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Melco Crown Misses Q2 Earnings, Revenues on Macau Slowdown - Analyst Blog

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Melco Crown Entertainment Limited ( MPEL ) posted second-quarter 2014 results, wherein both earnings and revenues missed the Zacks Consensus Estimate. Share price of this casino operator declined 4.9% in response and due to the concern related to slowdown in Macau gambling revenues.

Melco Crown's second-quarter 2014 adjusted earnings of 30 cents per share missed the Zacks Consensus Estimate of 37 cents by 18.9%. Further, earnings declined from the year-ago figure of 35 cents by 12.4%. The downside reflects lower-than-expected revenues.

In the quarter, net revenue declined 7.4% year over year to $1.20 billon and also missed the Zacks Consensus Estimate of $2.59 billion by 9.4% due to lower group-wide rolling chip revenues, partially offset by improved mass market table games revenues.

Adjusted Property EBITDA was $313.6 million, down 10.6% year over year, attributable to lower group-wide rolling chip volumes and rolling chip win rate, partially offset by growth in the mass market table games segment.

The downside in the numbers reflects slowdown in Macau gambling growth. The slowdown can be attributed to the fact that high-stake gamblers are curtailing spending amid a cooling Chinese economy. Also, it comes in the wake of a nationwide crackdown on corruption in China that has compelled Macau officials to impose restrictions on VIP gamblers in order to stop billions of dollars from being siphoned off illegally from mainland China to Macau.

Further, football World Cup diverted some bettors and tourists away from the world's largest gambling hub. As a result, gross gaming revenue in Macau for the month of June declined 3.7% to $3.4 billion - the first instance of decline since Jun 2009.

Segment Operations

The company operates in four segments - City of Dreams, Altira Macau, Mocha Clubs, City of Dreams Manila and Studio City. While City of Dreams, Altira Macau and Mocha clubs are currently operating properties, City of Dreams Manila and Studio City are set to open in later in 2014 and mid 2015, respectively.

Net revenue at City of Dreams was $967.5 million, up 0.1 % year over year. Adjusted EBITDA of $290.2 million in the second quarter of 2014 declined 3% from the year-ago quarter. The decline was primarily due to lower rolling chip volume and rolling chip win rate, partially offset by growth in mass market table games drop and an improved mass market table games hold percentage. Rolling chip volume totaled $22.1 billion, down 10.9% year over year.

Net revenue at Altira Macau was $181.6 million, down 34.9% year over year. Adjusted EBITDA of $15.6 million in the reported quarter was down 62.3% year over year, primarily due to lower rolling chip volume and rolling chip win rate, partially offset by higher mass market table games revenues. Rolling chip volume totaled $8.3 billion, down 29.7% from the year-ago quarter.

Net revenue from Mocha Clubs totaled $36.5 million, a decline of 1.9% from $37.2 million in the second quarter of 2013. Adjusted EBITDA of $8.6 million declined 12.2% from the year-ago quarter.

The company incurred $16.9 million as operating expenses in the second quarter of 2014 at City of Dreams Manila, related to pre-opening costs as well as share-based compensation cost. Adjusted EBITDA was a negative $0.5 million, compared with $0.2 million in the year-ago quarter.

Studio City reported negative EBITDA of $0.29 million, versus negative EBITDA of $0.32 million.

Our Take

Melco Crown missed the Zacks Consensus Estimate on both the counts owing to the sluggish Macau market. Given the scenario, we anticipate the pressure to persist for the company due to sustained weakness in demand in the U.S., along with China's crackdown on illegal money transfers, credit growth concerns, tighter restrictions on visas and an impending ban on smoking in the casinos. Nevertheless, we expect Melco's strong brand portfolio, solid mass market revenues and increasing traffic in Macau to bode well for the company over the long term.

Additionally, the company announced that its City of Dreams Manila is on track to open later this year, while Studio City remains on track for a mid-2015 opening.

However, the company's announcement that Taipei prosecutors have indicted its Taiwan office and some of the employees for allegedly violating banking and foreign exchange laws, keeps us on the sidelines.

Melco Crown currently carries a Zacks Rank #4 (Sell). A better-ranked stock in the same sector is Zynga, Inc. ( ZNGA ) with a Zacks Rank #2 (Buy). However, in the broader Leisure Services sector, Marriott Vacations Worldwide Corp. ( VAC ) and Wyndham Worldwide Corporation ( WYN ) with the same Zacks Rank as Zynga may also be considered.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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