How Melco Crown's Studio City Resort Represents the Future of Macau

After the People's Republic of China cracked down on money laundering and implemented stricter restrictions on the behavior of government officials several years ago, its gambling mecca of Macau went into a sharp decline. 

In this segment from the Industry Focus: Consumer Goods podcast, Sean O'Reilly and Vincent Shen talk about why so many companies are deciding to build new resorts and attractions now, even though the territory's market is doing so badly. Also, they look at what a few of those attractions will be, and how they will align with the new image of Macau that Beijing seemed to have in mind when it set down the new laws.

A full transcript follows the video. [Editor's note: The closed captions for this video contain an error. Melco Crown owns 60% of the joint venture that developed Studio City in Macau, not 6%.]

This podcast was recorded on April 12, 2016.

Sean O'Reilly: The new casinos that are opening up in this area ... this has actually been a long time coming. Is anybody nervous? Because, from what I could tell, they're all gung-ho, they're opening all these casinos and all this stuff. Does anybody think the timing is a little bad?

Vincent Shen: Well, yeah. The timing of when a lot of these projects broke ground ...

O'Reilly: It was the heyday. 

Shen: Exactly.

O'Reilly: It was awesome. (laughs) 

Shen: So, are a lot of these developers and operators facing a ton of uncertainty right now in terms of the fact that they have a lot of new supply coming in, not only in table games, but slots, and also hotel rooms? Absolutely. Lots of uncertainty. But a lot of people right now who are more bullish in terms of the near-term prospects, they think ... for example, February -- I was talking about the 22 months of declines -- most of them have been double-digit for the past year, year and a half. But February was a bright spot. Year-over-year decline was only about 10 basis points.

O'Reilly: Oh, so that's a fraction of ... yeah.

Shen: They happened to get a lot more traffic because of Chinese New Year. So, people saw that as a really positive sign. A lot of the stocks have done well since the beginning of February as a result, because, you know, these gaming companies had seen their shares trade down 75%.

O'Reilly: Yeah, whenever you mention, basically, gaming in Southeast Asia, you pretty much always come across Melco Crown Resorts (MLCO 0.33%). Correct me if I'm wrong, but they're in Singapore, too, right?

Shen: No, they're in Macau and in Philippines.

O'Reilly: Oh, in the Philippines, I'm sorry, that's actually what I was thinking. Anyways, they own 60% of that new one that's opening up in Macau, the Studio City place.

Shen: So, Studio City opened its doors last October. Huge event. They even spent, I think it was $70 million on a short film with Scorsese, De Niro, Dicaprio and Brad Pitt. It was a 17-minute film.

O'Reilly: Was it an Ocean's Eleven rip-off?

Shen: It was just a marketing film about the opening of the resort.

O'Reilly: I kind of need to see this. (laughs) 

Shen: The resort looks incredible. It was a $3.2 billion project from the company. And, keep in mind, that Melco Crown, their stock is down about 56% since that downturn began in June 2014. So, Studio City has 1,600 guest rooms between its two separate towers, and here is where we're seeing the strategic focus of these companies is shifting to accommodate the fact that a lot of their VIP customers are no longer making it, they're no longer dropping as much cash on the tables.

So, for example, you have one tower of the hotel, the Celebrity Tower, meets moreso a broad swath of customers. Then, they have the Star Tower, which is these bigger suites, much moreso for the luxury clientele. Again, they're splitting that in order to accommodate both ends of the market, so to speak. And then, another fact is, right now, they only have 250 gaming tables and about 1,200 slot machines, which is not that much compared to their other properties.

O'Reilly: So, this is kind of where China seems to want Macau to go, and it's definitely where it's going, which is having more entertainment, more family-friendly stuff, all that.

Shen: Absolutely. So, Beijing has basically signaled to Macau and said, "We want you to diversify your economy, and we want you to change how you market yourself. We want more family-friendly entertainment." And I think Studio City, being the newest opening, I'm pretty sure, in the area, is a really good example of that, because you have, for example, their Golden Reel, a figure-eight Ferris wheel, highest in the world at 130 meters.

O'Reilly: What's a figure-eight Ferris wheel? (laughs) 

Shen: Look up pictures, you'll see it. It's incredible.

O'Reilly: I'm going to Google this.

Shen: And also, they have the House of Magic. It's three separate theaters with magic shows running seven days a week. They have a Batman Dark Flight ride, which you would absolutely love.

O'Reilly: I would totally love to do that.

Shen: It's an interactive amusement ride, essentially. They have their Pacha Macau nightclub. They have a huge event center with 5,000-seat capacity for concerts, theaters, sports, awards ceremonies. They have a 40,000-square-foot arcade and playground for kids, which I'm probably sure I would love, too.

O'Reilly: Oh, it's like part of the center of the building -- I'm looking at the figure-eight Ferris wheel.

Shen: Exactly. And, a big thing is, they'll have this thing called The Boulevard. It's supposed to recreate New York street shopping, but in an indoor setting -- 377,000 square feet when it's finished. Right now, they're still building that out, as retailers move into the space. So, like I said, only 250 gaming tables, 1,200 slot machines, not that much compared to some of their other properties in Macau. So, all those other things I mentioned is the shift in terms of where, hopefully, their revenue is going to be coming from the resort. But, when I say that, I don't want listeners to believe it's like an even split. Still, the bulk of every one of these businesses, their revenue is coming from the casino.

O'Reilly: I'm itching to get your thoughts on this. I knew the most about the City of Dreams, which opened in 2009. That's not terribly big. That was started right before this stuff happened, so they've been doing well. Did you get a read on how they're performing lately?

Shen: They announced their fourth-quarter results. Net revenue was about $669 million. Unsurprisingly, it's down year-over-year about 25%. Non-gaming revenue made up about 10% of that number. So, you can see how much it's still focused on the casino. But that's up from 8% in the year-ago quarter. And the thing is, Studio City is a very different picture, where non-gaming revenue was about $37.8 million of total $123.2 million, which is about 30% is not gaming.

O'Reilly: City of Dreams was built for the rich millionaire who comes in there ...

Shen: Yeah, not only was it built more so focused on the gaming side, but on the VIP clientele as well. So, Studio City, that 30% split coming from non-gaming gives you an inclination of ...

O'Reilly: It's a big divergence, for sure.

Shen: Exactly. And though Studio City was only open for about two full months in that quarter, the resort generated about $123 million, adjusted EBITDA of $12.6 million. Those numbers will certainly go up as the resort ramps up its operations.