Melco Resorts and Entertainment Ltd (MLCO)

[eastunder]

Melco Crown Down More Than 10% On Excess Macau Supply?

http://www.forbes.com/sites/afontevecchia/2011/11/10/whats-wrong-with-melco-crown-down-more-than-10-on-excess-macau-supply/?partner=yahootix

Operated by the son of the legendary Stanley Ho, Melco Crown Entertainment posted third quarter earnings before the bell on Thursday, beating on both the top and bottom line but seeing its stock drop more than 10% in early trading in New York.

Melco Crown earned a record $113 million in the third quarter, on a GAAP basis, up from $15.8 million in the third quarter of 2010. In a per share basis, the company run by Lawrence Ho earned 21 cents, well above Wall Street’s consensus estimate of 16 cents a share.


Trefis Team
Contributor The company saw adjusted EBITDA surge 76% to $240.3 million in the third quarter. In the press release, Melco Crown’s management noted the increase in profitability was due to continued and sustained improvements in gaming and non-gaming operations across all operating segments.

Net revenue surged 45% to $1.1 billion, topping estimates of $964 million on a strong performance by Melco Crown’s strongest properties: Altira Macau, Mocha, and City of Dreams. The company derived 94% of its revenues from its casino operations, about 4% from its hotel operations (rooms and food and beverage) and the remaining portion from entertainment, retail, and other segments.

Mr. Lawrence Ho, Co-Chairman and Chief Executive Officer of Melco Crown Entertainment, commented, “I am delighted to announce another quarter of record Adjusted EBITDA and net income for our Company, representing the ninth consecutive quarter of sequential improvement in hold-adjusted EBITDA. These results build on the significant achievements delivered through the first half of 2011 and demonstrate our ability to deliver sustained high-quality results, with strong company-wide performance across all segments, despite the introduction of additional supply in the market.”

Ho also said “in relation to our previously announced proposed dual-listing on the Hong Kong stock exchange, we continue to work through the necessary steps with the relevant Hong Kong regulators, while at the same time monitoring the market conditions to ensure we maintain full flexibility as it relates to our capital structure.”

Melco Crown took a big hit after its earnings, despite posting solid increases in earnings and revenue, much like competitor Wynn. Las Vegas Sands was the star of the sector in the third quarter, its stock surging after posting results. MGM Resorts, another casino and hotel operator, fell on Thursday as well.

The problem with Melco’s earnings, which is actually a problem that affects Macau in general, is inflated expectations. Growth at Macau has been so strong, with October revenues growing about 40% year-over-year, that markets “may begin to take [it] for granted”, according to Nomura’s equity analysts. Morningstar’s Chad Mollman believes Melco’s beat was based on an abnormally high win rate at its major casinos, rather than underlying fundamentals, suggesting that in an adjusted basis, Melco actually missed expectations. With the development of Macau occurring at such a rapid pace, it is possible that the introduction of additional supply in the market, along with a novelty effect, drives higher gaming revenues that in the medium run are unsustainable.

Shares in Melco Crown took a beating, though. Opening well in the red, the stock kept on falling through the New York morning, and by 11:11 AM was trading down 11.2% or $1.22 to $9.68.