Studio City to open later this year
Japanese brokerage firm Nomura is recommending that investors reduce their Melco Crown Entertainment holdings, according to news reports. The brokerage said the company will likely see “limited value” from its majority-owned US$3.2 billion Studio City resort on Macau’s Cotai Strip.
“Where we probably differ most from our sell side colleagues is in the limited value we ascribe to MPEL’s new casino, Studio City, which should open in the third quarter of 2015,” said the April 24 note.
According to Nomura, Studio City’s 2016 EBITDA will be about US$198 million, in sharp contrast to Wall Street analysts, who contend that the new property will have adjusted earnings of US$457 million. “Our forecasts imply a first-year ROIC of 8.6 percent, which may not be greeted with enthusiasm by investors,” warned the firm.
In the same note, Nomura said on a “same-store” basis, EBITDA in the Macau market may fall by 26 percent in 2015 and decline by 2 percent in 2016. GGRAsia reports that those estimates do not include potential positive market impact from the opening of Studio City.
Morgan Stanley Research Asia Pacific recently questioned the value of new development on Cotai, especially in light of the stumbling market; efforts by the Chinese government to root out corruption among VIPs, which has caused them to play elsewhere; a possible cap on table games; delays in the development of new transportation, including a light-rail system; and also a plan to limit visitation, which would affect the number of much-needed mass-market consumers.
“Mass revenue per Chinese visitor in Macau is trending lower in the last 12 months,” noted Morgan Stanley. That could worsen as the local government, citing overcrowding and quality-of-life issues, implements a plan to limit the number of visitors from Mainland China to 21 million or fewer per year.
Nomura has estimated that ROIC on new Macau projects could drop to 15 percent per year from 25 percent, reported GGRAsia. “We doubt that the Macau government will allow the annual visitation growth of 20 percent in both 2016 and 2017 that we calculate would be required to generate reasonable returns on new casino investment,” said Nomura.
Meanwhile, Melco Crown has not yet disclosed how many gaming tables Studio City will have, but it must have at least 400 to meet the requirements of its loan agreements. As of mid-April, the Macau government had not decided how many tables would be allowed to Galaxy Entertainment Group Ltd. for the opening of its HKD19.6 billion (US$2.5 billion) Galaxy Macau Phase 2.
