Business context and reporting period
Studio City International Holdings Limited filed this audited Form 20-F for the fiscal year ended December 31, 2020—not a standalone fourth-quarter report. The company operates Studio City, an integrated resort in Macau: it runs the non-gaming businesses, while Melco Resorts’ Macau gaming operator runs the casino under a services and right-to-use arrangement. All company revenue is generated in Macau. Financial statements are prepared under U.S. GAAP.
COVID-19 severely disrupted operations. Macau casinos were required to close for 15 days in February 2020; travel restrictions, quarantine rules and health measures continued to constrain visitation. The company says casino and hotel facilities remained open after the mandated closure, but some outlets operated at reduced hours or closed.
Key financial metrics
| Metric (US$ millions, except per-share data) | 2020 | 2019 |
|---|---|---|
| Operating revenue | 49.2 | 626.7 |
| Operating income (loss) | (279.9) | 178.0 |
| Net income (loss) attributable to Studio City International | (321.6) | 33.6 |
| Basic loss (income) per Class A ordinary share | (1.091) | 0.139 |
| Adjusted EBITDA, non-GAAP | (113.8) | 361.0 |
| Adjusted EBITDA margin | (231.3)% | 57.6% |
| Net cash from (used in) operating activities | (167.4) | 228.5 |
| Capital expenditures on an accrual basis | 214.0 | 74.1 |
| Cash and cash equivalents at year-end | 575.2 | 299.4 |
| Total current assets / current liabilities | 607.8 / 162.2 | 414.4 / 100.2 |
| Gross debt principal at year-end | 1,600.1 | Not stated here on a comparable gross-principal basis |
2020 gross debt comprised US$600 million of 7.25% notes due 2024, US$500 million of 6.00% notes due 2025, US$500 million of 6.50% notes due 2028 and a small credit-facility term loan. Long-term debt, net of deferred financing costs, was US$1,584.7 million. The US$233 million revolving facility was undrawn and available subject to conditions. The filing reports net non-operating expenses of US$126.2 million, including US$104.8 million of net interest expense and US$18.7 million loss on extinguishment of debt.
Casino gross gaming revenue was US$264.4 million in 2020 versus US$1,432.0 million in 2019, before gaming taxes and operating costs deducted under the casino arrangement. The company’s resulting gaming-related service revenue was negative US$42.7 million versus positive US$393.5 million. Hotel occupancy fell to 28% from 100%; ADR was US$128 versus US$135 and REVPAR was US$36 versus US$135.
Material changes versus the prior comparable period
- Revenue fell 92.1% year over year, driven by the pandemic-related decline in visitors and casino activity. The company moved from operating income and net income in 2019 to substantial operating and net losses in 2020.
- Casino activity weakened sharply: mass-market table-games drop declined to US$0.73 billion from US$3.49 billion; VIP rolling-chip volume fell to US$2.21 billion from US$10.99 billion. Gaming-machine handle was US$0.74 billion versus US$2.60 billion.
- Operating costs and expenses decreased 26.7% to US$329.1 million, but the reduction did not offset the revenue collapse. Depreciation and amortization remained significant at US$160.3 million.
- Operating cash flow swung from a US$228.5 million inflow to a US$167.4 million outflow. Financing activities provided US$623.8 million, principally from US$499.2 million net equity proceeds and US$1.0 billion of note issuance, offset in part by US$850 million repayment of the 2021 notes.
- Class A shares outstanding increased to 370.4 million from 241.8 million following 2020 private placements. The company raised approximately US$499.2 million net; certain existing shareholders and investors participated.
- Property and equipment increased to US$2.18 billion from US$2.11 billion. The company recorded US$3.8 million of impairment losses related mainly to reconfigurations and renovations; management concluded that no further long-lived-asset impairment was required at year-end, based on projected undiscounted cash flows.
Outlook, management commentary, risks and unusual items
- Management could not reasonably estimate the pandemic’s future effect on results, cash flows or financial condition. It warned that disruption would likely continue and recovery depended on travel restrictions, public-health developments and customer behavior. No specific revenue or earnings guidance is provided.
- Mitigations included reducing non-essential spending, deferring or reducing capital expenditure, refinancing debt and raising equity and bond financing. Management stated it believed available resources would support operations and capital expenditures for at least 12 months from the financial-statement date.
- The remaining Studio City development was budgeted at approximately US$1.25–1.30 billion, excluding pre-opening and financing costs; US$256.2 million had been incurred by year-end. Contracted but unincurred construction and equipment commitments were US$498.5 million. The land concession requires full development by May 31, 2022; construction delays and any extension require Macau government review and approval. The planned project includes two hotel towers with about 900 rooms, a gaming area and other amenities.
- VIP rolling-chip operations were extended through December 31, 2021, subject to termination on 30 days’ notice. The company disclosed amounts received under the arrangement of negative US$16.7 million in 2020, compared with US$20.0 million in 2019. The Macau gaming subconcession held by the operator expires in June 2022; renewal, extension or replacement arrangements are uncertain.
- After year-end, the company issued US$750 million of 5.00% notes due 2029, used proceeds to tender for and redeem all remaining 2024 notes, and extended the small secured credit facility’s maturity to January 2028. These events do not change the reported year-end debt balances.
- Other risks include reliance on Melco Resorts for casino operations and shared services, substantial leverage and debt covenants, Macau gaming regulation and competition, possible loss of VIP operations, and the risk that the land deadline or project financing cannot be met. The Macau complementary-tax exemption on qualifying gaming-related income for a subsidiary was scheduled to expire in 2021.
- The filing reports no material legal or administrative proceeding expected by management to have a material adverse effect. It reports effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls. The auditor identified long-lived-asset impairment assessment as a critical audit matter.
Most important facts for investors to verify
- Whether Macau visitation and gaming activity recover, and whether the company can restore positive gaming-related service revenue and operating cash flow.
- Available liquidity after ongoing operating cash burn, debt service and the remaining-project commitments; also verify financing access, covenant headroom and the effect of the 2021–2029 refinancing transactions.
- Whether Macau authorities extend the land-development deadline and whether the remaining project can be completed within budget and financed.
- The status of the gaming operator’s subconcession after June 2022 and the continuation, economics and regulatory status of VIP rolling-chip operations.
- The assumptions supporting management’s no-impairment conclusion, particularly projected revenue recovery and margins.
- The status of the company’s NYSE continued-listing remediation plan and the risk arising from restrictions on PCAOB inspection of its Hong Kong-based auditor.
- Related-party service charges and allocations, which the company says may not represent the costs it would incur as an independent operator.