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Bear Market Macro: SP500 Levels, Refreshed...

As of 3PM EST, the SP500 continues to trade within the daily range that we outlined in both this morning’s Early Look note and on this morning’s Macro Call (1117-1133), with the low of the day actually being 1117.

 

What was immediate term TRADE resistance for the last 5 days is now support. This is an important risk management reality to acknowledge. It doesn’t mean that the intermediate term TREND (1144) in the SP500 isn’t bearish. It simply means that the immediate term TRADE has a support line that I am going to respect until the math tells me not to.

 

As a result, all you’ve seen me do today is cover 2 short positions (RT and DBB) and buy 2 long positions (WMS and IDX) in the Hedgeye Virtual Portfolio. There is no bullish catalyst for making these 4 moves that’s more important than price.

 

If the SP500 breaks down through (and closes below) 1117 again on the downside, I’d expect to not look so smart with these risk management decisions as there is no significant support line for the SP500 until 1089.

 

On the 16.5% of the time that I am wrong on my short positions (our batting average is 83.5% on the short side since Hedgeye’s inception in 2008), you’ve probably figured out that when I capitulate and cover some of my shorts for losses, it’s right around intermediate term tops.

 

Since I use stop losses, that’s a risk management reality of life that I am aware of, not often happy about, but willing to live with.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bear Market Macro: SP500 Levels, Refreshed... - 1


BYD 2Q2010 CONF CALL NOTES

A rough quarter followed by a rough conference call. Not much positive going on at BYD. Here are our notes from the call.

 

 

"Despite a difficult May and June, our overall performance was consistent with the previous two quarters, and generally in line with our expectations. The lingering effects of the recession have left consumers unusually sensitive to shifts in the economy, and they now react more quickly to economic data and other developments, such as fluctuations in the stock market. Although conditions remain uncertain, we believe long-term stabilizing trends are still in place, and that year-over-year growth is achievable by the end of 2010."

- Keith Smith, President and Chief Executive Officer

 

HIGHLIGHTS FROM THE RELEASE

  • "In Las Vegas, the Locals business declined at a slightly higher rate than the first quarter, but still showed marked improvement over the large quarterly declines we saw throughout 2009."
  • Downtown: "Continued lower spend per visit and reduced visitor volumes."
  • Midwest & Southwest: "Our Louisiana properties continue to account for the majority of the region's year-over-year decline, as they face tough comparable results from the strong levels experienced throughout most of 2009. Overall, the Midwest and South region continued to show trends similar to the previous two quarters."
  • Borgata: "Quarterly performance was negatively impacted by higher promotional activity from competitors in Pennsylvania, higher utility costs due to unseasonably hot weather, and reduced day trip visitation to the Atlantic City market in June."
  • Additional information: 
    • Cash, excluding Borgata: $78.2MM
    • Cash at Borgata: $21.9MM
    • Debt, excluding Borgata: $2.52BN
    • Debt at Borgata: $626.9MM

