Melco Crown (NASDAQ:MLCO) is scheduled to report second-quarter earnings on Aug. 7, following the results from major competitors Wynn Resorts (NASDAQ:WYNN) and Las Vegas Sands (NYSE:LVS). The gambling mecca of Macau has had its share of issues during the last few months, including regulatory issues with junket operators (the middlemen companies that provide credit lines to high rollers), competition for attention with the World Cup, and declining revenue from the VIP gaming segment.
Las Vegas Sands' second-quarter earnings release in mid-July delivered revenue and earnings-per-share numbers lower than expectations, which most have attributed to these issues. Wynn Resorts, due to report two days before Melco Crown, will likely face the same situation. For Melco Crown investors, or those looking to get in, here's what to expect for the second quarter and beyond.
The blessing in disguise
As long-term investors, we probably don't give too much thought to the noise that surrounds our investment thesis in the short term. An example of this is the World Cup, which some analysts said caused lowered gaming revenue over the summer as people focused on soccer. However, worth paying attention to are the regulatory issues surrounding junket operators and high-rolling gamers that is related to the lowered growth of the VIP segment.
VIP revenue has been important for Wynn Resorts, so the growth issue (this segment is still growing revenue year over year, but at a slower rate than expected) means Wynn investors could be in for a disappointment akin to that experienced by Las Vegas Sands shareholders. However, in the long term, this switch away from VIP gamers will actually be a boon for the industry, as it will be forced to focus on the more profitable mass market segment. Therefore, expect that this issue could cause lowered revenue for Melco Crown in the second quarter, but that it's a good thing over the long run.
New casinos opening
Each of these three companies is scheduled to open new casinos on Macau's Cotai Strip within the next 18 months, with Melco Crown getting things started in summer 2015.
The coming $4 billion Wynn Palace on the Cotai Strip, with an expected opening date about six months after Melco Crown's resort, will include a 1,700-room hotel-casino, a performance lake, and much more. Las Vegas Sands' Parisian is set to open in mid-2015 and to include over 3,000 new rooms and a 50%-scale replica of the Eiffel Tower.
There are many reasons to be bullish on Melco Crown's Studio City resort. The company recently announced an additional $300 million of funding for this project, raising the total investment to $2.3 billion. This cinematic-themed integrated resort is expected to be better than anything Melco Crown has produced yet, with 500 gaming tables, more than 1,500 slot machines, a five-star hotel, shopping mall, and much more. Analysts at both Citigroup and Deutsche Bank have said that Studio City will be the "best situated" resort on the Cotai Strip, as it will be directly adjacent to the Lotus Bridge that connects the strip to mainland China and to a proposed stop for the new intercity light rail coming next year.
Melco Crown CEO Lawrence Ho continues to lead the company's growth prospects. Photo source: Bloomberg.
In a press release, Melco Crown CEO Lawrence Ho said: "We are extremely excited about our newest integrated resort in Macau, which remains firmly on track to open in mid-2015. The property's cinematic theme and vast array of unique entertainment and attractions will enhance Macau's appeal as a leading tourist destination in Asia."
Two potential complications
There are two potential issues with this resort that investors should watch out for. First, there is yet no confirmation that the company has been approved for a gaming license, meaning the resort could very well open as just a nice hotel without the ability to provide gambling. Second, Melco Crown seems to have a heavier percentage of its EBITDA passed into interest expense than does the industry on average. While most resorts are being built with credit that carries interest of roughly 1%-5% of the total EBITDA, Melco Crown's appears to stand at closer to 11%.
Regardless, the company is confident that it will not have trouble obtaining the gaming license, and if the casino is open first and is very profitable, it should raise EBITDA enough to pay for that higher interest.
Betting on Melco Crown outside of Macau
A key reason that Las Vegas Sands has been able to post such huge global revenue is through diversified revenue growth in Asia. Sands' Asian revenue is not just Macau, but also includes operations in Singapore. Though Singapore operations were not much help in the second quarter, diversification among the 88% of Las Vegas Sands' revenue that comes from Asia will help the company to remain strong and steady in quarters to come. Wynn, by contrast, gets 75% of its revenue from Macau, its only Asian presence. Melco Crown is primarily focused on Macau right now as well, but that is about to change.
Melco Crown is opening its City of Dreams Manila resort later this year, possibly as early as September. Melco Crown made this initial $1.3 billion investment in Manila's new "Entertainment City" in the hope that this area will become a future gambling and resort hub of Asia. While Singapore represents a premier developed market, the Philippines will be another bet on a developing region supported by huge populations of mass-market gamers and access to tourists from nations such as China, Japan, and South Korea.
The pre-opening costs of this new resort added up to $8.8 million in the first quarter, and are likely to be equal or higher during the second quarter. These costs can be expected to lower the company's cash reserves for the quarter. However, when the resort opens in the third or fourth quarter, these costs should pay off. Furthermore, the Filipino government is giving an extra boost to the company with a nice tax break on its gaming revenue.
With lowered revenue from VIP gamers in Macau, and increased operating and opening costs (as well as higher debt interest expense) related to the coming casinos in Manila and Macau's Cotai Strip, expect lowered revenue for Melco Crown's second quarter, more than investors would like. However, each of these factors that might lower revenue in the quarter will be a boon for future profits via a larger and more profitable mass market consumer base, as well as new casinos in operation both in Macau and beyond.
Shares of Macau-focused gaming companies have been beat down over the last few months on these issues, regardless of incredible first-quarter earnings. For investors looking at the long term, this industry, especially Las Vegas Sands and Melco Crown, look to have a lot of upside left. Melco Crown seems to be a good buy now, and investors could see a good entry point if lowered revenue numbers in the coming second-quarter release drop share prices a little further.