The Duopoly Fade

The Duopoly Fade


As more and more players enter the toning category, pricing pressure and market share loss are beginning to rear their head in what was once a two horse race.


The latest weekly scan data confirms a growing trend in the toning category.  This is no longer a two horse race, dominated by Skechers and EasyTones.  The data below shows the emergence of “other” brands in the category as well as declining ASP trends.  There’s no question that increased competition was imminent in the category.  After all, toning has enjoyed one of the most spectacular category innovations we have seen in a long time.  However, success breeds imitators.  Which in this case means competition for shelf space, new players/brands/SKU’s at sub-$100 price points, and ultimately price/margin compression. 


One caveat to note.  Skechers recently noted that it is in the midst of a transition towards new styles and lines, which is resulting in clearance of some older SKU’s.  We do believe that this is in some part a reason for pricing pressure on the category.  We’ll be watching closely as product transitions towards fall, to see if ASP’s will (ever) rise again, or if competitive factors become the dominant force in impacting pricing.


Take a look at the charts below to see the changes underway as “toning” appears to be transitioning from a duopoly to a much broader range of players.


The Duopoly Fade - 1


The Duopoly Fade - 2


The Duopoly Fade - 3


The Duopoly Fade - 4


An Experimental Hedgeye Ad.  The Hedgeye Orb placed in the underground lobby of the Louvre, as a part of the permanent collection.


AD: MORE PERMANENT COLLECTIONS - Screen shot 2010 08 12 at 1.25.27 PM


Genting blew out numbers this quarter.  Even when adjusting for high hold the reported EBITDA number would have still been almost 50% above consensus.



Resorts World Sentosa reported revenue of S$860.8MM (US$618 MM) and EBITDA of S$503MM (US$362MM).  Part of the massive EBITDA beat was due to high hold on their premium play business.  While the company didn’t quantify the impact of high hold, they did say that normal margins would have been between 48-58%.  Using an average of the “normal range”, we estimate that high hold benefited them to the tune of S$45-55MM in the quarter.  Still S$450MM of EBITDA is nothing to get disappointed over.  While the release was short on details and haven’t spoken to the company yet, below are our preliminary takeaways.


2Q2010 Preliminary Details

  • We estimate that net casino revenues were approximately 87% of reported net revenues or S$753MM
    • We estimate that gross casino revenue per day increased to S$10.3MM in 2Q2010 from S$8.2 in 1Q2010
    • 64% of the gross win came from the VIP segment, with the balance coming from Mass table play and slots
    • Given the high contribution from VIP and the estimated hold impact, the implications is that total RC was pretty massive – around S$16.5BN  and that hold was about 3.65%.  We’ll get more details after we speak to the company.
    • While Genting made a useless comment that slot win was north of US$200/day, we estimate that slot & EGT win per day was approx S$1,000/day (US$737)
    • We estimate that Mass table revenues were approx S$220MM
    • Implied average rebates are about 1.1%
  • Hotel room revenues were approx S$17MM (1,000 rooms, ADR: S$263MM, OCC: 70%)
  • Universal revenues of $53.5MM (7,000 daily visitors / S$84 spend per visitor)
  • Estimated fixed expenses were about S$20MM lower than we estimated
  • Normalized taxes were around $80MM when you add back the impact of the impairment on the UK operations


2010 & 2011 outlook:

  • 2010:  We estimate that RWS can produce revenues of S$2.84BN and EBITDA of S$1.53BN for 2010.  Treating the UK operations as discontinued starting 3Q2010, we assume the Genting Singapore can do S$3.1BN in revenues and S$1.27BN of EBITDA.
  • 2011:  We project that RWS can produce revenues of S$3.6BN and EBITDA of S$1.9BN.  After corporate overhead, our 2011 EBITDA estimate is S$1.6BN.

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Bear Market Macro: SP500 Levels, Refreshed...

It’s about lunch time but this Thunder Bay Bear has had enough to eat on the short side for this week. Below the 1080 line in the SP500 is the immediate term TRADE bear trap that we call 3 standard deviations oversold (on a short term duration).


I covered our short position in the US Consumer Discretionary (XLY) this morning, not because I’m not bearish on consumer spending – that jobless claims # was a bomb (biggest weekly jump in rolling claims for 2010) – I covered because the XLY, like the SP500, is immediate term oversold.


Oversold is as oversold does, so we’ll see if I’m right with my refreshed immediate term risk management range for the SP500 (1080 to 1097). I think you can manage your gross/net exposures around this range for now. The Bear Market Macro TREND line of resistance remains overhead at 1144.



Keith R. McCullough
Chief Executive Officer


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


Let's face it, ASCA has been on the "for sale" block for 3 years.



Since Craig Neilsen died in 2006,  Ameristar has been on sale; maybe not formally but for all practical purposes.  If there was a corporate casino buyer, we'd bet that ASCA has already talked to them.  Hiring an investment bank, to some extent, may be an acknowledgment that PENN, BYD, nor Genting were interested and the talented bankers at Lazard will have to hit the pavement aggressively to find a buyer.  We're not saying they won't succeed but the premium to today's stock price may not be great.


