City of Dreams has been a smashing success for Melco Crown, but Studio City may not be the same.
Melco Crown Entertainment Ltd (MPEL 0.50%) has been dealt one of the worst hands it could have hoped for from the Macau government, which allowed its new resort Studio City just 200 table games. Another 50 will become available in January; but that's not likely enough to make the resort profitable, and the $1.4 billion in loans the company received for construction require 400 tables to be operating by October 2016.
This puts Melco Crown and other Macau competitors in a tough spot, with uncertainty the norm in the gaming enclave.
Where are all the table games?
Macau's government has been trying to diversify itself away from being a gaming-only city. To that end, Melco Crown's Studio City, Las Vegas Sands' (LVS +0.51%) The Parisian, and neighboring resorts, as well as Wynn Resorts' (WYNN +0.51%) Wynn Palace, have built billions of dollars in rooms and non-gaming activities for guests. But Macau's government put a cap on table-game growth at 3% per year, even as these resorts were under construction.
That's the problem for Studio City and other Macau competitors. And it's why the usually reserved Steve Wynn went a little crazy during his conference call with analysts last week. Gaming companies need table games to make money, and at the moment, no one knows how many table games they're going to get, or if it will be enough to make a profit.
Digging out from its hole with lenders
Lawrence Ho and James Packer, who control Melco Crown, say the company "intends to proactively engage" with lenders about its debts, but what they're really looking for is concessions. If they can't get 400 table games, they'll want lenders to overlook that particular covenant.
Melco Crown may also be able to move some of its 619 table games from its other two table-game properties to Studio City. Even a small shift from City of Dreams or Altira could help Studio City make more money. Melco Crown also has the option of retaining more cash from its positive cash flow operations to reduce debt at Studio City; but as a 60% owner, it would have to negotiate that funding with its partners.
The good news is that Melco Crown has options. How it decides to move forward with the table games it was given, however, is unknown.
The risk operating in Macau
Gaming operators have long done exactly what the government in Macau said because they were eventually given what they asked for, and the gaming market continued to rise, so any mistakes were masked by the booming market. That's no longer the case in Macau.
Gaming revenue has fallen 33% so far in 2015, and operationally, companies aren't getting what they wanted, either. It's a long-lost memory, but Las Vegas Sands lost more than $100 million when it couldn't develop parcels seven and eight in Macau fast enough. Melco Crown has now gotten fewer tables than it expected, and Steve Wynn is worried that the same thing will happen with his new $4 billion resort.
Macau is still a profitable place for these companies to operate, but the government isn't nearly as friendly as they once thought it was. If that continues, gaming stocks could continue the rough patch we've seen in 2015.
