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Melco Crown Casino Is The One To Watch In Macau
Corporate Digest | 13 June 2014
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By: Louis Kent Lee
Articles (199) Profile

Singaporeans are no strangers to integrated resorts (IR). Before we had legal casino operators in the lion city, most people I know of patronise Genting Highlands in Malaysia, and of course, Macau.

Apart from amazing egg tarts, Macau’s gaming scene is one of the hottest in the world and could even put Las Vegas’ gaming scene to shame.

2013’s gaming revenue from Macau stood at a record US$45 billion, far eclipsing Las Vegas strip’s of US$6.5 billion.

Even when I take in the Nevada state (which includes Las Vegas) figure as a whole, gaming revenue for 2013 showed US$11.14 billion.

Therefore, Macau is “the place to be” when it comes to looking at gaming players. The scene in Macau is very different compared to Singapore, where you only have two players.

Competition is extremely fierce. Currently, there are 45 casinos in the region, where the main players are Galaxy Entertainment Group, Las Vegas Sands, Wynn Resorts, SJM Holdings, MGM China Holdings, and Melco Crown Casino (Melco).

Whilst obviously seen from the chart that Melco is not in the top three placement for market share, the recent drop in price, coupled with what I’ve seen on its sheets and potential developments encouraged me to dig deeper.

Superb Profitability Growth
Ever since City of Dreams, Melco’s IR casino in Cotai, Macau opened in 2009, this premium focused property has been the core driver of revenue to the group.

The past five years have seen massive growth in its revenue, and profit.

ROEs and ROAs have also in the past five years shown consistent growth, reflecting the strong performance tone from quality income generated.

City Of Dreams Cash In Big, Studio City Next Catalyst To Watch
As mentioned earlier, the key driver of Melco is from its City of Dreams business segment, which drives approximately 77 percent of its total revenue.

Judging from the performance of this business segment, it is evident that Melco is doing a very good job capitalising on the gaming mass market in Macau.

In fact, it is doing so well that among the gaming players in Macau, it has registered the best performance for 1Q14 among the lot, endorsing its ability to tap on the gaming crowd.

Currently, growth is championed by the lucrative City of Dreams for Melco.

A roulette table on the gaming floor of City of Dreams

Come 2015, Studio City, Melco’s new and exciting large scaled cinematically themed IR will be up and running in Macau.

Studio City is set to follow the footsteps of City of Dreams, which attracts the mass market segment in Macau.

This new IR will be strategically located near Lotus Bridge immigration checkpoint and one of the proposed light rail stations.

Based on convenience alone, this is a good placement strategy that reminds me of how CapitaMall Trust chooses where to set up its malls.

Adding this fuel power behind City of Dreams, I’m expecting significant tailwinds for further revenue growth.

    Investment Merits

  • Superior ability in tapping on the mass market gaming segment of Macau
  • Consistent strong growth seen across profitability metric (Revenue, Operating income, Earnings, ROE, ROA)
  • Consistent growth in cash chest
  • Consistent growth in Free Cash Flow despite heavy capital expenditures
  • Studio City set to be another potential City Of Dreams, where revenue and earnings growth could be further extrapolated
  • City of Dreams Manila, set to open in the later part of 2014, set to be another catalyst to pump City of Dreams’ overall performance moving forward

    Investment Risks

  • Crackdown by China on illegal fund transfers on mainland tourists (where a considerable percentage are VIP gamblers) using government backed unionpay cards
  • Rejection of legislation bill by Japanese lawmakers on having legalised casino operators in Japan
  • Relatively high gearing of close to 60 percent
  • Unexpected slowdown in Macau’s gaming market

SI Research Takeaway
On a relative size basis, Melco is doing a great job capitalising on the mass market segment of Macau’s gaming crowd.

The growth seen in its numbers have been brilliant so far. Coupling this growth picture with the upcoming Studio City and City of Dreams Manila in the pipeline, tailwinds for Melco is expected to be strong.

I have discounted Japan from the equation currently as the verdict for the bill for legalised casinos is not known still, but if it passes through, it will be an even bigger add on.

Personally, I cannot wait for Studio City and City of Dreams manila to start contributing to the group’s overall scorecard.

Louis is a qualified accountant with the ACCA, and is the Research Editor at Shares Investment magazine.

Please click here for more information about this author.

CapitaLand Mall Trust  2.630 +0.03 +1.15%   
Business: Co owns and invests in quality income-producing assets which are used, or predominantly used, for retail purposes primarily in Singapore.

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