MACAU REVIEW AND OUTLOOK SHORT TERM GAIN, LONG TERM????

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1 MACAU REVIEW AND OUTLOOK SHORT TERM GAIN, LONG TERM???? GAMING/LODGING/LEISURE TEAM (Todd Jordan and Felix Wang) October 8, 2015

2 LEGAL DISCLAIMER Hedgeye Risk Management is a registered investment advisor, registered with the State of Connecticut. Hedgeye Risk Management is not a broker dealer and does not provide investment advice for individuals. This research does not constitute an offer to sell, or a solicitation of an offer to buy any security. This research is presented without regard to individual investment preferences or risk parameters; it is general information and does not constitute specific investment advice. This presentation is based on information from sources believed to be reliable. Hedgeye Risk Management is not responsible for errors, inaccuracies or omissions of information. The opinions and conclusions contained in this report are those of Hedgeye Risk Management, and are intended solely for the use of Hedgeye Risk Management s clients and subscribers. In reaching these opinions and conclusions, Hedgeye Risk Management and its employees have relied upon research conducted by Hedgeye Risk Management s employees, which is based upon sources considered credible and reliable within the industry. Hedgeye Risk Management is not responsible for the validity or authenticity of the information upon which it has relied. TERMS OF USE This report is intended solely for the use of its recipient. Re-distribution or republication of this report and its contents are prohibited. For more detail please refer to the appropriate sections of the Hedgeye Services Agreement and the Terms of Use at HEDGEYE 2

3 DISCUSSION POINTS 1 2 OUR LONG TRADE CALL HAS LEGS Despite the Sep weakness, the trade still looks higher. MTD #s may be better than expected, some indications of Mass stabilization have emerged and the Oct comp is finally an easy one for Mass. We are not, however, calling a bottom in Macau fundamentals so keep a trade a trade SEQUENTIAL DETERIORATION - AGAIN The details of the September 33% GGR decline suggest the fundamentals were worse than the headline 3 REVISITING A NO-JUNKET SCENARIO We analyzed the impact of junkets going to zero back in February. The topic is much more relevant now and our analysis suggests a less than dire impact on some of the operators HEDGEYE 3

4 THE TRADE

5 LONG MACAU STOCKS THE TRADE LOOKS HIGHER Catalysts A solid month to date number could be released next week: HK$ m/day possible implies ~-20% versus -36% YTD First easy and first negative Mass comp in October Solid Golden Week visitation Potential for a positive government announcement MSC could get a 250 table allocation vs expectations of 150 Direct VIP outperforming particularly at Sands China (LVS) HEDGEYE 5

6 EASING MASS COMPS OCTOBER 2014 WAS THE FIRST MASS DECLINE Mass revenues declined YoY in October 2014 due in part to the smoking ban. Investor focus could shift to the Mass segment where the rate of change is improving HEDGEYE 6

7 GOLDEN WEEK VISITATION BETTER THAN EXPECTED Macau visitation has been surprisingly strong through Golden Week. Visitation is positive but we re not suggesting it will translate into GGR growth. Rather, the YoY decline should look much better than trend when the weekly revenues are released on Monday and that should be good enough HEDGEYE 7

8 THE TRADE SANDS CHINA (LVS) MAY BE THE PLAY With Mass showing early signs of stabilization (see minimum bet chart on slide 14), and Mass comps easing, investor focus should shift away from junkets. LVS maintains the highest Mass exposure Sands China generates less than 10% of EBITDA from junkets Direct VIP may actually be trending higher YoY at some properties We believe market share is trending very high thus far in October HEDGEYE 8

9 THE TRADE KEEP A TRADE A TRADE At this time, we cannot make a longer term call on the Macau stocks unanalyzable? As evidenced by the September #s, fundamentals may still be deteriorating, the better October start notwithstanding Our 2016 estimates remain well below the Street and even we have little confidence in our projections Street may not be accounting for new supply impact on non-gaming segments HEDGEYE 9

10 SEPTEMBER 2015 ANALYSIS

11 SEPTEMBER GGR ANALYSIS Market VIP hold including direct play hit its highest level ever at ~3.5% Adjusting for both periods, normalized GGR in Sept fell 39%-40% Adjusted for the Mass reclassification associated with the smoking ban, we estimate Mass revenues declined 26%-28% and VIP revenues fell 37%-39% Junket volume still at its lows Concessionaires LVS: finally held lower than normal, hurting its market share WYNN: good luck offset lower junket volumes possibly due to Dore situation MGM: was the luckiest in September MPEL: despite high hold, VIP volume share hit its lowest point since Oct 2014 GALAXY: gained some mass share due to Phase 2 contribution DATA SOURCES: HEDGEYE ESTIMATES HEDGEYE 11

12 SEPTEMBER JUNKET VOLUMES JUNKET VOLUMES STILL DETERIORATING August and September reversed the slight uptick trend in the 2 nd derivative. While not depicted here, absolute volumes (seasonally adjusted) continue to deteriorate sequentially. On the bright side, we re hearing junket volumes have picked up in October, even more than the typical Golden Week seasonality DATA SOURCES: HEDGEYE ESTIMATES HEDGEYE 12

