GGRAsia – Melco Crown 2Q profit up, confirms VIP at Studio City

Melco Crown 2Q profit up, confirms VIP at Studio City

Aug 05, 2016 Newsdesk Latest News, Macau, Top of the deck

Asia casino developer and operator Melco Crown Entertainment Ltd on Thursday reported a 27 percent year-on-year increase in profit for the second quarter of 2016.

On a U.S. GAAP (generally accepted accounting principles) basis, net income for the three months to June 30 was US$30.8 million, or US$0.06 per American depositary share (ADS), compared with US$24.3 million, or US$0.05 per ADS, in the second quarter of 2015.

The Nasdaq-listed firm recorded gross revenue of US$1.14 billion for the period, with gaming revenue accounting for 87 percent of the total, at US$994.5 million.

Net revenue for the second quarter of 2016 was US$1.07 billion, up by approximately 17 percent from the prior-year period. Promotional allowances increased by 21.3 percent year-on-year to US$72.8 million, the firm said on Thursday.

“The increase in net revenue was primarily attributable to the net revenue generated by Studio City, which started operations in October 2015, and the increase in casino revenues at City of Dreams Manila, partially offset by lower casino revenues at City of Dreams and Altira Macau,” said Melco Crown.

Adjusted property earnings before interest, taxation, depreciation and amortisation (EBITDA) were US$245.3 million for the second quarter of 2016, up by 19.7 percent from a year earlier. The improvement was mainly attributable to “controlling costs and increased exposure to the higher margin mass-market segment in Macau, together with a strong performance at our integrated resort in Manila,” said Lawrence Ho Yau Lung, chairman and chief executive of Melco Crown, in a statement accompanying the results.

The firm’s board also declared on Thursday a quarterly dividend of US$0.0063 per share (equivalent to US$0.0189 per ADS) for the second quarter of 2016. The dividend will be paid on August 31 to those recorded as shareholders as of August 16.

Hong Kong-listed Melco International Development Ltd – headed by Mr Ho – is now Melco Crown’s single largest shareholder, after James Packer’s Crown Resorts Ltd decided to reduce its stake in Melco Crown to 27.4 percent.

Covenant test

For the second quarter of 2016, net revenue at Melco Crown’s majority-owned Studio City (pictured) was US$183.8 million. The property started operations on October 27 last year.

Studio City generated adjusted EBITDA of US$24.6 million for the three months to June 30. The company noted that this result is different from “consolidated EBITDA” defined under the US$1.4 billion Studio City senior secured facility agreement, of which the borrower is Studio City Co Ltd.

“The differences between the two figures are primarily driven by shared services and corporate recharges as well as operations that are not part of the Studio City borrowing group,” explained Melco Crown’s chief financial officer Geoffrey Davis on a conference call with analysts following the results announcement.

“Precise figures for the second quarter are not available at this time, but the differential between these figures in the second quarter of 2016 is expected to be approximately US$7 million to US$9 million,” he added.

The loan agreement requires compliance with several minimum financial condition requirements. In order for Studio City Co to meet such requirements for the year ending March 31, 2017, “the ramp-up of Studio City operations must be significantly accelerated” by then, said Melco Crown.

Brokerage Union Gaming Securities Asia Ltd said it expects a “significant shift of business from City of Dreams to Studio City … in the absence of a wholesale market recovery – if the tests are to be met”.

“In the context of significant new supply coming online … we think the task of ramping Studio City gets incrementally harder and the cannibalisation felt at City of Dreams in order to support Studio City gets more intense,” said analyst Grant Govertsen in a note on Thursday.

30 VIP tables

Mass-market table games drop at Studio City was US$592.2 million while gaming machine handle was US$485.3 million.

Studio City currently offers no VIP gaming but on the conference call with analysts, Mr Ho confirmed that the property would soon start catering to high rollers.

“Consistent with our approach of maximising profitability through yield management, we are in the process of setting up rolling chip operations at Studio City, including both junket and premium direct VIP offerings,” said Melco Crown’s CEO.

