Business context and reporting period
Melco Resorts & Entertainment Limited (formerly Melco Crown Entertainment Limited) filed this Form 20-F for the fiscal year ended December 31, 2016. Although the request metadata specifies “2016 Q4,” the filing reports full-year results; it does not provide a clear standalone fourth-quarter financial summary. The company develops and operates casino resorts in Macau and the Philippines, with most revenue generated in Macau. Figures below are in U.S. dollars unless noted.
Key financial metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Net revenue | $4.519 billion | $3.975 billion |
| Operating income | $363.1 million | $98.4 million |
| Operating margin | 8.0% | 2.5% |
| Net income (loss), consolidated | $66.9 million | $(60.8) million |
| Net income attributable to Melco | $175.9 million | $105.7 million |
| Net income attributable to Melco per diluted share | $0.115 | $0.065 |
| Adjusted EBITDA (non-GAAP) | $972.7 million | $816.2 million |
| Adjusted property EBITDA (non-GAAP) | $1.088 billion | $932.0 million |
Casino revenue was $4.177 billion, or 92.4% of net revenue; net non-casino revenue was $342.7 million. Consolidated net margin was 1.5% (2015: negative 1.5%); net income attributable to Melco represented 3.9% of revenue (2015: 2.7%). The difference between consolidated net income and income attributable to Melco reflects losses attributable to noncontrolling interests.
Net cash provided by operating activities was $1.158 billion (2015: $522.0 million). Investing activities provided $280.6 million, primarily reflecting withdrawals of bank deposits and reduced construction spending, while financing activities used $1.340 billion. Capital expenditure payments were $500.2 million. Cash and cash equivalents at year-end were $1.702 billion; bank deposits with original maturities over three months were $210.8 million and restricted cash was approximately $39.3 million.
At December 31, gross indebtedness was $3.822 billion; balance-sheet debt, net of issuance costs, was $3.720 billion. Total current assets were $2.280 billion and current liabilities $1.479 billion. Contractual obligations totaled $6.245 billion, including debt, interest, lease commitments and $317.2 million of construction and equipment commitments. The company reported total assets of $9.340 billion and total equity of $3.823 billion.
Material changes versus the prior comparable period
- Net revenue increased 13.7%, mainly from a full year of Studio City operations and improved City of Dreams Manila performance. These gains were partly offset by lower revenue at City of Dreams and Altira Macau.
- Operating income rose to $363.1 million from $98.4 million. Melco attributed the improvement to stronger group-wide mass-market table games revenue and increased non-casino revenue.
- Macau properties remained under pressure: City of Dreams revenue fell 7.3% to $2.591 billion and Altira revenue fell 23.6% to $439.1 million. Altira adjusted property EBITDA declined to $5.1 million from $36.3 million; City of Dreams adjusted property EBITDA declined to $742.3 million from $798.5 million.
- Studio City generated $838.2 million in revenue and $156.0 million in adjusted property EBITDA, compared with partial-year 2015 revenue of $125.3 million and EBITDA of $11.6 million. City of Dreams Manila revenue rose to $491.2 million from $300.4 million, and adjusted property EBITDA rose to $160.3 million from $55.4 million.
- Operating cash flow more than doubled, but the cash flow statement included a $448.3 million increase in accounts payable and accrued expenses. Verify how much of the cash-flow improvement is sustainable.
- Interest expense, net of capitalized interest, rose to $223.6 million from $118.3 million, mainly because less interest was capitalized after Studio City opened. The company also recorded $17.4 million of debt-extinguishment losses and $8.1 million of debt-modification costs.
- Melco repurchased and cancelled 155 million ordinary shares for approximately $800.8 million. Financing cash flows also included $385.6 million of dividends paid. Year-end equity declined to $3.823 billion from $4.932 billion.
Outlook, commentary, risks and unusual items
- Management targeted Morpheus, the fifth City of Dreams hotel tower, to open in 2018, with approximately 780 rooms. Studio City’s remaining-land development plan and schedule were under review and could require substantial additional funding.
- The filing noted Macau gross gaming revenue increased 10.6% year over year in the first two months of 2017 and 13.0% in the first three months. These are market figures, not company guidance; management cautioned that recovery remained exposed to China’s economy, policy measures and competition.
- In January 2017, the board announced a special dividend of approximately $650 million and a target quarterly cash dividend of $0.03 per ordinary share, subject to earnings, available cash, future commitments and contractual restrictions. The special dividend was paid in 2017; future distributions are not assured.
- Macau land concession deadlines require full development of City of Dreams by January 28, 2018 and Studio City by July 24, 2018. The Studio City extension request filed in October 2016 remained under government review. Failure to complete development or obtain extensions could put investments and land rights at risk.
- Material business risks include dependence on Macau and Chinese visitors, gaming regulation and table allocations, intense competition, VIP/junket liquidity and customer-credit collection, construction costs and financing needs, and compliance with the Macau subconcession and Philippine gaming license. Macau subconcession expires in 2022; the government has a redemption right beginning in 2017.
- Studio City issued $1.2 billion of senior secured notes in November 2016 and used the proceeds, with cash on hand, to repay its project facility. Gross year-end debt remained substantial, and debt agreements impose covenants and restrictions on distributions and other actions.
- Unusual items included the $800.8 million share repurchase, elevated dividends, refinancing-related charges, a $64.7 million net addition to the doubtful-debt allowance, and $5.5 million of provision for potentially unrecoverable Philippine VAT. The Taiwan banking and foreign-exchange case ended with acquittals affirmed in June 2016; the appeal deadline lapsed.
- Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective.
Important facts investors should verify
- Whether the reported full-year improvement translates into durable property-level earnings, particularly given declines at City of Dreams and Altira and Macau’s market conditions.
- Cash-flow quality: the effect of the large increase in accrued liabilities, ongoing construction spending and expected funding for Morpheus and Studio City’s remaining development.
- Debt-service capacity, refinancing and covenant headroom, including the maturity profile, Studio City secured debt and restrictions on cash transfers and dividends.
- Status of Macau government review of the Studio City land-concession extension, development deadlines for both Macau properties, and progress and cost outlook for Morpheus.
- Collection and credit risk: casino receivables were $480.2 million gross, with a $265.9 million doubtful-debt allowance; the allowance increased from $210.8 million in 2015.
- Whether the announced dividend target can be sustained after the 2017 special dividend, given debt covenants, cash needs and capital commitments.
- Resolution of Philippine tax treatment and availability of tourism-enterprise incentives, as well as ongoing compliance with PAGCOR license and operating-agreement requirements.