ASCA currently trades at 7.5x our 2011 EV/EBITDA estimate, a slight premium to PENN and a huge premium to PNK.  PENN's leverage is half of ASCA's and its growth profile dwarfs that of ASCA.  PNK trades at a 1.5x turn discount to ASCA, indicative of a solid takeover premium implicit in ASCA.


It is conceivable to us that ASCA could be worth 8x or $19 in a takeout scenario, 16% upside from here.  However, let's not forget about the time value of money, which is always important in gaming deals.  Due to licensing and jurisdictional approval requirements, gaming transactions take more time to close.  Moreover, most private equity firms are not licensed in ASCA's jurisdictions and some of the major PE players in gaming have already been burned (Harrah's, Station, Aztar, PENN, etc). 


Assuming 6 months to find a buyer and reach an agreement and 9-12 months to close, 16% upside does not seem so juicy, and that's assuming a buyer can be found and the deal can be closed.  We'd handicap those odds below 50%.


The Macau Metro Monitor, August 12th, 2010


DIRECT PLAY Inside Asian Gaming

IAG believes the difference in LVS's rebate rate in Macau (0.9%-1%) vs in Singapore (1.2%), and Singapore's lower taxes give LVS incentives to shift its Macau DIrect VIP players to Singapore.  But a source familiar with the VIP trade around the Asia Pacific region said, " A lot of high rollers travel regularly around the region for business and may have a home in more than one city. For them, it may not be a choice of playing either in Macau, Melbourne, or Singapore. It may be a case of the more destinations they have to try their luck, the better."  Nevertheless, IAG thinks credit risk in Macau and the Lion City factor would cause LVS to realign its Direct VIP business and focus on Singapore. 


Also, IAG had reported some Macau junkets were offering 0.2% of a player's rolling turnover to third parties in order to convert Direct players into junket players.

A TALE OF TWO CITIES Inside Asian Gaming

SJM-licensed Taipa casinos--Greek Mythology (New Century), Macau Jockey Club Casino, and Grandview-- are significantly underperforming in revenue terms.  Their 200 tables (almost as many as Grand Lisboa) could boost SJM's profitability if at least some of the mass tables were reassigned to busier floors on Taipa.  The presence of those 200 SJM tables in Taipa gives SJM and affiliates coverage in the southern part of the Macau market.  The Government's position so far has been to restrict any further expansion of gaming in suburban areas.


The mass market prospects of Greek Mythology have been overlooked by Ho family interests in order to focus on Altira. The 16 VIP tables at Greek Mythology actually outperformed relative to Altira, but its 100 mass tables are often empty. 



Sands China said a worker shortage will delay the opening of its Cotai resort to 4Q 2011 from 3Q 2011.  "That [delay] will affect the ramp-up of the product and will affect the short-term income situation. But the cost of the product will be the same," acting CEO Michael Leven said.  "Sands China has 1,293 workers (mostly locals) at its project," Leven said.  "We're about half the amount we needed for this particular time," he said, adding that the firm would need 10,700 workers (30% locals) at its peak. "We expect over the next six weeks to get closer to our goals."  In addition, Leven said the name of its Cotai project could be decided by September.


As for the search of Sands' CEO, Leven hopes to find a replacement by the end of the year, adding that it is hunting externally for someone with Asian experience, particularly in China, among other traits.  Leven also wants to bring in more junket play without increasing the commissions.



IM is not expecting much from Dragone.  According to an IM survey, less than 1% of visitors at the border points said a show, e.g. House of Dancing Water, was something they would consider.  House of Dancing Water ticket prices go for MOP 400 and the average stay for a Macau visitor is only 1.5 nights.



IAG believes the process of localization will take time in Macau and that Galaxy and Sands will raise construction sector wages to attract locals from other sectors--a wage fight that could lead to an upward inflationary spiral. In addition, according to sources, casino dealer jobs, pit supervisor and pit manager jobs are reserved for permanent residents, which force locals to attend higher education.


A GROWING GAME Inside Asian Gaming, Hedgeye

Lindsay Stewart, VP of Electronic Gaming, SJM: "Not all our slots are systemized yet. Once that happens, we hope within 12 to 18 months we will have far more firepower in terms of being competitive with these big guys.... There's one manufacturer [Aristocrat] that still holds sway."


Peter Johns, Director of Slot Operations, MGM Macau: "We constantly get slots at around 20% now of the mass floor revenue (July 2010: 23.7%).... At my last count there were 23 vendors selling machines in Macau. Most operators stick to the top six [manufacturing] names."


Darrin Carlson, Slot Manager-operations Sands China:

"Slots will progress just like they did in Las Vegas."



The joint statement by Marina Bay Sands and IPBA stated that the suits will be discontinued as part of an amicable, confidential settlement.

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