While all five other gaming concession owners in Macau perfect their newly opened properties or complete construction on new resorts, Melco Crown (NASDAQ:MLCO) is left with the resorts it's been operating for at least a year now. Studio City opened in 2015 and City of Dreams is a dinosaur by Cotai standards.
So, it's no surprise that Melco Crown's business has come under pressure given the recent opening of Las Vegas Sands' (NYSE:LVS) The Parisian and Wynn Resorts' (NASDAQ:WYNN) Wynn Palace, but investors didn't quite know what to expect from the company until fourth-quarter results were released. And the operational pressure we're seeing now will only get worse.
Macau's power dynamics are shifting
Melco Crown's most important resort is City of Dreams, which is in the center of Macau's Cotai region. And given Macau's 10.2% growth in gaming revenue in the fourth quarter, you might think it was a good quarter for the company. But competition is taking up market share.
Revenue at City of Dreams fell 1.2% to $661.1 million and EBITDA dropped 1.8% to $188.7 million. The drop was due in part to a decline in mass market play and bad luck at high-roller tables. But the trend isn't positive for a resort that drives Melco Crown's results.
At Studio City, revenue nearly doubled to $246.2 million and EBITDA was $56.7 million. That's not bad but, when you compare it to revenue and EBITDA of $344 million and $95 million, respectively, at The Parisian and $418.7 million and $77.5 million at Wynn Palace, the results look pretty paltry. And remember that The Parisian and Wynn Palace are just starting to ramp up their operations, so they'll likely take more share in the future.
MGM Resorts will open another resort on Cotai in the next year and SJM is building there as well. Melco Crown can count on increasing competition, and if Macau's gaming market doesn't grow enough to offset the competition, we can expect declines in revenue, EBITDA, and earnings going forward.
Melco Crown's best value for investors
In the past year, Melco Crown has reported $1.09 billion in EBITDA and has just $1.8 billion in net debt on the balance sheet. So, its $8.4 billion market cap isn't an incredibly high valuation given the cash coming out of the business.
What should concern investors is that Melco Crown's core operations could be past their peak and in a steady state of decline. Macau only has so many gaming and entertainment dollars to go around, and when City of Dreams and Studio City were part of only a handful of resorts, they could command a lot of business just by virtue of being on Cotai. But with new resorts being completed, competition is going up, and I'm afraid earnings will go down. Melco Crown isn't a bad value today, but I don't see much growth ahead, either. Investors should set their expectations appropriately.