No VIP action could make SC a good buy
Melco Resorts & Entertainment’s Studio City casino resort in Macau’s Cotai district has announced it will halt VIP rolling chip operations as of January 15, 2020. The parent company disclosed the information in December 15 filings to NASDAQ in the United States and to the Hong Kong Stock Exchange.
According to GGRAsia, the filing did not specify a reason for the decision or clarify if it would apply to all VIP operations at Studio City, including in-house VIP play and VIP play supported by external junket partners.
A note from Japanese brokerage Nomura speculated that the operator will relocate the tables to Morpheus to serve premium-mass players. “Studio City’s leased VIP tables generated only 10 percent to 15 percent of estimated property-level EBITDA (approximately US$40 million in 2018),” the brokerage noted. “Melco Resorts believes the tables will generate greater volume if repositioned, probably at Morpheus where premium mass demand has been strong.”
Analysts Harry Curtis, Daniel Adam and Brian Dobson posited that moving 30 higher-margin tables to mass and 15 higher-volume tables to VIP could help increase Melco Resorts’ EBITDA “by US$20 million to US$30 million.
“Further, Melco will retain 100 percent of the EBITDA on the 45 tables,” they continued. “Today it is obliged to allocate 46 percent of the profits to its minority partners” at Studio City.
According to Nomura, Melco must give 12 months’ notice to its minority partners before the tables can be moved next January. “This strategy is timely and should be effective. We think it could add at least US$1 per American depository share in value to this already-undervalued stock within a year,” said the note.
Several junket runners in Macau market told GGRAsia that Studio City has “limited appeal” to VIP customers because it doesn’t have five-star hotel accommodations.
Sanford C. Bernstein analysts agree that Melco could be well-served by shifting its 46 VIP tables to its 100 percent-owned City of Dreams or Altira properties.
The VIP segment overall at Studio City “generates less than 10 percent of the EBITDA for Studio City and has shown lackluster improvement,” wrote the Bernstein team. “The key question will be if absence of VIP hampers Studio City’s premium mass business in some way (likely it will be some headwind to higher-end premium mass).” It went on to say the repositioned tables will take time to become profitable, “but at CoD, the Morpheus property will help hasten ramp-up.”
Though the move may “theoretically negatively impact the value of the Studio City asset,” wrote the Bernstein team, if and when Melco decides to acquire the asset outright, “it could come at a slightly cheaper price.”