13 SEPTEMBER MASS: RE-CLASSED REVS MASS DISAPPOINTMENT IN SEPTEMBER BUT YoY decline got worse again in September. The good news is that Golden Week is off to a better than expected start and October faces the first easy Mass comparison DATA SOURCES: HEDGEYE ESTIMATES HEDGEYE 13

14 MASS: TABLE MINIMUM BETS HIGH LIMIT/PREMIUM MASS (HK$) WEIGHTED AVERAGE $4,700 $4,200 $3,700 $3,200 $2,700 $2,200 MACAU: AVERAGE POSTED TABLE BET MINIMUMS HIGH LIMIT/PREMIUM (HK$) BASE MASS (HK$) $1,500 $1,400 $1,300 $1,200 $1,100 $1,000 $900 $800 $700 BASE MASS (HK$) WEIGHTED AVERAGE STABILIZING TABLE BET MINIMUMS Here is the good news. Our data suggests that casinos are no longer cutting minimum bet levels on Base and, surprisingly, Premium Mass tables. This could be indicative of some stabilization in Mass or at least the expectation of stabilization. Either way, compared to where we were, this is bullish under the less bad thesis DATA SOURCE: HEDGEYE RESEARCH 2015 HEDGEYE RISK MANAGEMENT HEDGEYE 14

15 MASS: AVERAGE TABLE BET $8,000 MACAU: OBSERVED AVERAGE TABLE BETS HIGH LIMIT/PREMIUM MASS (HK$) $7,500 $7,000 $6,500 $6,000 $5,500 $5,000 $4,500 HIGH LIMIT/PREMIUM (HK$) BASE MASS (HK$) $3,500 $3,000 $2,500 $2,000 $1,500 BASE MASS (HK$) * - May 2015 includes Galaxy Phase HEDGEYE RISK MANAGEMENT STABILIZING AVERAGE BETS This dataset is more anecdotal but instructive over time. Here we also see some evidence of stabilization in average bets DATA SOURCE: HEDGEYE RESEARCH HEDGEYE 15

16 MACAU VISITOR ARRIVALS In thousands 3,500 3,000 2,500 2,000 1,500 1,000 TOTAL VISITATION TOTAL VISITATION YOY CHANGE MAINLAND CHINA VISITATION YOY CHANGE 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% YoY Change 2015 HEDGEYE RISK MANAGEMENT SEQUENTIALLY IMPROVING TRENDS Visitation has fallen YoY since Q1. Given the strength over Golden Week, visitation could turn positive for October DATA SOURCE: HEDGEYE RESEARCH HEDGEYE 16

17 SEPTEMBER GGR MARKET SHARES LUCK SHIFTED MARKET SHARES LVS suffered a bid drop in share September was a relatively low hold month for the Sands China properties versus high hold in the prior 3 months. We see a big jump coming in October share for the company DATA SOURCES: HEDGEYE ESTIMATES HEDGEYE 17

18 SEPTEMBER VIP HOLD PERCENTAGES MACAU VIP HOLD % (INCLUDING VIP DIRECT PLAY) ADJUSTED FOR PREMIUM TABLE RECLASSIFICATION 5.0% Sep-15 Sep-14 Sept 2014-Aug % 4.5% 4.41% 4.0% 3.5% 3.0% 3.32% 2.93% 3.34% 2.86% 3.15% 3.59% 2.79% 2.88% 2.89% 3.44% 3.53% 3.38% 3.10% 3.17% 3.55% 2.87% 3.07% 2.5% 2.26% 2.44% 2.0% 1.5% SJM LVS WYNN MPEL GALAXY MGM MARKET LUCKIEST MONTH EVER Galaxy s hold was normal while the rest of the market held high, particularly MGM and MPEL 2015 HEDGEYE RISK MANAGEMENT DATA SOURCES: HEDGEYE ESTIMATES HEDGEYE 18

19 SSS VS TOTAL GGR SUPPLY GROWTH MAY NOT GROW THE MARKET MUCH While many analysts are focusing on potential market growth in 2016, same-store revenue should be decidedly negative. We re forecasting negative market and same-store growth DATA SOURCES: HEDGEYE ESTIMATES HEDGEYE 19

20 HEDGEYE OUTLOOK

21 2015/2016 OUTLOOK: TAKEAWAYS 2015/2016 GGR forecast unchanged Full year 2015 GGR projected to fall 34% YoY in 2015 following a 3% decline in 2014 We re not much different than the Street for 2015 However, our 2016 GGR forecast of a 7% decline is below the Street 2015/2016 EBITDA estimates We re generally in line with the Street for EBITDA and actually higher on a couple of names 2016 looks much more bleak HEDGEYE 21

22 Q3 OUTLOOK: EBITDA ESTIMATES MIXED Q3 The Street has certainly improved its near term forecasting but some variances remain for Q3. Galaxy still looks like a big miss while high Q3 hold could boost MPEL and LVS EBITDA above the Street. HEDGEYE 22