CONF CALL NOTES

  • Fragile state of the consumer is impacting their results.  
  • However, they still believe in the long term stabilizing trend and that YoY growth is possible by year end
  • Discontinuing their efforts to acquire STN's assets and spend on those efforts given the Ferritta's advantage
  • Will focus on strengthening their balance sheet and reducing leverage
  • The stabilizing trend that Las Vegas locals experienced in the first quarter moderated in the second quarter
    • However, for the 4th consecutive quarter, they saw normal seasonality in that market
    • Orleans EBITDA was flat YoY for the first time in over 2 years
  • Downtown results showed improved trends
  • So far, no impact of the oil spill
  • Anticipate that the 3Q results will be down again YoY but expect to improve some due to easier comps in 4Q
  • AC: July trends have normalized and improved vs. June results. Too early to predict impact of tables games in PA on Borgata. Unseasonally hot weather impacted utility costs at Borgata in 2Q. Adjusting for weather, results are running in line.
  • Refinancing of Borgata debt will provide them with a $100MM distribution if approved by the NJ regulatory authority
  • Total corporate expense for 2010: $40MM
  • Pre-opening was related to Echelon
  • Expect 30% tax rate for the remainder of the year
  • Las Vegas locals market - what changes they have seen vs. a few months ago?
    • As they got into June & July, which are the slowest time of the year for the locals market, they saw similar trends to 1Q and 2Q and expect similar trends for the rest of the year.
    • Any improvement YoY given how dismal last year was?
      • Optimistic but guarded given the sensitivity of the consumer
  • Incremental impact of slot promotions with the introduction of table games in PA
    • Their slot business continues to perform quite well.  They think that the promotional activity is just to facilitate the rollout of table games and is low margin.
  • Utility cost impact was just an impact of a very hot summer. Don't expect it to be replicated in 4Q. Was a usage, not rate, issue
  • Any interest in getting in PA?
    • Not currently looking there. No particular interest in that market
  • Echelon?
    • Years away before they decide to do anything with it. The improvements that the strip is seeing is just a slow gradual build.
  • Borgata - Any contingency plan to cut costs if they get hit harder than expected by table games in PA?
    • Will wait and see - they are prepared to manage around any impact that they see from PA
  • Frequency of visitation to their properties has trended upwards, but spend levels continue to be depressed
  • Midwest/ South?
    • Louisiana contributed to the majority of the decline. Delta Downs had record performance last year this time - so the comps are very hard and that will continue into 3Q.  Expect an improvement in the 4th quarter.
    • Louisiana and TX were hit with trends just later on
  • Given the lack of acquisitions opportunities, is there a point to ramp up capex?
    • Claim that their properties have been well maintained
    • Expect Capex to increase in 2011
  • What's the strategy, aside from waiting for a recovery, given that Echelon is on hold and STN is no longer a priority?
    • Still focused on Las Vegas - just don't have any compelling M&A opportunities. Think that it is better to buy than to build EBITDA today. The best opportunity for them is in the locals Las Vegas business. It's all about gaining distribution points. If valuation makes sense though, they will look elsewhere
    • Bid on M Resorts? No comment - according to Lerner they bid on it.
  • Given that FTE's in Vegas are down despite high occupancies with no plans to add FTEs, what's their plan?
    • Construction segment is the real problem for them, and may get worse as more projects wind-down
    • Those people have already adjusted their spending levels to the new reality
  • Texas?
    • If it happens, they would be interested in participating
  • July in Louisiana?
    • Still tough comps - won't improve until comps ease
  • They did take out some machines at Borgata when they reconfigured the floor - to be more efficient
  • Refinancing by mid 2011
  • Would buy EBITDA if it was deleveraging and had a good cash on cash return, and how it strategically fits into their company.
  • Will use FCF to delever
  • They wouldn't risk the company to do an acquisition. Factor in their capital structure/ refinancing needs going forward.

FOOTWEAR: BIG MAN, BIG MOVE, BIG IMPACT

Am I the only one that was taken aback by Kevin Garnett switching his endorsement from Adidas to Chinese local brand Anta?  This is getting lost in the noise around earnings reports, but mark my words…it is big (bigger than the 6’ 11” man himself). Let's take this past the sensationalistic headline stage and really look at the facts and the underlying implications for the industry, and for Nike.

 

FOOTWEAR: BIG MAN, BIG MOVE, BIG IMPACT - Kevin Garnett

 

First off, let’s get the facts right… The press is pitching this as Garnett ditching Adidas. I guess that’s partially true. But if Adidas really wanted to keep him, then it would have kept him. Mind you, this is the big man’s 4th endorsement in his career. Most athletes have one. Two max. Similar trajectory as Shaq. Wanna guess why?  Big dudes don’t sell product. They tend to be viewed by the target consumer as inaccessible. True or not, the consumer generally has a mindset that one of the reasons they are good is because of freak genetics. That compares to players like Michael Jordan, Allen Iverson, Kobe Bryant, and KG’s teammate Rondo – who are gifted, fast, and hard working athletes in the shell of a semi-normal sized guy.  The bottom line is that Adidas hardly fought to keep Garnett, and I don’t blame them.

