Business Context and Reporting Period
Company: Melco Crown Entertainment Limited (MCE)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2009
Business Overview: MCE is a Cayman Islands exempted company and a holding company that develops, owns, and operates casino gaming and entertainment resort facilities exclusively in Macau. Its principal operating assets include the City of Dreams (opened June 2009), Altira Macau (opened May 2007), and Mocha Clubs (electronic gaming machines). The company is a 50/50 joint venture between Melco International Development Limited and Crown Limited.
Key Financial Metrics
| Metric (in thousands USD) | 2009 | 2008 |
|---|---|---|
| Net Revenues | $1,332,873 | $1,416,134 |
| Operating Loss | $(272,047) | $1,174 (Income) |
| Net Loss | $(308,461) | $(2,463) |
| Loss Per Share (Basic & Diluted) | $(0.210) | $(0.002) |
| Cash and Cash Equivalents | $212,598 | $815,144 |
| Restricted Cash | $236,119 | $67,977 |
| Total Assets | $4,900,369 | $4,498,289 |
| Total Debt | $1,798,879 | $1,529,195 |
| Shareholders' Equity | $2,509,044 | $2,408,604 |
Cash Flow Summary (2009):
- Net cash used in operating activities: $(112,257)
- Net cash used in investing activities: $(1,143,639)
- Net cash provided by financing activities: $653,350
Material Changes vs. Prior Period
- Revenue Decline: Net revenues decreased by 5.9% to $1.33 billion, driven by a decline in global economic conditions and lower rolling chip hold percentages at Altira Macau and City of Dreams. This was partially offset by the contribution of $552.1 million from the new City of Dreams property.
- Significant Net Loss: The company reported a net loss of $308.5 million compared to a net loss of $2.5 million in 2008. The deterioration was primarily due to increased operating costs associated with the opening of City of Dreams, higher depreciation and amortization, and increased interest expenses as capitalization ceased upon project completion.
- Debt Increase: Total debt increased to approximately $1.8 billion, reflecting drawdowns from the $1.75 billion City of Dreams Project Facility to fund construction.
- Operating Costs: Total operating costs and expenses increased by 13.4% to $1.60 billion, largely due to the commencement of operations at City of Dreams and increased pre-opening costs ($91.9 million in 2009 vs. $21.8 million in 2008).
Guidance, Outlook, Risks, and Unusual Items
Outlook and Guidance
Management does not provide specific numerical guidance for future periods. The company intends to retain earnings to finance development, service debt, and expand operations. It plans to monetize non-core assets to aid financing and focuses on de-leveraging as a priority.
Key Risks and Contingencies
- Regulatory Risk: Operations are subject to the Macau gaming subconcession, which expires in 2022. The government has the right to terminate the subconcession without compensation for non-compliance. A tax holiday on gaming income is set to expire in 2011.
- Debt Covenants: The company is subject to strict financial covenants under the City of Dreams Project Facility, including leverage, interest cover, and cash cover ratios. Failure to meet these could result in default.
- Market Concentration: All operations are in Macau, exposing the company to local economic conditions, travel restrictions from mainland China, and intense competition.
- Construction Risk: Future development (Phase II of City of Dreams) is subject to financing availability and government approvals.
Unusual Items
- Macau Peninsula Project Termination: The company terminated an agreement to acquire a development site on the Macau Peninsula in December 2009. A $2.9 million impairment loss was recognized on construction in progress related to this site, and the deposit was refunded.
- Rebranding Costs: Approximately $4.1 million was incurred for the rebranding of Altira Macau.
Investor Verification Checklist
- Debt Covenant Compliance: Verify the company's ability to meet the Consolidated Leverage Ratio (max 4.50:1 through mid-2011) and Interest Cover Ratio (min 2.50:1) required by the City of Dreams Project Facility.
- Subconcession Status: Confirm the status of the minimum investment requirement (MOP 4.0 billion) under the gaming subconcession and the government's confirmation of compliance.
- Land Grant Amendment: Monitor the publication of the revised land grant for City of Dreams to finalize the increase in developable gross floor area.
- Tax Expiration: Assess the impact of the expiration of the Macau corporate tax holiday on gaming income in 2011 on future profitability.
- Rolling Chip Hold Percentages: Review future performance of VIP rolling chip hold percentages, which were below expected levels (2.55% - 2.65%) in 2009.