How Melco Crown Became the Hottest Stock in Macau

It's well established that Cotai is now the hottest market in Macau. Right now, Las Vegas Sands (NYSE: LVS  ) and Melco Crown (NASDAQ: MPEL  ) have a monopoly on exposure to Cotai on the U.S. stock market, and they've both generated outsized returns for investors.

What most people may not realize is that Melco Crown has actually outperformed Las Vegas Sands by a wide margin recently, both on the market and operationally.

MPEL Total Return Price Chart

MPEL Total Return Price data by YCharts.

Let's look at just how Melco Crown came to generate such great returns in Macau.

Melco Crown's key to growth
Las Vegas Sands has grown on Cotai through building new resorts, increasing the company's market share. Melco Crown, on the other hand, has taken advantage of the growing number of hotels in the area to attract more gamblers.

You can see in the table below that City of Dreams generated more rolling chip volume (a.k.a. VIP play) than Las Vegas Sands' The Venetian Macau and Four Seasons Macau combined. It also grew rolling chip volume far more quickly than either of Las Vegas Sands' casinos.

 

Q2 Mass Market Volume

Year-Over-Year Mass Market Volume Growth

Q2 Rolling Chip Volume

Year-Over-Year
VIP Growth

City of Dreams

$1.11 billion

35%

$24.8 billion

30%

The Venetian Macau

$1.59 billion

56.1%

$11.8 billion

6.1%

Four Seasons Macau

$186 million

105%

$9.9 billion

8%

Source: Company earnings releases.

Note that Las Vegas Sands is growing more quickly in the mass market, but the reason Melco Crown is growing more overall is that VIP play is still about 70% of the volume in Macau. When all of the numbers are added up, City of Dreams' revenue growth of 41.3% is higher than 38.8% at The Venetian Macau or 3% at Four Seasons Macau, even including a very lucky quarter at The Venetian Macau.

Melco Crown's weak spot
Where Melco Crown doesn't stack up to Las Vegas Sands is in flowing revenue to the bottom line. City of Dreams' EBITDA margin was 31% last quarter compared to 40.3% at The Venetian Macau, which is why the former's EBITDA is still higher than City of Dreams'. The difference was partly due to good luck during the quarter, but this has been a long running challenge for Melco Crown. The company has improved margins in recent years, though it still isn't on the same level as competitors.

Foolish bottom line
Melco Crown has generated better returns because it is growing its VIP business more quickly than Cotai rivals. VIP gaming is still by far the largest portion of gaming in Macau that's resulted in strong revenue and EBITDA growth. It's a formula that investors are hoping will continue to work for Melco Crown.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 25, 2013, at 7:16 PM, spokanimal wrote:

    It's always advisable to discuss the rate of growth of VIP vs the mass market whenever a discussion of relative shares of each class (eg: 70% of macau gaming volumes are VIP) is conducted.

    The reason is simple. A reader might assume that if 70% of gaming volumes are VIP, that that is also indicative of how each class of gaming is growing, SAR-wide, YOY...

    ... and, of course, the reality on that score is exactly the opposite, with mass market gaming volumes growing at a rate that's more than 2.5 TIMES that of VIP gaming in macau.

    Your comment on EBITDA vs volumes is a revelation worth highlighting. Both Wynn and Melco have much better "table productivity" than Sands, while Sands has been the EBITDA leader in Macau for some time.

    Chalk it up to Sand's incessant focus on long-term success and expense control... even if doing so would harm near term results or market share. Adelson won't give up any comp that doesn't have an ROI associated with a propensity to gamble... whereas Steve Wynn lost control of Mirage resorts to Kerkorian almost entirely because of all the money he wasted below the gross-margin line...

    ... all the company-owned art on display in Bellagio at the time was the defining element of that particular shareholder revolt.

    It's the same with the junket splits. Adelson was the last hold-out on the junket commission caps negotiated among the 6 concessionaires back in early 2010, and only when it was apparent that his adherence to the 1.25% cap was hurting Venetian badly, did he relent and succumb to the competitive realities being forged by the "market share at all costs" leader, SJM.

    Still, direct VIP was practically pioneered by LVS (and horribly abused by Steve Jacobs), and that effort, in turn, has morphed into a gradual re-definition of mass that is methodically re-categorizing "premium mass" more and more into the ranks of low-end VIP. Indeed, the picture is increasingly muddy when one is contrasting VIP with the many flavours of mass.

    Finally, while macau is still primarily a "gambling" destination, the advent of cotai is increasingly shifting that paradigm. MICE, shopping and ALOS in general are functions of the mass markets that go beyond table hold percentages when guaging the total value of a patron's visit. The future of macau may not necessarily be the reality of vegas, but we know the inevitability of the trends, and who is positioning themselves in front of those trends and who is not...

    ... the extreme case being in 2010, as he so quickly was violating the junket commission caps, when Stanley Ho so confidently proclaimed that "macau will always be a day-tripping, VIP industry".

    It was a proclamation that had oh so much to do with his SJM being the last concessionaire with a presence on Cotai.

    Spokanimal

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