We expected a miss but the hold impact was much greater. With this hurdle out of the way, the catalysts are lining up positive beginning with MGM’s pricing next week.
While we remained positive on the intermediate and long term MPEL story, we had expected a bigger blip from the earnings miss. With earnings out of the way, the catalysts are lining up positive.
- MGM will price its deal next week – we expect at the high end of the range and a premium to MPEL. This should highlight how cheap MPEL is – under 10x 2012 EV/EBITDA
- April was a great month for Macau and MPEL’s share went up significantly. MPEL had hold issues in the first 2 weeks of May but that will normalize. We are looking for strong, consensus beating estimates for Q2.
- Galaxy not having much of a negative impact so far despite the market’s concern
- There may be an announcement soon regarding Studio City which upon completion should provide MPEL with a sizable concession and management fee.
As we expected, MPEL reported strong volumes and top line, but missed consensus expectations due to low hold. Compared to our estimates, MPEL’s 1Q11 revenues came in 2.4% above our estimate while EBITDA was 7.4% below our estimate. Management claims that the low hold and playing especially unlucky in their rolling chip commission programs (vs the revenue share programs) impacted their EBITDA by $53MM. Of course, investors have no way of knowing the exact magnitude of the ‘mix’ impact but we think it may have been less than what management estimated. If we take management’s assertion of unlucky mix impacted EBITDA of $12-13MM, our math says that the actual hold impact on EBITDA was closer to $35-40MM than $53MM. Still, absent low hold, this would’ve been a very strong quarter.
City of Dreams
- Net revenues of $500MM were 3% above our estimate while EBITDA of $86MM was $9MM below our estimate or 9%.
- Gross VIP win of $470MM was $7MM above our estimate
- RC volume was $1.1BN lower than we estimated since direct play was only 13.7% in the quarter compared to 18.9% in 4Q10 and 16.4% in 2010. The decrease in the direct play mix could have also decreased EBITDA flow through since direct play has theoretical margins that are roughly 8% higher than junket VIP play. However, this is not something that you would normalize for.
- Hold of 2.5% was 17bps higher than we estimated, given our higher RC estimate
- We estimate that low hold negatively impacted revenues by $66MM, however, we have a hard time getting close to the $53MM impact that company claims hold had on EBITDA. If hold was 2.5% across both revenue share and rolling chip play, assuming 2.85% hold, and a 50/50 RevShare/RC commission mix, hold would have negatively impacted EBITDA at CoD by $25MM. The company stated that $40MM of the EBITDA adjustment was due to just low hold, but that would be the math if you just removed gaming taxes. Since they have 50/50 mix, higher hold also means higher commissions to the junkets on revenue share deals.
- Mass win of $146MM was 2% higher than we estimated
- Drop grew 35% YoY vs. our estimate of 42%. However, hold was 1.5% higher than we estimated. Using the 2010 average win % of 21.3%, mass win would have been $8MM lower and we estimate that EBITDA would have been $5MM lower.
- Slot win of $32MM was $6MM lower than we estimated
- Handle only grew by 16% YoY, materially lower than our estimate of 45% growth. However, slot hold of 6.3% was 70bps higher than slot win in 2010 and 1.1% higher than 2009.
- We estimate that elevated slot hold % boosted revenues by $2MM and EBITDA by $1M
- We estimate that fixed expenses were $74MM for the quarter, although some of what looks like higher expenses is likely attributed to unlikely mix in the quarter.
- Net revenues and EBITDA missed our estimates by 1% and 8% respectively.
- VIP gross win of $356MM came in $6MM below our estimate
- RC volumes were in-line with our estimate but hold was 5bps lower
- If hold was 2.85%, we estimate that gross revenues would have been $6MM higher and EBITDA would have been $3MM higher
- Mass win of $25MM was $4MM better than we estimated
- Table volume grew 96% YoY vs. our estimate of 65%
- Implied fixed cost were $32MM - $10MM above our estimate, although as the company mentioned on the call there were some hold/mix issues that impacted the property which would show up in implied fixed costs in our model