 

Second, and more importantly, this is a newfound offense on the part of Anta. Who?  Anta, the second largest local sneaker brand in China behind Li Ning.  Anta will debut KG’s shoe and an accompanying line of sportswear for the ’10-’11 season. They have already planned major basketball events in Beijing, Xiamen and Shanghai throughout the month of August.

 

Why does this matter? I could care less about the events they are hosting in China to highlight Garnett. There’s more than enough to go around as China’s middle class emerges. But I’m concerned about the US. Back in 2006 Li Ning debuted basketball shoes in the US for the NBA. And while they have yet to catch on, they just opened an office in ‘sneaker alley’ in Oregon (yes, to poach Nike employees). Now they’re making a heavier push with Baron Davis. I have no idea whether it works or not, but they’ll keep trying.

 

FOOTWEAR: BIG MAN, BIG MOVE, BIG IMPACT - bd

 

Now Anta is in the game too? Ugh.

 

If there’s anything that gives me comfort it is that I had a meeting with Nike’s Charlie Denson earlier this year when we started to highlight this as a risk. Everyone was concerned about China from a sourcing perspective. While valid, we started to sense a greater risk from China as it relates to content being exported back into the US from Chinese brands.  When I asked Charlie about this, he gave me one of those stone cold looks in the eye with a little smirk and said “we’re keenly aware of that.” 

 

Knowing how Nike works, this tells me that they’re a step or two ahead of the game. They will not get beat in their own category on their own soil. This is also one reason why I think the company reorged like it did a year ago and radically changed its go-to market.  

 

But also keep in mind that Nike is sitting on $5bn in cash. Yes, they’ll start repo’ing licenses. But what better way to get better exposure in China at lower price points, gain more local talent and connections, and have a burgeoning US lower-price brand with an Asian flair than to buy one of these competitors?

 

What does Anta get? For one, it gets US distribution. That’s big. Nike’s distribution is near impossible to replicate without a few billion dollars to get it there.  Also, keep in mind that Anta, Li Ning, and other Chinese locals are fine from an FX standpoint as long as they stay in China. But as they grow outside of China (and into the US and Europe) they become net short the Yuan – which is the currency with the long-term tailwind. Like it or not, they NEED a US partner more than they care to admit.

 

Can someone explain to me why this does NOT make sense?


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MGM 2Q10 CONF CALL NOTES

Our notes from the Q2 earnings conference call.


 

“The Las Vegas operating environment remains difficult, but as we expected, we are seeing a gradual recovery.  Our Adjusted EBITDA improved compared to the first quarter, despite low hold percentages. CityCenter is seeing improved business activity. Aria is gaining brand awareness, which led to a 17 percentage point sequential occupancy increase in the quarter and higher non-casino revenues.”

- Jim Murren, MGM Resorts International Chairman and CEO

 

HIGHLIGHTS FROM THE RELEASE

  • "Net revenue for the second quarter of 2010 was $1.54 billion. Excluding reimbursed costs revenue mainly related to the Company’s management of CityCenter, the Company earned net revenue of $1.45 billion, a decrease of 2%"
  • Total casino revenue decreased 6% YoY:
    • Slots revenue -3% YoY
    • Table games volume, excluding baccarat, -7% YoY
    • Baccarat volume was +10% YoY
  • "The overall table games hold percentage was lower in the 2010 second quarter compared to the prior year quarter and near the low end of the Company’s normal 18% to 22% range.  Lower than normal table games hold percentage at the Company’s Las Vegas Strip resorts resulted in an impact to Adjusted EBITDA of approximately $20 million."
  • "Bellagio, The Mirage, and Mandalay Bay were affected by the lower table games hold, partially offset by MGM Grand which benefited from a higher than normal table games hold percentage. These factors led to an overall decrease in table games revenue of 11% for the quarter."
  • Room revenues decreased 1% YoY
  • City Center details:
    • Aria Adjusted EBITDA of $7MM
    • $162MM of condo proceeds excluding forfeitures
    • City Center net revenue excluding condo sales or forfeiture revenue of $183MM, so Crystals, Mandarin and rental fees from Vdara contributed $26MM

