Last week the PBOC reported total social financing of 760.8B yuan for the month of May versus the 1,300B yuan consensus estimate. Total social financing can be extremely volatile month to month, but when smoothing the data over the last twelve months the overall trend is still slowing, and the data is now contracting on a y/y basis. We care because credit has been a key driver of GDP growth in China, and this has also been a leading indicator for Macau GGR. LTM growth from total social financing has led Macau GGR growth by five months at a +0.61 correlation over the last decade (see below). In fairness, some other forward looking Chinese data points tell a better story for Macau GGR, and Macau GGR growth has remained surprisingly strong as TSF has decelerated in the last year, but this is still not a positive development.
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The news. On Thursday morning (06/14/18) RCL announced it’s acquiring a 2/3 equity stake in Silversea Cruises for $1B. RCL also reaffirmed FY18 EPS guidance despite an incremental $0.25 headwind from fuel/FX because of a stronger 2Q, while citing continued strong demand trends. We believe the guidance and demand commentary is the main reason why the stock rallied 5% on the day given investors needed reassurance in the face of poor sentiment.
Shares of RCL are down 23% since the peak back in January, and its forward P/E multiple has contracted by 28% from 15.2x to 10.9x mostly due to rising oil/USD and concerns about future supply growth. RCL has undeservedly been hit the hardest in the group, in our view, which we attribute to more exposure to the Caribbean. We think RCL’s valuation has created a very attractive risk/reward and we have three charts to illustrate our view.
We’re initiating coverage of VAC with an Outperform rating and $147 YE18 target price. Shares are now down 19% from the January peak, due to a weaker tape, M&A news selling, and perhaps perception that VAC overpaid for ILG at what feels later in the cycle. We see positives from the deal, and VAC’s current valuation is attractive.
We’re initiating coverage of HGV with an Outperform rating and $48 YE18 target price. We like HGV because of its long-term organic growth opportunities, brand advantages, lower-end valuation, and clean balance sheet and prudent credit metrics.
CZR filed an S-4 today after the market closed disclosing its intention to take back the $1.1B convertible note. The convertible note does not mandatorily convert until October 2020, so CZR will have to provide some incentive for holders to convert. Interest payments from now until October 2020 total $140M and the convert could seemingly be sold in the open market for $175M more than CZR’s offer, so we suspect CZR will have to offer value equivalent to at least $175M. It’s possible CZR could use its buyback authorization to acquire some shares (we hope), but the more likely outcome is CZR uses cash to offer an incentive to convert, we think.
We looked at stock ownership for CEOs in our coverage and compared the results to other CEOs in the S&P 500. We also looked at prior periods of open market purchases by C-Level executives, and both charts are shown below. We believe stock ownership is the single best form of shareholder alignment. When executives take this a step further and use their own capital to buy stock in the open market – rather than just accumulating stock options – it’s even more bullish, as executives at that point are also confident enough in the direction of the business based on forward data that only they can see.
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