Melco Crown sees profit fall on Studio City costs

melco-crown-profit-fallsAsian casino operator Melco Crown Entertainment (MCE) saw profit fall by more than half in Q1 2013 due to costs related to the construction of its new casino in Macau. Revenue rose 11% to $1.145b on higher rolling-chip and mass-market gambling volume, while earnings rose to $273.5m from $242.5m for a margin of around 24%. But lower VIP win rate and expenses stemming from the development of the new Studio City project on Macau’s Cotai Strip pushed profit down 56% to $53.8m.

MCE is a joint venture of Australian casino operator Crown Ltd. and Hong Kong’s Melco International Development that operates the City of Dreams and Altira Macau casinos as well as the Mocha Clubs slots parlor chain. MCE has teamed with Henry Sy’s Belle Corp to develop the Belle Grande resort-casino in the Philippines’ Entertainment City complex in Manila, which is set to open in mid-2014.

City of Dreams lived up to the company’s self-described designation as “the dominant premium mass market property in Macau,” posting 25% earnings growth to $246.9m on 20% growth in mass market table drop and a record 32.5% hold, up from 28.8% in the same period last year. Rolling chip volume was up 24%, but the win rate fell from 3.0% to 2.7%, the bottom end of the expected range. Slot handle rose an impressive 50% to $1.026b.

Altira Macau saw revenue basically flat at $265m but earnings fell from $55.1m in 2012 to $40.1m this year as gamblers’ luck improved. Rolling chip volume rose to $11.8b from $10.9b, but win rate fell from 3.1% to 2.9%. Mass market table drop rose 10% to $164.8m but win rate fell to 15% from 17.1%. Mocha Clubs revenue fell nearly 10% to $34m while earnings fell 11% to $8.5m. The number of machines in operation fell 5% to 2,000 but win per machine per day rose 10% to $214.

MCE’s non-operating expenses rose $92.8m to $116.6m, predominantly due to financing charges related to the Studio City project. The corporate reorganization of Melco Crown Philippines contributed the bulk of MCE’s $17.1m of development costs. MCE is currently sitting on a $2.5b stash of cash compared to $2.7b in total debt.

On a post-earnings call with analysts, MCE CEO Lawrence Ho discussed the recent tax changes in the Philippines, saying the four Entertainment City casino operators were “united” and “seeking a joint resolution on this front.” Ho noted that the four operators were investing billions of dollars in the project, which would obviously be quite negatively affected by this kind of “game change or a rule change at this stage.”

Ho says all four operators are “hopeful that the government will do the right thing” and suggested the brouhaha “could be neutralized by a reduction of payments” to the Philippine Amusement and Gaming Corporation (PAGCOR). Ho also said he expects the Philippines to become “a much bigger market than I think most people will expect.”

Ho also discussed the recent uptick in Macau’s VIP gaming market, saying it was a reflection of the end of the uncertainty surrounding the once-in-a-decade change in China’s leadership, which concluded in March. Ho believes that after new premier Xi Jinping restated his priority to grow the economy at a rate of 8%, “there was a collective sign of relief.” Ho says MCE’s view of the overall growth of the Macau market is “probably much higher than our original thinking at the beginning of the year.”