 

CONF CALL NOTES

  • Increased RevPAR for Bellagio and MGM Grand was driven by better convention mix
  • June was the first month where their company wide RevPAR was up YoY. In June ADR was up YoY as well
  • Convention room mix was 13%, up 2 points over last year and better than last quarter
  • Catering was up 27% YoY in 2Q
  • Pace of convention bookings has continued to be strong and expect 2H2010 to have better convention business than last year.  For 2011, bookings are 20% ahead of pace (compared to last year) and the rates are 15-20% better than what they are getting this year. So they still think that 2H2010 RevPAR will be positive.
  • Baccarat continues to be the main driver of growth for them. Baccarat grew 13% for April & May on the Strip and MGM properties saw a 20% increase in Baccarat business.
  • Domestic trends remain quite challenged and have not improved
  • Doing a good job cross promoting their properties and are continuing to improve their efforts there
  • City Center:
    • Aria's ADR is the second highest in their portfolio
    • Hold had a 24MM adverse effect on Aria's EBITDA
    • Attracting a lot of high end play
    • Total equity value: $2.65BN which resulted in the $1.2BN cash charge in the quarter. Charge also included a $29MM charge for inventory at Veer.
    • City Center has no financial covenants until June 2011
    • $8.8MM of Adjusted EBITDA
    • $34MM of adjusted EBITDA for CC residential
    • $48.7MM of casino revenue at Aria, $140.4MM of non-casino revenue
    • YTD through May, Aria achieved 14+% of the strip Bacc business
    • Maintaining hotel room rate integrity has been a priority
    • Aria booked 44,000 room nights this quarter for this year and future years
    • FTE's counts - 6,083 - decrease of 217 despite the increase in occupancy
    • Vdara occupancy reached 75%
    • Vdara also had staffing reductions
    • Mandarin- $8MM in 2Q vs. $6MM in 1Q.
    • 62% of Crystals was open in 2Q and over 70% of the space is currently leased. Crystals will be 72% occupied by 3Q end and over 80% occupied by year end.
    • Closed 18 units at Mandarin, 105 at Vdara
    • 142 unit / $86MM of revenues at Vdara
    • $57MM of revenues at Veer.
    • Closed 33 of the 232 sub contractor contracts outstanding.
  • MGM Macau:
    • Facility was oversubscribed and upsized from $850MM to $950MM.
    • July 2016 maturity date
    • Focusing on IPO later this year and expansion opportunities
  • Borgata sold 4 property leases for $73MM to Vornado, making up $11.3MM acres of land. Expect to finalize the sale of their share of Borgata within the 18 month time frame
  • Repurchased $211MM of principal notes : $136MM of 2010 notes, $75MM Feb 2011 notes.  Saved them $5MM of interest.
  • Looking at other non-core land - including some on the strip
  • 3Q 2010 Guidance:
    • $8-9MM stock comp
    • $165-$175MM of D&A
    • $291MM of gross interest; this quarter consisted of $267MM related to cash interest in the quarter, no capitalized interest
    • 285-295MM with no capitalized interest
    • 200MM of capex this year, 80MM of which has been spent

