MPEL COULD MISS Q2 BUT WILL PEOPLE CARE?

We think that Melco will miss street expectation when they report this Thursday.  However, the CoD commentary will be positive since the property has ramped nicely, albeit with high hold %. 

We’ve been positive on MPEL (see “BUY THE RAMP UP, SELL THE RAMP DOWN”, of 07/16/2009) since right after City of Dreams (CoD) tanked its first two weeks.  The stock is up 43% over the last 3 weeks on the strong CoD rebound.  We would caution investors that while we still feel the property is on a ramp up, the July numbers indicate that a lot of the July revenue bounce was hold related.

 

2Q09:

-For MPEL’s Q2, we’re at $217MM of revenues (4% below consensus) and a loss of $13MM of EBITDA (vs. Street at $2MM) for 2Q09.

-We estimate that Altira will report $172MM of net revenue and $8MM of EBITDA.

  • The drop off in EBITDA is due to low hold, which we estimate to be around 2.5% for the quarter. As a reminder, commissions at this property are based on rolling chip volumes (as opposed to revenue share) so hold will be low but the junket payout is still high.
  • We estimate fixed expenses at Altira are roughly $25MM per quarter

-Our CoD projection is net revenues of $21MM and an EBITDA loss of 16MM

  • We were surprised when the company told investors that fixed costs were $23MM for the month of June, based on the number of employees, we expected a cost of $15MM for the month (using our number the EBITDA loss would be 9MM)
  • Our understanding is that, in June, some of the junket commissions were variable and some were fixed

-We estimate that Mocha Slots will report $24.5MM of revenue and 6.4MM of EBITDA

-We also assume $9MM of overhead.  Excluding pre-opening expenses, we assume a loss a of 16 cents this quarter

 

Thoughts on July #’s and Melco’s pre-release

While CoD demonstrated impressive growth in the month of July, we would note that some of the growth is not sustainable and low “quality”. We estimate that about $37MM of revenues came from abnormally high hold.  Given the “fixed” commission caps at the property, 60% of this revenue directly flows down to EBITDA.

  • While we aren’t going to complain about the growth, we would have been a lot happier if it came on the “Mass” side, after all, City of Dreams is supposed to be a premium mass property. In July, 83% of the revenues came from VIP. 
  • Please see “JULY GOT HOTTER IN MACAU” which we put out yesterday, where we talk about July trends in further detail.

Despite noting that VIP hold was only a little above “normal” in July, hold was not normal at either property

  • CoD held very high, while Altira held pretty poorly
    • At CoD that extra hold drops to the bottom line, ex-taxes given the fixed 1.25% commission rate
    • We would also note that Altira experienced “abnormally” low hold in 6 of the 9 quarters since it opened
      • 4 of the 9 quarters had hold below 2.5%, while 2 had hold in the 2.6-2.7% range, despite this small fact Melco raised the “normal” range to 2.85% from 2.75%

So while trends in July were definitely positive, before we all high–five each other, we’d like to see the “money” in Mass and some sustainable hold data that we can put a multiple on.

 

Outlook

Over the long term we are bullish on Macau, as it is one of the few markets with excess demand.  Beijing will continue to control the market growth, but growth will be positive.  Same store Mass market growth, on the other hand, will be decidedly negative since Beijing’s target mid-single digit market growth will not offset 20%+ Mass table supply growth later this year and into 2010.  However, MPEL added a lot of the supply so they are less susceptible to market share losses.

Once the difficult credit comparisons are lapped in the 3Q09, we think the VIP market will begin to grow as well.  We also believe that there can be substantial upside if the government decides to lower the gaming tax rate and if the Yuan is pegged away from the dollar. 

 

Altira

Until growth resumes in the in VIP market, we believe that Altira’s EBITDA generation will be capped at about $20MM per quarter (subject to hold of course).  When the entire market begins to grow, we think that Altira may be able to eventually get to the $90- $100MM EBITDA range. We do not believe that the property will see $163MM of EBITDA again unless the tax rate gets cut in Macau.

 

City of Dreams

There is some confusion over what the fixed costs should be at this property once Hyatt opens.  Hopefully, management will provide some color on Thursday.  Based on the “$23MM” figure in June, management implied approximately $90MM per quarter in fixed costs once the Hyatt is fully opened.  However, based what we know the fixed costs to be at operating properties in Macau, our guess is that fixed costs will move closer to $60MM per quarter over time.  Based on this assumption, we think that CoD will be able to produce $175MM of EBITDA in 2010, and eventually ramping to the low to mid 200MM range.

MPEL 3Q09:  We’re at $70MM of EBITDA and $492MM of revenues, which is materially higher than the street, which probably hasn’t updated their numbers for high hold and flow-through