You might think it's easy to operate a brand-new casino in the biggest gaming market in the world. Open your doors, hand out chips, serve a few drinks, and watch cash pour in. But Melco Crown Entertainment (Nasdaq: MPEL) is having a hard time matching the performance of its rivals in Macau.

The initial buildup
Melco has two casinos, Altira Macau and City of Dreams, in Macau, where it has been operating since 2007. This was the same time Las Vegas Sands (NYSE: LVS) opened the Venetian Macau. Predecessors were SJM Holdings' dingy, smoke-filled gaming halls that lacked the glitz and glamour we've seen for two decades in Las Vegas, but that has changed. Since 2007, we've seen Wynn Resorts (Nasdaq: WYNN) add on to Wynn Macau with Encore. MGM Resorts (NYSE: MGM) built MGM Grand Macau. The list goes on and on.

All of this development must leave us with winners and losers in the battle for gambling dollars, so let's see who is actually winning. We'll compare Melco Crown's two casinos to two of the more notable casinos in Macau, The Venetian Macau by Las Vegas Sands and Wynn Macau including Encore by Wynn.

Melco Crown
Altira Macau is Melco Crown's first casino in Macau, located on the island of Taipei. The casino opened in 2007 and is the smallest of the properties we will look at. Its larger brother, the City of Dreams, opened in June 2009 and includes a Hard Rock Hotel and Grand Hyatt Hotel. Costing $2.1 billion, this was the second megaresort on the Cotai Strip.

Las Vegas Sands and Wynn
The Venetian Macau is the massive resort built by Las Vegas Sands on Macau's Cotai Strip in 2007. Across from the City of Dreams, these resorts form the foundation for the strip development.

Wynn Macau opened in September 2006 and opened an addition called Encore earlier this year. Since Encore did not contribute to the entire quarter, revenues will probably be higher in future quarters (so keep that in mind). This will affect return on the massive property investment.

By the numbers
Our comparison includes established casinos open for a year, which will eliminate one-time opening costs and the crazy swings openings can bring. I have included building costs for each property to ground our expectations. Also included are revenue, adjusted EBITDA, and EBITDA margin for the second quarter of 2010. I have not used any adjustments for "non-normal" gaming win, which would have some impact on each property. Wynn Macau would be affected most with lower EBITDA if we made adjustments, but other adjustments would be minor.


Building Cost

Q2 2010 Revenue

Q2 2010 Adjusted EBITDA


City of Dreams





Altira Macau





Venetian Macau





Wynn Macau





Source: Securities and Exchange Commission filings. In millions. EBITDA margin = adjusted EBITDA divided by revenue.

As you can see, both Melco Crown properties are underperforming The Venetian and Wynn Macau in nearly every respect. Adjusted EBITDA margin at Melco properties is half of comparison properties, a big challenge to make up.

EBITDA margin doesn't include depreciation or financing cost, so it shows how revenue is being eaten up by ongoing costs. I don't see a lot of positive with margins this low. It will take more than revenue growth to keep pace with competitors.

The one positive could be Altira Macau, which appears to have more than its share of revenue compared to construction cost. But margins still aren't keeping up. Management hopes to increase revenues and improve operations with increased EBITDA margins in the future, but what is the excuse for poor performance now?

One line struck me from Melco's recent conference call, "We look with a bit of envy, but also with very great recognition to the level of performance that the operators who have been running in the market two or three years longer than us with their mass product are now achieving through their properties." Envy? Seriously? Altira Macau has been open for three years, so I don't think being new is an excuse any more.

Melco thinks it will "figure it out" eventually or be helped by new developments like Galaxy Entertainment's Galaxy World Resort. By then, Melco may have already been crushed by better, more efficient casino operators.

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