This is a 35 page note we write each quarter where we update our thesis with new charts and preview each company into earnings. In this note we’re examining estimates and multiples during prior recessions as guides for possible downside scenarios. For our coverage we see binary outcomes: either a brewing recession or meaningful outperformance. The risk/reward setup to us seems more favorable for the latter, as our stocks seem to have already discounted a recession with over 50% likelihood, in our view, which we’ll show in the note.
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Macau December GGR was released on Tuesday (1/1/19), showing growth of 16.6% y/y, versus a consensus estimate of we think around +10% y/y. We’re raising Macau estimates for 4Q, as the quarter came in better than initially expected. We think WYNN’s downbeat earnings call in mid-November kept estimates low, but the quarter ultimately wasn’t bad. It seems likely win rates could have been better than normal in the quarter on the VIP side, and mass trends seemingly remained firm. Macau GGR has been surprisingly strong in recent months despite deteriorating Chinese macro data we think largely because of still pent-up demand following a >40% peak to trough decline during the 2014-2016 anti-corruption driven downturn, as well as ramping new property launches. However, comps are growing tougher in 2019, new smoking rules just took effect, and the Chinese macro data has continued to deteriorate.
We have three charts to highlight this week from some of our observations: 1) MAR’s EV/EBITDA premium to HLT has now been wiped out for the first time since the HLT spinoffs, 2) crude oil is down 38% from the highs and yet cruise stocks have also declined 26% over the same time, and surprisingly even underperformed other consumer discretionary names, 3) European PMIs have been soft and there are now incremental concerns about Europe following poor commentary from a few companies this week, so we show European sourcing for each company we cover.
This is a recurring piece we write monthly where we track several key monthly indicators, which have historically led Macau GGR growth. The key takeaway is the forward-looking Chinese macro data mostly remains soft. The most recent data points for the most recent month show only 5 of the 18 indicators are better than the prior month versus 9 of 18 last month. We chart all 18 of the indicators in the note, and in Exhibit 2 we show a summary table.
Throughout 2018 cruise, gaming, and lodging stocks have been tightly correlated with the Chinese equity market, despite the fact that many of these companies have little to no direct exposure to China. So far YTD the y/y change in the S&P 500 has had a +0.61 correlation to the y/y change in the China CSI 300 index. This compares to the average of cruise stocks at +0.85, the average of timeshare stocks at +0.92, the average of hotel C-Corp stocks at +0.85, the average of Vegas gaming stocks at +0.90, and the average of Macau gaming stocks at +0.95.
Macau November GGR was released overnight (11/29/18), showing growth of 8.5% y/y, versus a consensus estimate of we think around +6% y/y – though with the usual wide range – and our initial estimate of +4% y/y. We think normal seasonality would have implied y/y growth of about 5%, but better hold rates may have helped in the latter half of the month, especially since WYNN sounded downbeat on demand trends during their earnings call earlier in the month on 11/7. Our gaming summary file with all monthly GGR data is updated and included in this link.
Gaming, lodging, and cruise stocks have performed poorly in 2018, with the average stock down 21% YTD. A few of these stocks we cover are down over 40% YTD, and down even more if we use the highs from earlier in the year. The weakness this year has been most pronounced in gaming and in timeshare, two sectors generally with more debt (even though much of timeshare debt is non-recourse). In many cases the overall fundamental trends have been strong (i.e. cruise lines and timeshare), and it seems to us that the market is pricing in a meaningful change to the macro environment for many of these stocks. We compared these YTD returns to all U.S. listed consumer discretionary stocks with a market cap above $500M entering the year, and we found that on average gaming, lodging, and cruise stocks are in the 34th percentile for YTD performance among consumer discretionary. The weakness has also been driven by multiple contraction, with the average stock in gaming, lodging, and cruise lines experiencing 19% forward EV/EBITDA multiple contraction YTD. When compared to the same consumer discretionary group we find that gaming, lodging, and cruise stocks on average are in the 33rd percentile for YTD forward EV/EBITDA multiple change.
This is a new recurring piece we will write monthly where we track several key monthly indicators, which have historically led Macau GGR growth. The key takeaway is the Chinese macro remains poor, which has in turn affected Macau GGR and Macau gaming stocks, but the most recent month provides some small signs of hope. Exhibit 2 in the note shows a summary of all 18 indicators we track.
MLCO reported 3Q property EBITDA of $295M versus our $387M estimate and consensus of we think around $382M. VIP hold negatively impacted EBITDA by $38M. MLCO also paid out an unexpected special $32M bonus to employees. And then mass hold at CoD Macau negatively impacted EBITDA by $20M if using the LTM hold rates as a guide.
Macau October GGR was released overnight (11/1/18), showing growth of 2.6% y/y, versus a consensus estimate of we think around 3.0%. We think consensus began the month expecting high single digit growth, and Golden Week seemed healthy, but then estimates began to taper off toward the low single digit level as the month progressed. Our gaming summary file is updated and attached with all monthly GGR data.
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