Melco Crown Entertainment Limited — FY2015 Form 20-F
Reporting period: Fiscal year ended December 31, 2015; filed April 12, 2016. This is an annual report, not a standalone fourth-quarter filing. Financial statements are audited and prepared under U.S. GAAP. The company operated casino resorts in Macau and the Philippines; Macau accounted for the substantial majority of revenue.
Key financial results
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net revenue | $3.975 billion | $4.802 billion |
| Operating income | $98.4 million | $685.4 million |
| Consolidated net income (loss) | $(60.8) million | $527.4 million |
| Net income attributable to Melco Crown | $105.7 million | $608.3 million |
| Adjusted EBITDA | $816.2 million | $1.167 billion |
| Net cash from operating activities | $522.0 million | $894.6 million |
| Capital expenditures | $1.456 billion | $1.637 billion |
| Total debt | $3.963 billion | $3.903 billion |
- Revenue fell 17.2%; operating income fell 85.6%. Operating margin was approximately 2.5%, versus 14.3% in 2014. Adjusted EBITDA margin was approximately 20.5%, versus 24.3%.
- Casino revenue was $3.767 billion, down 19.1%, and represented 94.8% of net revenue. Net non-casino revenue was $207.5 million.
- At December 31, cash and cash equivalents were $1.611 billion, bank deposits with original maturities over three months were $724.7 million, and restricted cash was $317.1 million. Current assets were $3.020 billion and current liabilities $1.215 billion.
- Debt consisted principally of the $1.296 billion Studio City project facility, $1.000 billion 2013 Senior Notes, $825 million Studio City Notes, $501.3 million 2015 Credit Facilities, and $318.0 million Philippine Notes. Capital lease obligations of $300.3 million were reported separately.
- Operating cash flow less capital expenditure payments of $1.291 billion was negative approximately $769 million. The company reported $254.7 million of contracted capital commitments not yet incurred.
Material changes and operating drivers
- The decline in results was principally attributed to lower rolling-chip and mass-market table-game revenues at City of Dreams and Altira Macau, amid weaker Chinese demand and restrictive policies. New revenue from Studio City and City of Dreams Manila partly offset the decline.
- City of Dreams revenue fell to $2.795 billion from $3.849 billion; Altira Macau revenue fell to $574.8 million from $744.9 million. Studio City, opened in October 2015, generated $125.3 million; City of Dreams Manila generated $300.4 million in 2015, compared with $7.6 million in its partial 2014 operating period.
- Macau rolling-chip volume fell 46.4% at City of Dreams and 29.2% at Altira. The company’s Macau market remained under pressure: Macau gaming revenue declined 34.3% in 2015, according to DICJ, and was down approximately 11.8% year over year in the first two months of 2016.
- Adjusted property EBITDA declined to $932.0 million from $1.285 billion. City of Dreams contributed $798.5 million; Altira contributed $36.3 million; Studio City contributed $11.6 million; and City of Dreams Manila contributed $55.4 million.
- Pre-opening costs rose to $168.2 million from $94.0 million, largely reflecting Studio City. General and administrative expense increased 23.2% to $383.9 million, partly due to the newly opened properties.
Outlook, risks, contingencies and unusual items
- The filing provides no specific quantified earnings or revenue guidance. Management said operating cash flow, existing cash, available credit facilities and potential future financing were expected to meet current and anticipated commitments, while cautioning that additional financing was not assured.
- Planned investment included the fifth City of Dreams hotel tower, the City of Dreams retail expansion expected to open in mid-2016, and further development of Studio City’s remaining land. The Macau land concessions require full development by January 2018 for City of Dreams and July 2018 for Studio City; missing deadlines without extensions could jeopardize land and investment.
- Key exposures include Macau’s dependence on Chinese visitors, travel and monetary-transfer restrictions, anti-corruption initiatives, smoking rules and gaming-table limits; intense regional competition; volatility in VIP gaming and gaming-promoter liquidity; credit collection; and extensive Macau and Philippine licensing requirements.
- The Macau gaming tax holiday was scheduled to expire in 2016. The Macau subconcession expires in 2022, with a government redemption right beginning in 2017. Philippine operations face license, tax, infrastructure, competition and lease-related risks.
- Debt covenants and cross-default/change-of-control provisions may restrict dividends, financing and transfers of cash. Variable-rate exposure remained material; management estimated that a 100-basis-point change in HIBOR and LIBOR would change annual interest cost by about $15.8 million.
- Unusual accounting estimate changes effective October 2015 extended useful lives of certain Macau buildings and estimated land-use-right terms. These changes increased FY2015 attributable net income by about $12.6 million combined and earnings per share by about $0.008.
- A $30.3 million provision was recorded for Philippine input VAT considered non-recoverable; property charges also included $5.5 million of restructuring costs. The Taiwan banking/foreign-exchange case resulted in a 2015 acquittal and release of a frozen deposit, but remained under appeal.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether Macau gaming demand, especially rolling-chip volume and mass-market play, stabilized after the sharp 2015 decline.
- Studio City and City of Dreams Manila operating performance, including profitability, cash generation and debt-covenant compliance as operations mature.
- Available unrestricted liquidity versus restricted/project cash, upcoming debt service, lease obligations and remaining development commitments.
- Progress, cost and financing plans for the City of Dreams tower and Studio City land development, including concession deadlines and any extensions.
- Outcome of the Taiwan appeal, the 2016 expiry of Macau tax exemptions, and any changes to Macau or Philippine gaming licenses, taxes or regulations.
- The earnings impact of the useful-life and land-lease estimate revisions; consolidated net loss was $60.8 million despite $105.7 million of income attributable to Melco Crown, reflecting losses allocated to noncontrolling interests.