STUDIO CITY INTERNATIONAL HOLDINGS Ltd annual report, Q4 FY2019

Business context and reporting period

Studio City International Holdings Limited filed this annual report on Form 20-F for the fiscal year ended December 31, 2019. It is not a standalone fourth-quarter report; the filing does not provide a clear Q4-only set of financial results. The company operates the non-gaming businesses of Studio City, an integrated resort in Macau, while Melco Resorts’ Macau subsidiary operates the casino under a subconcession and services arrangements. All reported revenue is from Macau. Financial statements are prepared under U.S. GAAP.

Key financial metrics

Operating margin was approximately 28.4%, compared with 24.1% in 2018; attributable net margin was approximately 5.4%, versus negative 3.8%. These margins are calculated from reported figures. Adjusted EBITDA is a company-defined non-GAAP measure and should not be treated as a substitute for GAAP earnings or cash flow.

• Revenue drivers: Gaming-related services revenue rose 15.8% to US$393.5 million, primarily on stronger mass-market table games. Mass-market table games drop increased to US$3.49 billion from US$3.27 billion, and hold percentage rose to 29.1% from 26.5%. Casino gross gaming revenue, before gaming taxes and operating deductions, was US$1.432 billion, down from US$1.584 billion.
• Mix and non-gaming: VIP rolling-chip revenue fell to US$338.3 million from US$631.4 million, as volume dropped to US$11.00 billion from US$21.24 billion. Gaming-machine revenue was US$79.5 million, down from US$83.9 million. Room revenue declined 2.7% to US$86.0 million; occupancy remained 100%, while ADR fell to US$135 from US$138. Food and beverage, entertainment, mall, retail and other revenue rose overall, though mall and retail figures were weaker.
• Costs and unusual items: Operating costs and expenses increased 3.6% to US$448.7 million, less than revenue growth. Depreciation and amortization was US$168.6 million. Property charges and other expenses of US$8.5 million included a US$7.6 million write-off related to remodeling a non-gaming attraction. Net interest expense was US$132.3 million, down from US$160.5 million, partly reflecting debt refinancing and repayment.
• Cash, liquidity and debt: Year-end cash and cash equivalents were US$299.4 million; restricted cash was US$27.9 million. Current assets were US$414.4 million and current liabilities US$100.2 million. Gross outstanding debt was approximately US$1.450 billion, compared with US$1.610 billion of reported debt at year-end 2018; cash was not netted against debt. Debt included US$850 million of 7.25% secured notes due 2021 and US$600 million of 7.25% notes due 2024. The US$29.9 million revolving facility was available subject to conditions. Cash used in financing was US$190.0 million, primarily reflecting debt repayments, partly offset by the issuance of the 2019 notes.
• Investment and commitments: Cash capital expenditure payments were US$78.6 million; capital expenditures on an accrual basis were US$74.1 million. Contracted but unincurred construction and equipment commitments totaled US$481.4 million. Total contractual obligations were US$2.271 billion, including scheduled debt principal, interest, leases and construction commitments.

Material changes versus prior periods

Compared with 2018, 2019 revenue and operating income increased and the company returned to attributable profitability. Operating cash flow improved, while cash and cash equivalents declined by US$46.5 million; cash, cash equivalents and restricted cash together decreased by US$50.3 million. Gross debt decreased, following issuance of US$600 million of 2024 notes, the tender and redemption of the remaining 2012 notes, and repayment at maturity of US$350 million of 2016 notes due 2019. The mass-market business strengthened, but VIP rolling-chip activity contracted sharply. The company adopted the new lease accounting standard in 2019; it reported no material effect on results.

Outlook, commentary, risks and contingencies

• COVID-19 subsequent event: After year-end, Macau casinos were required to close for 15 days in February 2020, and travel, entry and quarantine restrictions followed. Management said the disruption materially affected first-quarter 2020 operations and financial condition, could continue or worsen, and could not then be reasonably quantified. This is a post-2019 development, not a 2019 operating result.
• Remaining project: The company estimated a US$1.35–1.40 billion project budget, excluding pre-opening and financing costs, and had incurred US$80.7 million of related costs by year-end. Plans included approximately 900 additional hotel rooms, a gaming area, waterpark and other amenities. Completion of full land development was required by May 31, 2022; COVID-related delays could require an extension from Macau authorities, which was not assured. Financing and construction risks are substantial.
• Gaming access and regulation: The company itself does not hold a Macau gaming license and depends on the Gaming Operator and government-approved arrangements. The operator’s subconcession expires June 26, 2022, with renewal or replacement terms uncertain. VIP operations were continued only until January 15, 2021, subject to early termination on 30 days’ notice; the company warned that their discontinuation could materially affect results. VIP-related service revenue was US$20.0 million in 2019 versus US$35.7 million in 2018.
• Other exposures: The business is concentrated in one Macau resort and is exposed to tourism and gaming demand, competition, China travel and currency controls, regulatory changes, reliance on Melco affiliates and related-party service arrangements, and high leverage. The company’s Macau complementary-tax exemption on qualifying gaming-related income runs through 2021. It reported no material legal proceedings expected by management to significantly affect the company; ordinary-course proceedings and contingencies remain possible.
• Capital returns and listing: No dividends were paid, and management did not expect dividends in the foreseeable future. In February 2020, the NYSE notified the company that it did not meet the 400-stockholder minimum and required a plan to regain compliance; failure to comply could lead to suspension or delisting procedures.
• Controls and audit: Management and Ernst & Young reported effective internal control over financial reporting as of December 31, 2019. The auditor issued unqualified opinions on the financial statements and internal controls.

Most important facts for investors to verify

1. Review the full audited statements and notes, including debt maturities, collateral, covenants, guarantees and restrictions on subsidiary distributions.
2. Assess whether operating cash flow and financing availability can support the remaining project’s budget and the May 2022 land-development deadline, particularly after COVID-related disruption.
3. Track the subconcession renewal process and whether VIP rolling-chip operations continue, terminate or change; quantify the resulting impact on gaming-related revenue and cash flow.
4. Reconcile the decline in VIP volume and casino gross gaming revenue with the increase in the company’s net gaming-related service revenue, noting the deductions under the related-party operating arrangements.
5. Monitor 2020 visitor, casino and resort operating trends, tenant and partner payment risks, and the company’s NYSE stockholder-compliance status.