee
  • Mall:
    • Believe that the mall will be a big shopping destination
    • Tenant terms:
      • Base rents: $150-$200, closer to $150 when you net their free rents and TI incentives
      • Term: 3-5 years
      • Percentage rents: 7-12%
      • Sheldon thinks that the mall can do $200mm of NOI but $100mm ramping to $150mm is probably a more realistic assumption
  • Costs:
    • Have 7,000 employees now and will likely have 7,700 when they are fully open (excluding the retail employees for whom they are not responsible).  Average yearly salary of $30k/year is a reasonable assumption.
    • Marketing/HVAC/other expenses are roughly $20-25mm per month.
  • Credit granting:
    • Usually know in advance when an incoming big player would want credit.  They have an extensive credit approval process and are supposedly taking very large reserves



  • Have a huge bus interchange--120 buses daily to and from Malaysia.
  • A high percentage of visitors from Malaysia are already their players but the Genting Highlands hasn’t taken much of a hit
  • Phase 2 will be completely open by the end of 2011 and will cost an incremental S$2.6BN to complete.  Phase 2 will consist of:
    • Arcade and Asian food court (“hawker” food) on the waterfront which is opening in 2 months
    • Maritime museum with a massive aquarium
    • 2 more hotels--all suites are underground and have “ocean” views which will open in mid-2011
    • Waterpark will open at the end of 2011
  • Universal Studios:
    • Designed to handle up to 25k daily visitors people.  Currently, they are capping the number of ticket sales to 8k mid-week and 10k on weekends
    • The park is sold out for the whole month
    • It should be fully open within a few months, at which time they expect to be selling between 15-20k tickets per day
    • Haven't even started marketing the park yet
    • Ticket prices range from S$66-74/ day (depending on whether they are peak or off peak purchases)
    • Pay Universal a royalty fee but operate the park themselves
    • At current visitation levels, the park is still EBITDA negative
  • Have about 10,500 employees that make roughly S$2,000-2,500/month
  • Hotel occupancy currently at 75% right now
    • Festive (the family hotel with 400 rooms) is almost entirely cash
    • Crockfords (120 suites) is 100% comped and for VIP players only
    • Hotel Michael (300 rooms) is roughly 40% comped
    • Hard Rock is roughly 30% comped
    • Rates are roughly S$300-350
  • Casino details:
    • They are currently operating more than 300 tables and have the ability to operate up to 500 tables
    • Opened with 1,200 slots but now have roughly 1,500-1,600 slots. Can have up to 2,000 machines
    • Orchid club for Singaporeans only
    • Despite huge gaming volumes, they still believe that their business is ramping, as marketing of the property has only just started
    • Smoking is permitted in 70% of the casino, but they have designated only 50% of the space to smoking areas
    • Maxims is their members-only premium, mass casino with 8 private salons with minimum bets of S$500 and Crocksford is their VIP casino with minimum bets of S$2,000 and has 14 private salons
    • Commission rates on various buy-ins and turns (add .1% for comps to all levels):
      • S$30-99k: 0.6%
      • S$100-999k: 1%
      • S$1mm-1.99mm: 1.1%
      • S$2-4.99mm: 1.2% - 1.3% (depending on number of turns)
      • > S$5mm: 1.3-1.4% (depending on number of turns)
    • A fair amount of players don't want to register for programs in order to remain anonymous; hence, they get no rebates/commissions.


"Market Rumors"

  • Genting is rumored to be at risk of investigation by the CRA for running illegal junket operations, loan sharking, and side insurance betting
  • MBS is rumored to be subject to government fines for its delayed opening

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