Q&A

  • Hold at Aria
    • Related to baccarat hold in particular.  100% luck related. Had 11% hold at the property. Not a function of short play times. Have had 30% hold on the other side of that. Aria's market share is already at 14% for high end play.
  • Timing in IPO at MGM Macau?
    • $250MM of EBITDA on an LTM business. Think that they will continue to grow the business. Have added several operators there.
    • Are waiting for land on Cotai to get approved - officially- that's part of the hold up. It needs to get printed in the gazettte and then there is a comment period... let's move on.
  • Convention and group related business
    • Will end the year around 13% of total, and should be closer to 14% in 2011
    • In Mandalay Bay they had 40% in 2007, and is 34.9% to date this year
    • Bellagio: In 2007, it was 15.7% and in 2009, it was only 12% and it's 14.2% YTD in 2010
    • MGM Grand: 11.5% in 2009 and is 18.5% YTD
    • Doesn't look like they are that far off peak and the 1% mix improvement guidance next year is a rounding error
    • Aria - it's 11-12% this year and targeting 15% for 2011
  • There wasn't much of an increase in spend per occupied room in June, despite RevPAR growth in June.  Think that spend per room will be a lag - but will eventually follow RevPAR growth.
  • Macau Strategy:
    • Brought in new operator
    • Changing mix of tables to more VIP/Junket
    • Team has been adding hosts and marketing representitives in the region
    • Hired significant people in the marketing role
    • Junket incentives haven't changed though
  • Convention bookings at City Center into 2H2010 vs. 1H2010
    • They accelerated in 2Q vs. 1Q.  Got off to a slow start since they didn't have a lot on the books when they opened.  Mid week (57.4% in 1Q to 74.3% in 2Q) vs. weekend business (75.7% in 1Q to 95.8% in 2Q)
  • Forward bookings for 2011 (+20%)--same as the guidance on the last call. So what's changed?
    • Quality of the bookings has increased, so they are booking more fill in business now. So while the booking pace remains constant, pricing is better and spread across more properties (Mirage/Luxor/ Excalibur).
  • City Center - FTE's represent 60% of the cost base, but think that they can lower costs a bit more
  • City Center interest - cash? 50% is cash to 3rd parties and 50% is non cash to JV partners.
  • Hospitality division:
    • 2 openings in China next year, one opening in the 3Q one in the 4Q. Great from a marketing and brand awareness opportunities.  First of half a dozen in China
    • Signed one in India and Eygpt this year
    • Mgmt fee income will start coming in next year
    • Have about a dozen or so in the pipeline
    • Will eventually spin it off - ala Four Seasons (good luck with that - don't think that they will get the same multiple)
  • July - they are occupying the building at or above what they would be and rates are where they thought they would be. As advertised.
  • Have a $190MM receivable for taxes - should get some of that in April 2011
  • FTE's won't improve until the banquet business comes back in the convention space. But overall expect their FTE's to be down to flat going forward. Down 14% from peak to trough on FTE's
  • Attrition rates are improving a lot - under 10% in the month of June.  Conventions are booked with less excess room nights than in prior years, allowing them to plan better.
  • Pricing into 2H?
    • Already in mid-90s. Casino rates are down YoY (ie comp rooms). Casino mix is about 14% of total, but intercompany ADR is down. They track with the cash business. The RevPAR growth is driven by convention and transient; leisure is up a little bit too.
  • Baccarat business? How much of their total volume?
    • Company wide- 25% of table volume historically, but last 2 years it's more like 35%. In the longer term, it should help table hold since Bacc is higher hold.
    • Aria - 44% of the table drop YTD and it should come down over time as they build the other segments

THE M3: 3 COTAI CASINOS WAITING; JULY GGR; CHINESE LENDING; MACAU RE

The Macau Metro Monitor, August 3rd, 2010

 

 

THREE COTAI CASINOS AWAITING LAND GRANTS Macau Daily Times

Committee for Land and Public Concession Affairs President, Kwan Tsui Hang, said one project, which MDT believes to be Wynn's, involving a land area of 200,000 square metres, has already begun construction on a 5-star hotel, a casino and a convention and exhibition centre.  But according to MDT, the construction at that site has yet to start. At present, Wynn has only put up the fences encircling the area next to City of Dreams.  The applications for the other two development projects, which were submitted respectively in 2006 and 2007, both involve 70,000 square metres of land intended for the construction of a hotel and a casino.  Kwan mentioned that the Government explained that the delays were caused by “technical changes” and “constant adjustments in the development projects.

