Studio City International Holdings Limited — FY2018 Form 20-F
Reporting period: Fiscal year ended December 31, 2018; this is an annual report, not a standalone fourth-quarter filing. Financial statements are audited and prepared under U.S. GAAP. Studio City operates the non-gaming resort businesses; a Melco Resorts subsidiary operates the casino under Macau-approved arrangements.
Financial and operating performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $571.2 million | $539.8 million |
| Operating income | $137.9 million | $80.5 million |
| Net loss attributable to the company | $21.6 million | $76.4 million |
| Adjusted EBITDA (non-GAAP) | $314.8 million; 55.1% margin | $279.1 million; 51.7% margin |
| Cash flow from operations | $139.5 million | $68.3 million |
| Cash and cash equivalents at year-end | $345.9 million | $348.4 million |
| Gross debt principal at year-end | $1,625.1 million | — |
Revenue increased 5.8%, while operating costs and expenses fell 5.7% to $433.4 million. Gaming-related services revenue rose 15.0% to $339.9 million; this is the residual after the casino operator deducts gaming taxes and operating costs from casino gross gaming revenue. Casino gross gaming revenue was $1,583.8 million. Mass-market table-game revenue grew to $868.5 million; VIP rolling-chip revenue was $631.4 million. Hotel occupancy was 100%, with ADR of $138 and REVPAR of $138.
Despite operating income, net losses continued: net interest and other non-operating expenses were $158.1 million, including $160.5 million of interest expense. Adjusted EBITDA is a company-defined non-GAAP measure and should not be treated as cash flow or a substitute for GAAP results.
Investing cash outflow was $147.5 million, including $151.3 million of property and equipment payments; financing cash inflow was $5.2 million, reflecting IPO proceeds largely offset by a $400 million debt redemption. Year-end restricted cash was $31.7 million, giving total cash, cash equivalents and restricted cash of $377.6 million. Current liabilities were $439.0 million, including $347.7 million of current debt.
Material changes and financing
- Compared with 2017, revenue grew 5.8%, operating income increased to $137.9 million, and net loss narrowed by $54.8 million. Operating cash flow more than doubled.
- Mass-market table-game drop increased to $3.27 billion from $2.91 billion, and hold rose to 26.5% from 26.1%. VIP volume rose, but the VIP win rate declined to 2.97% from 3.16%.
- In October 2018 the company completed its IPO and received approximately $406.7 million net proceeds. It used the proceeds to partially redeem $400 million principal of the 8.5% 2012 Notes on December 31, 2018.
- After year-end, the company issued $600 million of 7.25% senior notes due 2024. Proceeds funded the tender and redemption of the remaining 2012 Notes; those notes were fully retired in March 2019. The filing’s $1.625 billion gross debt figure is as of December 31, 2018, before these subsequent transactions.
- The 2016 5.875% notes, with $350 million principal, were due in 2019; the $850 million 7.25% notes were due in 2021. At year-end, the company had $345.9 million cash and $29.8 million of revolving facility availability, subject to conditions.
Outlook, risks and unusual items
- No formal financial guidance is provided. Management said it intended to focus on mass-market gaming and differentiated non-gaming amenities; it was assessing mitigation for the planned VIP closure.
- The casino operator notified the company that it would cease VIP rolling-chip operations at Studio City on January 15, 2020. The company received $35.7 million from these operations in 2018 and expects cessation to materially adversely affect results and cash flows. VIP tables are operated by the affiliate under its gaming subconcession, not a company-held license.
- The planned remaining development includes hotel towers with about 900 rooms, gaming and non-gaming facilities. Estimated budget is $1.35–$1.40 billion, excluding pre-opening and financing costs; only $39.6 million of development costs had been incurred by year-end. The land concession requires full development by July 24, 2021, and financing, approvals, construction timing and costs remain uncertain.
- The Gaming Operator’s subconcession expires June 26, 2022. Loss of the subconcession, or termination of the related operating arrangements, could stop casino operations and threaten the company’s ability to service debt. The company itself does not hold a Macau gaming license.
- Other material exposures include substantial leverage and debt covenants, reliance on Melco affiliates for casino and shared services, related-party allocations, Macau/China gaming regulation and travel restrictions, competition, foreign-exchange risk, and the complementary-tax exemption on gaming-related income that expires in 2021. No cash dividends are planned for the foreseeable future.
- Unusual items included a $2.5 million loss on early debt redemption and $4.5 million of property charges and other costs in 2018; the latter included a contract termination write-off and typhoon-related repairs. The 2017 comparison included a $19.6 million impairment charge. Adoption of the new revenue standard reduced opening accumulated equity by $3.3 million and had no material effect on 2018 results.
- Management reported effective disclosure controls, but the annual report did not include management’s assessment or auditor attestation of internal control over financial reporting under the newly public company transition relief. The financial statement audit opinion was unqualified. Management reported no material legal proceeding expected to affect the company.
Key facts for investors to verify
- Post-March 2019 debt balances, maturities, interest costs and covenant headroom after the $600 million note issuance and retirement of the 2012 Notes.
- Actual financial and visitation impact of ending VIP operations, and progress in replacing those contributions through mass-market and non-gaming business.
- Funding plan, approvals, construction schedule and cost controls for the $1.35–$1.40 billion remaining project, including compliance with the July 2021 land-development deadline.
- Renewal or replacement prospects for the Gaming Operator’s subconcession before its June 2022 expiry, and continuing Macau approval of the operating arrangements.
- Related-party service charges and cash flows, restrictions on subsidiary distributions, and whether the gaming-related tax exemption is extended beyond 2021.