“We believe that the approximately 30 tables will result in improved EBITDA over time,” he added.

At the time of the property opening, Melco Crown’s CEO said not having junket rooms at Studio City’s casino was a “business decision” driven mainly by the size of the gaming property’s new-to-market allocation of 250 tables from the Macau government.

Junket operator Suncity Group has confirmed to GGRAsia that the firm will establish a VIP room at Studio City. Business news outlet Bloomberg reported last month that Tak Chun Group would also operate a VIP room at the casino resort.

Melco Crown’s chief operating officer, Ted Chan Ying Tat, said on the conference call that the table allocation for VIP at Studio City was “still subject to the government’s approval”.

The company expects a decision to be made in the “later part of August or early September”, and plans to allocate two-thirds of the tables to junkets, while the rest will be for premium direct, added Mr Chan.

Mr Ho additionally said that the firm was negotiating with the government whether the gaming tables would come from Melco Crown’s existing VIP portfolio – at City of Dreams or Altira Macau – or from the mass floor of Studio City.

“Having some VIP presence will probably also help the rest of the non-gaming amenities and [provide] an overall better experience and positioning for the property [Studio City],” added Mr Ho.

Improving trends

Brokerage Sanford C. Bernstein Ltd said in a note on Thursday that Studio City continues to ramp up, “but at a slower-than-anticipated pace partly due to its currently isolated location”.

On the post-result announcement conference call, Mr Ho said the firm noted a material upswing in operating and financial metrics at Studio City following the end of the second quarter.

“Our number one focus … has been in ramping up Studio City; it’s been harder than anticipated … [but] we think that the ramp up is of course very sustainable,” added Mr Ho.

Melco Crown’s COO said the firm had also noticed an improvement in the performance of other Macau properties during the second quarter.

“If you look at the revenue year-on-year decline, I think for City of Dreams, we have improved to a single-digit decline over the last few months and [are] trending up quite nicely,” said Mr Chan.

For the quarter ended June 30, net revenue at City of Dreams was US$629.9 million, a decline of 3.7 percent from the prior-year period. The property generated adjusted EBITDA of US$177.7 million in the second quarter of 2016, broadly flat from a year earlier.

Rolling chip volume totalled US$9.9 billion for the period, versus US$11.1 billion in the second quarter of 2015. Mass market table games drop decreased 13.4 percent year-on-year to US$1.03 billion.

Net revenue at Altira Macau was US$98.7 million, down 31.4 percent from the prior-year period. The property generated adjusted EBITDA of US$1.7 million, compared to US$6.5 million in the comparable period of 2015. Rolling chip volume reached US$4.2 billion in the three months to June 30, down 35.4 percent from a year earlier.

Strong Manila performance

Net revenue at City of Dreams Manila, in the Philippines, was US$120.2 million, up 36.3 percent compared to US$75.0 million in the second quarter of 2015.

City of Dreams Manila generated adjusted EBITDA of US$36.5 million in the second quarter of 2016 compared to US$12.6 million a year earlier. The improvement was a result of increased casino revenue, including from the junket operations that began in the middle of 2015, said Melco Crown.

“City of Dreams Manila performed better than we had anticipated, largely on VIP (volume and hold rate) and good luck in mass tables,” said Sanford Bernstein’s analysts Vitaly Umansky and Clifford Kurz.

Rolling chip volume totalled US$1.7 billion for the second quarter, up from US$495.8 million in the prior-year period. The rolling chip win rate was 3.4 percent in the second quarter, an increase from 2.4 percent in the comparable period of 2015.

Mass-market table games drop increased to US$134.3 million, compared to US$116.6 million in the prior-year period. The mass-market table games hold percentage was 29.9 percent in the second quarter, up from 25.4 percent a year earlier.

“In Manila, City of Dreams delivered impressive improvements in all gaming segments,” said Mr Ho, adding that the property provides Melco Crown “with a strong and diversified earnings stream” to complement the operations in Macau.