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Is City of Dreams' Underwhelming Opening a Preview of Cotai's Future?

By Travis Hoium - Feb 22, 2016 at 2:00PM

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Could Macau's newest resorts be in for a poor start.

Image source: Las Vegas Sands.

2015 was supposed to be a transformational year for Melco Crown (MLCO -6.96%). The company was an early mover in Macau with Altira and City of Dreams, but its growth would be driven by City of Dreams Manila and Studio City, which was recently completed.

The decline in Macau's gaming market certainly hurt the company, but the allocation of just 200 table games to Studio City when it opened may have been the worst news of the year. And it's already starting to hurt operations.

The numbers
Gaming revenue as a whole dropped 27.5% in Macau during the fourth quarter, so the numbers from Melco Crown weren't expected to be blowouts. What was more important was that the company didn't lose market share at City of Dreams and that Studio City, which opened Oct. 27, 2015, performed well.

At City of Dreams, revenue dropped just 25.3% and EBITDA fell 25.5%, so the resort held its own in Macau. But Studio City was another story.

Part of the problem with Studio City is that it was only allocated 200 table games when it opened, increasing to 250 in 2016. This was well below the 400, or more, management had asked for and called into question the profit potential of the resort. You can see below that Studio City generated far less revenue than neighbor City of Dreams and had a very low EBITDA margin.

 

City of Dreams 

Altira Macau

Studio City

Net Revenue

$669.0 million

$142.0 million

$123.2 million

Non-Gaming Revenue

$67.6 million

$7.6 million

$37.8 million

EBITDA

$192.2 million

$9.7 million

$12.6 million

EBITDA Margin

28.7%

6.8%

10.2%

Data source: Melco Crown earnings report.

There could be some operational improvements on the way, but the loss of table games is a huge blow to Studio City and will make it difficult to make a solid return on the $2.3 billion construction cost.

Image source: Wynn Resorts.

Is this a preview of Macau's future?
The fear in Macau is that Studio City's underwhelming financials are just a preview of what investors should expect over the next year as Las Vegas Sands (LVS -0.06%), Wynn Resorts (WYNN -1.76%), and MGM Resorts (MGM -0.75%) all open new properties on Cotai. Each is spending multibillions with an unknown number of tables being allocated to their properties.

The fear is that each new resort is expecting to get a generous 400-500 table allocation, something that isn't likely for each property. Macau has said it will cap table game growth at 3% annually and the low allocation to Studio City implies that it might stick to that. In the fourth quarter of 2015, there were 5,957 gaming tables in Macau, implying the region would allow about 179 new tables in 2016.  

The problem here is that Wynn Resorts is opening Wynn Palace in June, Las Vegas Sands plans to have The Parisian open by the end of the year, and MGM Cotai is coming in early 2017. This is on top of 50 additional tables already given to Studio City.

More uncertainty faces Macau
There are a lot of unknowns in Macau for 2016, but the biggest may be this table allocation from regulators. Like Studio City, if Wynn, Las Vegas Sands, and MGM get fewer tables than anticipated they could be far less profitable than management and investors are anticipating from these new resorts.

Keep an eye on how this plays out because it's still unclear if the 3% rule will be a hard cap or if there's some leeway given the flood of new resorts coming. If it's a hard cap, it could be another bad year for gaming stocks.

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Stocks Mentioned

Wynn Resorts, Limited Stock Quote
Wynn Resorts, Limited
WYNN
$56.98 (-1.76%) $-1.02
MGM Resorts International Stock Quote
MGM Resorts International
MGM
$28.95 (-0.75%) $0.22
Melco Crown Entertainment Limited Stock Quote
Melco Crown Entertainment Limited
MLCO
$5.75 (-6.96%) $0.43
Las Vegas Sands Stock Quote
Las Vegas Sands
LVS
$33.59 (-0.06%) $0.02

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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