23 2015 OUTLOOK: EBITDA ESTIMATES GENERALLY IN LINE FOR 2015 Abnormally high Q3 hold at City of Dreams keeps our full year 2015 estimate above the Street DATA SOURCE: HEDGEYE, FACTSET HEDGEYE 23

24 2016 FORECAST MUCH MORE CONCERNED ABOUT 2016 This is why we re not calling for anything more than a trade in the Macau stocks. We think the Street has 2016 wrong DATA SOURCE: HEDGEYE, FACTSET HEDGEYE 24

25 HEDGEYE FORECAST FOR 2015/2016 UNCHANGED FROM PREVIOUS FORECAST Our projections essentially assume current volumes, seasonally adjusted, carry through the rest of the year with a little pop for Macau Studio City opening in late Oct DATA SOURCE: HEDGEYE ESTIMATES HEDGEYE 25

26 NO JUNKET SCENARIO REVISITED

27 NO JUNKET SCENARIO REVISITED WITH VIP DETERIORATING SO RAPIDLY TO THIS POINT, IF THE JUNKET CONTRIBUTION WENT TO ZERO, VALUATIONS ACTUALLY DON T LOOK THAT BAD GALAXY AND WYNN ARE THE MOST EXPOSED TO THE JUNKETS WHILE SANDS CHINA COMES THROUGH RELATIVELY UNSCATHED WHILE THE JUNKET SEGMENT PROBABLY WON T GO TO ZERO, ANYONE LOOKING AT THE MACAU STOCKS FOR LONGER THAN A TRADE MUST VIEW THEM UNDER THAT SCENARIO #RISKMANAGEMENT HEDGEYE 27

28 NO JUNKET SCENARIO REVISITED METHODOLOGY We analyzed the impact of the junket business essentially going to zero from a ground up perspective 3 scenarios: 1) none of the junket business comes back through another channel 2) 10% comes back through Direct VIP and 3) 25% comes back through Direct VIP. We view the 10% scenario as most likely. The overwhelming majority of the junket business would probably be permanently impaired without the credit and anonymity that the junkets provide While falling short of predicting the junkets go away, we remain very concerned with this segment There is little evidence that this segment has stabilized The government could potentially force more transparency from the junkets which would have a material negative impact For any would be, long-term shareholders in Macau stocks, we recommend gaining comfort with cash flows and valuations assuming the junket business is zero HEDGEYE 28

29 EBITDA IMPACT VARYING DEGREES OF JUNKET EXPOSURE We believe only 10% of the junket business would ultimately find its way back to the casino, most likely through the Premium or Direct VIP channel. The casinos would almost break even in the aggregate if 25% flowed back through a higher margin channel. With such limited exposure now to the junkets, LVS shines on this analysis (relatively speaking) HEDGEYE 29

30 EV/EBITDA IMPACT ECONOMIC EV/EBITDA ANALYSIS NO JUNKETS, NO PROBLEM FOR SOME Rather than consolidated EV/EBITDA, we use economic EV/EBITDA. Not surprisingly, LVS has the smallest variance among the scenarios but also starts from a higher base given its more highly valued Mass exposure. Galaxy looks very expensive across all scenarios HEDGEYE 30

31 VENETIAN MACAU CASE STUDY This is an example to illustrate the line items involved in estimating the impact from a no junket or a junket transfer to direct VIP scenario. HEDGEYE 31

32 VENETIAN MACAU CASE STUDY This is an example to illustrate the line items involved in estimating the impact from a no junket or a junket transfer to direct VIP scenario. HEDGEYE 32

33 OVERALL CONCLUSIONS 1 THE LONG TRADE HAS LEGS BUT KEEP A TRADE A TRADE 2 YES SEPT WAS A BAD MONTH BUT MORE EVIDENCE OF A MUCH BETTER START TO OCT SHOULD ARRIVE NEXT WEEK 3 THE JUNKET SEGMENT WILL GET WORSE, POTENTIALLY MUCH WORSE. LVS REMAINS THE PLAY TO AVOID EXPOSURE HEDGEYE 33

34 APPENDIX

35 RECENT MONTHLY RESEARCH TOPICS 1 2 BASE MASS TURNING NEGATIVE Using observed minimum and average bet levels as well market contacts, we determined that it wasn t just the Premium Mass and VIP segments that were struggling. Despite Q1 confirmation, the Street still doesn t appear to be reflecting deteriorating Base Mass in their projections. THE GALAXY PHASE 2 IMPACT We showed that the opening of Phase 2 did not grow the market. Through July, however, the property does appear to be ramping, although with still no positive impact on the market. 3 IMPACT OF NEW CASINO AND HOTEL SUPPLY LVS should bear the brunt of the new supply as some of its properties are overflow properties that, because of excess capacity, will do better in good times and worse in bad. Demand is falling as supply increases not a good environment for LVS. Room supply growth will be a real issue. HEDGEYE 35

36 TRANSIT VISA VISITORS TRANSIT VISITATION CONTRIBUTION STILL HIGH Transit visitors are a larger part of total Mainland visitation while Mainland package visitors have declined significantly. We ve shown that transit rule changes have historically had little financial impact on Macau. DATA SOURCE: HEDGEYE RESEARCH HEDGEYE 36

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