Business context and reporting period
This is Melco Crown Entertainment Limited’s audited Form 20-F for the fiscal year ended December 31, 2014, not a standalone fourth-quarter report. The company develops and operates casino resorts in Macau and the Philippines; financial statements are prepared under U.S. GAAP. The filing was signed April 15, 2015. The filing’s legal name is Melco Crown Entertainment Limited, despite the request metadata naming Melco Resorts & Entertainment Ltd.
City of Dreams generated 80.1% of 2014 net revenue. City of Dreams Manila began operations in December 2014; Studio City was under construction, with opening then expected in the third quarter of 2015.
Key financial metrics
| Metric (US$ millions, except per-share data) | 2014 | 2013 |
|---|---|---|
| Net revenue | 4,802.3 | 5,087.2 |
| Operating income | 685.4 | 839.8 |
| Net income | 527.4 | 578.0 |
| Net income attributable to Melco Crown | 608.3 | 637.5 |
| Basic earnings per share | $0.369 | $0.386 |
| Adjusted EBITDA (non-GAAP) | 1,166.5 | 1,287.8 |
| Operating cash flow | 894.6 | 1,151.9 |
| Capital expenditures (accrual basis) | 1,637.3 | 912.4 |
| Cash and cash equivalents | 1,597.7 | 1,381.8 |
| Debt | 3,902.8 | 2,533.5 |
Operating margin was approximately 14.3%, versus 16.5% in 2013. The company reported net income attributable to Melco Crown above consolidated net income because losses allocated to noncontrolling interests were added back in determining parent-attributable income.
At year-end, the company also held US$110.6 million in bank deposits with original maturities over three months and US$1,816.6 million of restricted cash. Restricted cash included project-related funds, the PAGCOR escrow and a Taiwan account frozen by authorities. Current assets were US$3,503.0 million and current liabilities US$1,316.7 million. Total liabilities were US$5,390.9 million. Debt included US$1,295.7 million drawn under the Studio City Project Facility, US$1,000.0 million of 2013 Senior Notes, US$825.0 million of Studio City Notes, US$417.2 million under the 2011 Credit Facilities, US$336.2 million of Philippine Notes and US$28.7 million of aircraft debt.
Cash flow from investing activities was negative US$1,605.3 million and financing activities provided US$927.0 million. The company paid US$342.7 million in dividends and repurchased US$300.5 million of shares during 2014.
Material changes versus the prior comparable period
- Revenue fell 5.6%, operating income fell 18.4%, and parent-attributable net income fell 4.6%. Management attributed weaker results mainly to lower group-wide rolling-chip revenue, partly offset by stronger mass-market table-game revenue.
- Casino revenue declined 5.8%. Altira Macau revenue fell 28.0%, while City of Dreams revenue was nearly flat. Rolling-chip volume fell at both properties; mass-market table-game drop and hold improved at City of Dreams.
- Adjusted EBITDA declined 9.4%. Operating costs and expenses fell 3.1%, but general and administrative expenses rose 21.9% and pre-opening costs increased to US$94.0 million from US$17.0 million, mainly for Manila and Studio City.
- Operating cash flow declined 22.3%, while capital expenditures increased substantially, primarily for Studio City, City of Dreams Manila and City of Dreams projects.
- Debt increased to US$3,902.8 million, and the reported gearing ratio rose to 37.4% from 28.7%, principally following Studio City project borrowing and issuance of Philippine Notes.
- Manila contributed US$7.6 million of revenue in its opening period. The Studio City Project Facility was fully drawn for its term-loan component in July 2014.
Outlook, commentary, risks and unusual items
- Market outlook: Management cited a challenging Macau gaming environment. Macau gross gaming revenue declined 2.6% in 2014 and approximately 35.1% year over year in the first two months of 2015, according to the filing. Management identified weaker Chinese demand, travel and visa restrictions, and casino smoking restrictions as pressures. The filing provides no company-wide numerical earnings or revenue guidance.
- Projects and funding: Studio City’s first phase was budgeted at approximately US$2.3 billion, with opening expected in Q3 2015; remaining development plans were under review. Contracted capital commitments were US$1,065.8 million at year-end. A Studio City facility condition required formal opening by October 1, 2016, including at least 400 gaming tables; failure could trigger default and acceleration. City of Dreams’ fifth hotel tower schedule was also under review.
- Concentration and regulation: The business remains heavily dependent on Macau and City of Dreams. Macau table allocations, smoking rules, Chinese visitation policies and the gaming subconcession are key sensitivities. The Macau subconcession expires in 2022, with a government redemption right beginning in 2017; the gaming-income tax exemption was scheduled to expire in 2016.
- Debt and liquidity: The company cautioned that high leverage, covenants, refinancing access, interest-rate exposure and project funding needs could constrain operations. A 100-basis-point move in HIBOR and LIBOR was estimated to change annual interest cost by approximately US$15.0 million at 2014 year-end. The company stated available cash, operating cash flow and facilities should meet anticipated needs, but future financing availability was not assured.
- Contingencies: A Taiwan prosecutor indicted a subsidiary’s Taiwan branch and employees in August 2014 over alleged banking and foreign-exchange violations; a deposit with a balance of approximately US$102.2 million when frozen was restricted. Management said it would defend the matter and did not expect an immediate material impact. Philippine license, tax, lease and co-licensee arrangements also carry operational risks; a regular casino license application for Manila was filed in January 2015.
- Unusual items: The year included a US$22.1 million gain on disposal of Macau properties, a US$4.1 million impairment charge, and a US$300.5 million share repurchase. The auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Most important facts for investors to verify
- Whether Macau demand and rolling-chip trends continued to weaken after the filing date, and how subsequent results compare with the first two months of 2015.
- Studio City’s actual opening date, construction cost, gaming-table authorization and compliance with project-facility conditions.
- Availability of unrestricted liquidity after separating restricted project and escrow cash, and the schedule and covenant terms of debt maturities.
- Progress and financial contribution of City of Dreams Manila, including regular-license approval and resolution of Philippine tax and operating-agreement uncertainties.
- Developments in the Taiwan investigation and access to the restricted deposit; also confirm whether the Macau gaming tax exemption and subconcession arrangements changed.