Melco Resorts & Entertainment Limited — FY2018 Form 20-F
Reporting period: Fiscal year ended December 31, 2018; filed March 29, 2019. This is an annual report, not a standalone fourth-quarter filing, and the supplied text does not provide separate Q4 financial results. Financial statements are audited and prepared under U.S. GAAP.
Business context
Melco develops and operates casino resorts in Macau and the Philippines. Its portfolio includes City of Dreams, Altira Macau, Studio City and Mocha Clubs in Macau, and City of Dreams Manila. Macau remained the principal market and generated the substantial majority of revenue. Morpheus opened at City of Dreams in June 2018. Melco held approximately 97.9% of MRP, its Philippine subsidiary, at year-end.
Key financial results
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net revenue | US$5.159bn | US$5.285bn |
| Operating income | US$626.8m | US$607.6m |
| Operating margin | 12.2% | 11.5% |
| Net income attributable to Melco | US$351.5m | US$347.0m |
| Diluted EPS | US$0.240 | US$0.235 |
| Adjusted EBITDA (non-GAAP) | US$1.369bn | US$1.285bn |
| Net cash from operations | US$1.057bn | US$1.163bn |
- Reported revenue fell 2.4%, but the company said FY2018 revenue would have risen 5.2% to US$5.560bn under the prior revenue-accounting basis. FY2018 and FY2017 reported revenue are therefore not directly comparable.
- Revenue included US$4.464bn of casino revenue and US$694.8m of non-casino revenue. Casino revenue as reported declined 9.6%, primarily because the new revenue standard changed the presentation of promoter commissions and complimentary items.
- Adjusted property EBITDA was US$1.478bn, up from US$1.423bn. This and Adjusted EBITDA are company-defined non-GAAP measures, not substitutes for GAAP income or cash flow.
- Net cash used in investing activities was US$609.7m; capital expenditure payments were US$509.5m. Net cash used in financing activities was US$404.9m. Cash, cash equivalents and restricted cash totaled US$1.485bn at year-end, including US$1.437bn of cash and cash equivalents.
- Current assets were US$1.957bn and current liabilities US$2.130bn. Total liabilities were US$6.132bn; total equity was US$2.746bn.
- Gross debt was approximately US$4.105bn; reported debt, net of financing costs, was US$4.061bn, including US$395.5m classified as current. Debt increased from US$3.619bn gross at year-end 2017. Approximately 64% of debt was fixed-rate; a 100-basis-point change in HIBOR/LIBOR was estimated to change annual interest cost by about US$14.8m.
Changes, outlook and material items
- Operating income increased 3.2% and attributable net income increased 1.3%. Operating cash flow declined about 9.1%, which management attributed primarily to increased working capital. Higher interest expense, lower interest capitalization after Morpheus opened, and a US$9.6m foreign-exchange loss affected results.
- Property performance varied: Studio City revenue was broadly flat and Adjusted property EBITDA rose to US$375.3m; Altira revenue and Adjusted property EBITDA increased. City of Dreams revenue and Adjusted property EBITDA declined, while City of Dreams Manila revenue fell but Adjusted property EBITDA increased. Manila’s casino revenue benefited from stronger mass-market indicators, while rolling-chip volume declined.
- Management expected the remaining Studio City development to cost approximately US$1.35bn–US$1.40bn, excluding pre-opening and financing costs, with an estimated 32-month construction period. The land concession requires full development by July 24, 2021; failure to meet the deadline without an extension could put the investment and land rights at risk. The filing does not provide a formal consolidated earnings or revenue forecast.
- In 2018, Melco repurchased 96.6m ordinary shares for approximately US$655.7m, paid US$271.5m in dividends, and drew approximately US$1.096bn under its 2015 revolving credit facility. Studio City’s IPO generated approximately US$406.7m in net proceeds from ADS sales. Melco also increased its MRP ownership, while MRP trading was suspended from December 10, 2018 after its public float fell below exchange requirements.
- Melco adopted the new revenue standard using the modified retrospective method. It moved promotional allowances and all gaming-promoter commissions into revenue reductions and reclassified costs of complimentary items to relevant operating expense categories. Adoption reduced opening accumulated equity by US$13.0m in total and materially changed reported revenue and expense presentation.
- The board’s February 2019 dividend policy targeted US$0.0517 per ordinary share quarterly, subject to earnings, cash availability, commitments and board discretion. FY2018 declared dividends were US$0.1867 per share, versus US$0.5604 in FY2017, which included a large special dividend.
Principal risks and contingencies
- Concentration in Macau and the Philippines exposes results to China’s economy, travel and currency restrictions, consumer spending, competition, natural disasters and regional political or economic disruption.
- Gaming operations depend on regulatory approvals. Macau subconcession expires June 26, 2022; renewal or replacement is uncertain. Casino table limits, smoking restrictions and promoter regulation may constrain operations.
- Studio City requires substantial additional investment and timely completion under its land concession. Development cost, financing availability, construction delays and debt covenants are material execution risks. Studio City VIP operations were scheduled to cease in January 2020.
- High leverage, interest-rate exposure, covenant restrictions and refinancing needs may limit flexibility and increase the risk of accelerated repayment or default. Contractual obligations totaled US$5.844bn, including principal, interest, leases, land fees and project commitments.
- Gaming-credit receivables, especially from overseas customers and promoters, may be difficult to collect. Net accounts receivable was US$242.1m after a US$203.0m doubtful-debt allowance; gross casino receivables were US$433.6m.
- Philippine operations face licensing, tax, lease, co-licensee and labor risks. The filing describes uncertainty about possible corporate income, VAT and other tax assessments notwithstanding court decisions concerning PAGCOR licensees.
- Other disclosed risks include anti-money-laundering compliance, litigation and regulatory investigations, cyber and data security, foreign exchange, and the limited PCAOB inspection access for audit work in mainland China. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions.
Investor verification checklist
- Reconcile reported FY2018 revenue with the prior-accounting-basis figure and assess the revenue-standard effect on casino revenue, commissions, complimentary services and margins.
- Review the debt maturity schedule, revolving-facility availability, covenant headroom, refinancing terms and post-year-end Studio City note issuance and redemptions.
- Test the funding plan, budget and schedule for the remaining Studio City project against the July 2021 land-development deadline and extension risk.
- Monitor Macau subconcession renewal, gaming-table allocations, smoking rules and promoter regulation, and Philippine license and tax developments.
- Assess the collectability and concentration of casino receivables and the quality of Adjusted EBITDA reconciliations and other non-GAAP measures.
- Verify the sustainability of dividends and repurchases against cash generation, capital commitments, debt restrictions and subsidiary distribution limits.