 

The three land applications will likely be approved as long as the development does not “violate the contractual commitments”, Kwan told reporters.  “To know which gaming operators they are isn’t the most important. What we need to make sure is that the Government policies won’t give preference to the gaming companies anymore and that the fourth land application [of this kind] won’t appear in the future,” she stressed.

 

Meanwhile, Secretary Lau told the committee that the revision of the law that governs land leases (known as “Land Law”) will “hopefully” be sent to the Legislative Assembly in 2012. 

 

GAMING REVENUE UP 70% macaubusiness.com

July GGR reached MOP16.3 billion (US$2 billion), up 70.4% according to DICJ. Market share is as follows: Sands 19%, Melco 14.8%, SJM 32%, Wynn 15%, Galaxy just over 12%, and MGM 7%.


NEW LENDING MAY REACH 700B YUAN IN JULY China Daily

China's new loans are expected to reach 700 billion yuan in July, according to Shanghai Securities News, citing an industry insider.  According to the insider, yuan-denominated loans by China's big-four banks, Construction Bank of China, Bank of China, Industrial and Commercial Bank of China and Agricultural Bank of China, totaled 243 billion yuan, a 78 billion-yuan increase from that of June.  These loans account for 27.3% of all new loans, and extrapolating that number would result in 700 billion yuan new loans.

 

PROPERTY SALES TRANSACTION IS LOOKING OPTIMISTIC DURING THE 2Q OF 2010 Macau Daily News

According to the Managing director of Centaline Property Agent in Macau, total property sales transaction in July was around 300, of which most of the sales transaction was made by the last 10 days before the end of July.  The sales figure was not as encouraging as compared to HK's.  It is anticipated that total volume of the sales transactions should continue to grow during August up to the end of this year.


MGM: HOLD WASN’T THAT BAD

Better hold you say? We had heard all quarter long that MGM held very poorly, but it wasn’t that bad – within their “normal” range. That didn’t stop management from mentioning hold 7x in one press release.

 

 

An astute client emailed me this morning that MGM used the word “hold” seven times in its earnings release.  After getting over my disappointment that I didn’t realize that first, I had a good chuckle.  This is, after all, the management team that decided a few years ago to provide a wide normalized hold range of 18-22% and get out of the quarterly hold blame game.  That strategy is no longer convenient, I guess, as management offered up that low hold impacted them by $20 million in EBITDA for the quarter.  Yet hold was still in the normal range, albeit at the low end.  Would management have been so transparent if hold had been at the high end of the range?

 

Probably not.  In fact, VIP hold percentage in Macau was about 70bps higher than that of Q2 2009.  Using the same hold VIP percentage as last year would’ve translated into $18 million less of EBITDA for the property, half of which would’ve accrued to MGM.  We didn’t see that discussion in the release.

 

So how were the numbers?  Well, despite the better than expected table hold in Las Vegas – we had expected hold well below the 18-19% actual - they slightly missed our EBITDA estimate which was below the Street.  So volumes were lower than we expected.  We aren’t even going to spend a lot of time talking about RevPAR since they can pretty much report whatever they want given the large number of comped room nights.  However, we will note that despite reporting higher RevPAR at almost every property that we projected, they still managed to report slightly lower revenue.  Put another way, higher "room revenues" were offset by lower "casino & other revenues."  We continue to believe that 2011 Street estimates need to come down.


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