The third-quarter performance of casino operator Melco Crown Entertainment (Nasdaq: MPEL) illustrates that glamour raises revenue in the gambling enclave of Macau, especially when you have a casino called City of Dreams.
But it also raises questions: How much of that revenue increase is sustainable? And how well can Melco Crown stand up to players like Las Vegas Sands (NYSE: LVS) and Wynn Resorts (Nasdaq: WYNN), which have luxury casinos in Macau and are already building more in the area?
The biggest question: Can Macau fulfill the dreams of all six casino operators that are betting on strong, steady growth to realize their profit goals and to justify their expansion plans? The other players are MGM Mirage (NYSE: MGM) plus the China-based SJM Holdings and Galaxy Entertainment Group.
Read the fine print
On Tuesday, Hong Kong-based Melco Crown reported third-quarter net revenue of $500.3 million, up 69% from the year-ago quarter thanks primarily to the June opening of City of Dreams, which accounted for nearly three-fifths of third-quarter revenue. The company owns another high-roller casino in Macau and eight small gambling clubs.
Despite the boom in revenue, there are issues for investors to consider. Melco Crown's third-quarter revenue was $20 million below the average analyst estimate. Total revenue for the first nine months of 2009 dropped to $933 million from $1.16 billion for the same period last year.
Melco Crown also continues to lose money. On a GAAP basis, its third-quarter loss per American Depositary Share (ADS) was $0.08 versus a loss of $0.05 for the year-ago quarter. When one-time items are removed, Melco Crown lost $0.05 per ADS, or slightly better than the average Wall Street estimate of a $0.09-per ADS loss.
Check the details
For U.S. investors, Melco Crown is a Macau pure play, offering an unvarnished picture on how casino growth is apportioned in China compared to U.S. companies that also own other properties.
For the third quarter, in comparison, Wynn's Macau revenue slipped to $448.5 million from $474.8 million for the year-ago period. Operating income rose to $83.2 million from $59.6 million. The company plans to open its Wynn Encore in Macau during the first half of 2010 next year.
For Las Vegas Sands third quarter, revenue fell 5.5% to $493.6 million at one major casino, although operating income gained 17.2% to $95.6 million. At a second property, revenue rose 13% to $280.8 million while operating income jumped 126% to $64.4 million. A third casino/resort, Four Seasons Macau, opened in August 2008, so a year-over-year comparison isn't currently possible.
Las Vegas Sands expects to restart construction soon on several casino projects that had been halted last year, and it is raising money via an IPO on the Hong Kong Stock Exchange and through other investors to help complete the projects.
Like its peers, Melco Crown wants to build more casinos in Macau, figuring there's much more growth ahead. Investors must decide if the company's plan is based on reality -- or if it is just a dream.
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