Delays in opening the VIP gaming rooms at Melco PBL’s first Macau casino, the six-star Crown Macau, prompted a major sell-off in the company’s stock. Weary investors could be neglecting the positives, however
Melco PBL Entertainment (Macau) Limited held a lavish opening ceremony for its six-star hotel and casino property, Crown Macau, on May 12. Unfortunately, the VIP rooms were not ready by the time of opening. As Deutsche Bank analyst Karen Tang pointed out in a note to clients, although Crown Macau debuted “with elegant décor and a packed mass gaming floor,” Crown “prides itself to be a six-star property. So we feel it should be judged on its VIP strength.”
At the property’s opening, Crown Macau chief executive Greg Hawkins declared: “What we want to bring to Macau is the six-star experience. We’re aspiring to the premium individual players around the world who’ll fly in on our own aircraft.” That aspiration will just have to put on hold for a little while.
Deutsche Bank’s Karen Tang added the delay would not likely be rectified until June, and that “slow ramp-up of VIP volume would hurt market share in early months.” Melco PBL announced on May 15 that about 26 VIP tables were open at Crown Macau over the opening weekend, compared to the 80 VIP tables that will eventually fill the casino in four weeks. The company also said that hotel rooms at the property won’t be fully operating until July.
Crown Macau is Melco PBL’s first casino property in the city –until now, it has only operated a chain of slot parlours. The 36-storey tower features 220 gaming tables, 500 slot machines and 216 hotel rooms. The property is located on Taipa Island, off the main Macau peninsula where most casinos are clustered. “Over the opening weekend, Crown had won the battle against its disadvantaged location [on the outskirts of town], as the mass gaming floors were as busy as Sands and Wynn,” Ms Tang said.
Whether Crown Macau can maintain a busy floor after the initial opening buzz has faded remains to be seen. Sands creates excitement with its high ceilings and stadium-style atmosphere, while Wynn Macau’s main gaming floor exudes luxury. By comparison, Crown’s casino has low ceilings, a less luxurious (though arguably more tasteful) brown colour scheme, and because of the property’s small land area, stretches over five floors. It’s only major casino neighbour is the Greek Mythology, which has arrangements with travel agencies to deposit bus loads of relatively low-income mainland tourists at its casino – not exactly the kind of customers Crown Macau is courting. Melco PBL claims, however, that its secluded location will be a draw for VIP customers.
Credit Suisse analyst Gabriel Chan said the casino’s move to sign up “junket operators” to deliver punters to the venue was positive. Melco PBL management also said that Crown Macau would not join the junket commission war to draw VIP customers, and would only pay the prevailing rate of 1.1% of rolling-chip turnover. There had been some speculation that Crown would raise the commission rate further to draw VIP customers, although at 1.1%, casinos can barely cover their overheads. Melco PBL believes that Crown’s established brand among VIP players will draw the high-rollers, though it is not clear whether it will have any more allure than the US brands already operating in or about to open in Macau, including Las Vegas Sands Corp, Wynn Resorts and MGM MIRAGE.
Positive signs
Crown Macau’s VIP and hotel issues will be resolved in time, but investors saw few positive signals – casino revenue won’t be recorded until next quarter, and management refuses to issue forward guidance – and massively sold down Melco PBL stock. There are some positives, however.
Melco PBL released its first quarter earnings on May 15, indicating several positives going forward. The company’s average net win per gaming machine at its six Mocha Slot outlets rose 26% in the quarter from a year ago. Mocha Slot offers slot machines and electronic table games in conveniently-located café-like settings around Macau.
Melco PBL has also committed to building a second condo tower at its next casino project, City of Dreams, which is planned to open in late 2008. This new tower will add 380 units, bringing the grand total at the project to 680 condos. Given the roaring Chinese stock market and growing wealth in the region, sales could be brisk.
Melco also said it would be willing to sacrifice planned restaurant space at the Crown property to build out a larger casino floor if demand calls for it. Granted, Macau’s other casinos have sacrificed dining and entertainment in favour of putting in more tables, but the net result could be greater cash flow at the property.
Operating results
Melco PBL reported a net loss of $27.2 million for the first quarter of 2007, compared to a net loss of $7.5 million for the first quarter of 2006. The company’s total revenue for the first quarter of 2007 was US$20.3 million, up 274% from US$5.4 million in the first quarter of 2006. This is largely the result of the acquisition of its gaming sub-concession from Wynn Resorts in September 2006 (for a whopping US$900 million), which resulted in a change in reporting of gaming revenues from the company’s Mocha Slot outlets from a service fee basis prior to acquisition of the sub- concession, to gaming revenue based on net win after gaming taxes since the acquisition of the sub-concession. Average net win per gaming machine per day was US$230 during the first quarter of 2007, up from US$183 during the first quarter of 2006.
Total group operating costs and expenses were US$56.1 million in the first quarter of 2007, up from US$15.3 million for the first quarter of 2006. The increase was largely attributable to the commencement of amortization of the company’s costly gaming sub-concession, increased amortization of land use rights for projects under development, and increased pre-opening, selling and marketing investment costs associated with the development of the Crown Macau and City of Dreams projects.
In announcing the company’s first quarter 2007 results, Lawrence Ho, Chief Executive Officer and Co-Chairman of Melco PBL Entertainment, said: “During the first quarter of 2007, the company remained focused on executing on its development projects and completing construction of Crown Macau, which formally opened on May 12, 2007. We believe that Crown Macau will raise the standard for servicing the VIP and premium mass market segments in Macau. Crown Macau opened with 26 VIP tables, 142 premium mass tables and 479 gaming machines operational. I am disappointed that we were unable to open Crown Macau with a full complement of VIP tables operational and with our hotel completed to the standard required to enable us to open it to our VIP customers. We are fully committed to having the casino at maximum VIP capacity within a month from now, and the Crown Towers hotel will be open and accepting guests within three weeks.
“We have made significant progress at City of Dreams, our integrated casino and entertainment resort in Cotai. All principal sub-structure construction is complete and a substantial portion of the steel podium super-structure has been manufactured off-site in China. The erection of the podium structure has commenced and it is transforming the visual status of the site.
Peninsula Project
During its first quarter results announcement, Melco PBL also commented on its third project, to be located on the Macau peninsula. It revealed that conceptual designs by the Pei Partnership and Paul Steelman Associates have been presented for an iconic twin tower building with a gross floor area of more than one million square feet. The proposed property incorporates a mixed use casino with approximately 215 gaming tables and 500 gaming machines designed to cater to the day-tripper mass market, a boutique hotel and a single tower of premium serviced apartments. Melco PBL targets completion of the peninsula project by mid-2010.
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