Melco Crown Entertainment Limited — FY2012 Form 20-F
Period and business: Audited annual filing for the year ended December 31, 2012, prepared under U.S. GAAP; it is not a standalone fourth-quarter report. The filing identifies the registrant as Melco Crown Entertainment Limited. Its principal business was casino gaming, hotels and entertainment in Macau, with Studio City under development and a Philippines project in early development.
Financial results and liquidity
| Metric (US$ millions unless noted) | 2012 | 2011 | Change |
|---|---|---|---|
| Net revenue | 4,078.0 | 3,830.8 | +6.5% |
| Operating income | 507.1 | 445.1 | +13.9% |
| Net income attributable to the company | 417.2 | 294.7 | +41.6% |
| Basic earnings per share | $0.254 | $0.184 | — |
| Operating cash flow | 950.2 | 744.7 | +27.6% |
| Cash and cash equivalents | 1,709.2 | 1,158.0 | +47.6% |
| Restricted cash | 1,414.7 | 364.8 | — |
| Total debt | 3,194.9 | 2,326.0 | +37.4% |
| Total assets | 7,947.5 | 6,270.0 | +26.8% |
Operating margin was approximately 12.4%, versus 11.6% in 2011; attributable net income margin was approximately 10.2%, versus 7.7%. Casino revenue was $3,934.8 million, about 96.5% of net revenue. Macau gaming taxes were $2,024.7 million. Adjusted EBITDA, a non-GAAP measure, was $920.2 million, compared with $809.4 million.
Operating cash flow rose, but investing activities used $1,335.7 million, principally reflecting $1,047.0 million of additional restricted cash and $220.5 million of cash property-and-equipment purchases. Financing activities provided $934.7 million, including proceeds from Studio City notes and the aircraft loan. Capital expenditures recorded for the year were $284.0 million; this differs from cash property-and-equipment purchases.
At year-end, debt comprised $1,014.7 million under the 2011 Credit Facilities, $825.0 million of Studio City notes, $594.0 million of 2010 Senior Notes, $367.6 million of RMB Bonds, $353.3 million of a deposit-linked loan and $40.2 million of aircraft debt. Of total debt, $854.9 million was classified current. The company reported $188.6 million of undrawn availability under the 2011 Credit Facilities. Restricted cash included Studio City project funds and RMB bond proceeds pledged to secure the deposit-linked loan; it should not be treated as freely available liquidity.
Changes and operating drivers
- Revenue growth was primarily driven by mass-market table-game volumes and hold, plus gaming-machine activity; lower group-wide rolling-chip volume partly offset growth.
- City of Dreams revenue increased 17.2% to $2,920.9 million and represented 71.6% of group revenue. Altira Macau revenue declined 17.6% to $966.8 million, while Mocha Clubs revenue increased 8.6% to $143.3 million.
- At City of Dreams, mass-market table-game drop rose 22.0% and hold increased to 29.1% from 24.4%. Altira rolling-chip volume fell 14.1%; its mass-market drop increased 3.4%.
- Studio City was consolidated after the company acquired a 60% interest in 2011. The project remained pre-operational; $139.8 million had been incurred for its development by year-end, excluding land cost.
- Debt increased substantially, partly following the $825 million Studio City Notes issuance. Gearing, defined by the company as debt divided by assets, increased to 40.2% from 37.1%.
Outlook, risks and unusual items
- No specific consolidated revenue or earnings guidance is provided. Management stated that available cash, operating cash flow, facility availability and potential additional financing were expected to meet operating, debt and capital needs for 12 months following the report date, while cautioning that future financing was not assured.
- The first phase of Studio City was targeted to open by mid-2015, subject to approvals and financing; estimated construction and design costs were approximately $2.04 billion. The Philippines project was expected to open in mid-2014, subject to development and funding. The filing describes these estimates and timetables as uncertain.
- Subsequent to year-end, the company issued $1.0 billion of 5.00% senior notes due 2021. It used proceeds to repurchase and redeem the 2010 Senior Notes and partially repay the RMB Bonds; in March 2013 it repaid the deposit-linked loan and redeemed the RMB Bonds. The Studio City Project Facility, approximately HK$10.9 billion, was executed in January 2013.
- A Taiwan deposit account holding approximately $102.2 million was frozen in connection with an investigation into alleged banking-law violations by subsidiary employees. Management said the investigation was preliminary and could not determine the probability or range of possible loss.
- Key exposures include dependence on Macau and City of Dreams, gaming-win volatility, credit and collection risk from promoters and customers, intense competition, regulatory and license risk, construction delays and cost overruns, substantial leverage and restrictive debt covenants. Macau’s smoking restrictions and casino minimum-age increase took effect, and three Mocha locations were directed to close or relocate by November 2013.
- The Macau gaming-income tax holiday was extended through 2016, but continuation beyond that date was not assured. The subconcession expires in 2022 and may be redeemable by the Macau government beginning in 2017.
- Deloitte issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal financial controls were effective as of year-end.
Investor verification priorities
- Reconcile unrestricted cash, restricted project cash, debt maturities and the post-year-end refinancing and repayments; confirm which funds were available for general corporate use.
- Track Studio City and Philippines project funding, construction budgets, approval status and opening schedules, including the effect of debt covenants and required equity contributions.
- Assess the durability of City of Dreams mass-market growth against Altira’s lower revenue and rolling-chip weakness; monitor gaming-promoter concentration, receivables and doubtful-debt allowances.
- Check the status and recoverability of the frozen Taiwan deposit, and any material developments in the related investigation.
- Verify ongoing compliance with Macau gaming, labor, smoking, slot-club and subconcession requirements, and the implications of the 2016 tax-holiday expiry and 2017 redemption right.