MELCOCROWNMPEL.OQ0927

20161284012Deutsche BankMarkets ResearchRatingBuyAsiaHong KongCompanyMelco CrownDate27 September 2012Company UpdateConsumerHotels / Leisure /GamingReutersMPEL.OQBloombergMPEL USExchange TickerNMS MPELPrice at 25 Sep 2012 (USD)Price target - 12mth (USD)52-week range (USD)HANG SENG INDEX12.7917.4016.00 - 7.3820,528Potential to raise stake in Studio CityKaren TangResearch AnalystGovt confirmed that Studio City will have a casinoMPEL has announced an increase in its equity capital commitment to its 60%-owned Studio City project of US$350m, to a total of US$830m. If its partnerchooses not to raise its contribution within six months, MPELs stake will riseto 67%. Last week, the govt confirmed that Studio City was one of the fivepipeline projects in Macau that will receive table quota. These developmentsreduce risks for the project, in our view. Reiterate Buy as MPELs focus onpremium mass should allow it to outgrow peers in 2013. Trading at 8x 2013EEV/EBITDA (14x PE), the stock looks to be pricing in a free option for twogrowth opportunities (Cotai & Philippines).(+852) 2203 Price/price relativeSolid balance sheet allows participation in growth opportunitiesOutstanding capex for the Studio City project remains at US$1.9bn. Additionalfunding is likely to come from bank loans and other debt financing, which weexpect to be completed by year end. As MPELs operating cashflow is over9/10 3/11 9/11Melco CrownHANG SENG INDEX (Rebased)Performance (%) 1m3/123m12mUS$700m per year, we think the company can comfortably fund thisincremental commitment and its investment in the Philippines.AbsoluteHANG SENG INDEX7.54.112.89.525.517.1More clarity on table allocation from the govtLast week, Francis Tam, Secretary for Economy in Macau, said that afterSands Cotai Central receives its additional 200 table quota in 2013, the tablecap policy will allow only 2,000 more tables over the next 10 years. The govthas identified five pipeline projects in Cotai (Galaxy Macau Phase 2, StudioCity, Wynn, SJM and MGM) which should each have around 400 tables. Theexact table allocation will depend on the amount of non-gaming facilities.Reiterate Buy on strong premium mass penetrationMPELs City of Dreams has overtaken Wynn Macau as the new leader in masstable yield in Q2. We think it has more room to improve as our table countexercise in Sept reveals that City of Dreams has further raised its % of massmarket table in the premium segment during Q3. Our SOTP target price isbased on 9x 2013E EV/EBITDA plus Cotai. Key risk is VIP slowdown in Macau.Forecasts And RatiosYear End Dec 31Sales (USDm)EBITDA (USDm)Reported EPS FD(USD)DB EPS FD(USD)DB EPS growth (%)PER (x)EV/EBITDA (x)Yield (net) (%)2010A2,641.9430.4-0.02-0.0197.98.70.02011A3,830.9809.60.550.6116.68.40.02012E4,062.0883.10.720.7217.817.89.10.02013E4,687.5982.00.900.9025.214.27.90.02014E5,399.01,109.81.161.1628.911.06.60.0Source: Deutsche Bank estimates, company dataDB EPS is fully diluted and excludes non-recurring itemsMultiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which usesthe year end close_Deutsche Bank AG/Hong KongAll prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourcedfrom local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subjectcompanies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES ANDANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 072/04/2012.27 September 2012Hotels / Leisure / GamingMelco CrownModel updated:16 September 2012Fiscal year end 31-Dec2009201020112012E2013E2014ERunning the numbersFinancial SummaryAsiaHong KongHotels / Leisure / GamingMelco CrownDB EPS (USD)Reported EPS (USD)DPS (USD)BVPS (USD)Weighted average shares (m)Average market cap (USDm)-0.63-0.630.004.74882,307-0.01-0.020.004.75332,4970.610.550.005.45395,4380.720.720.006.15507,0290.900.900.007.15497,0291.161.160.008.35497,029Reuters: MPEL.OQBloomberg: MPEL UWEnterprise value (USDm)3,6573,7276,8388,0157,7877,294Valuation MetricsBuyP/E (DB) (x)P/E (Reported) (x)nmnmnmnm16.618.417.817.814.214.211.011.0Price (25 Sep 12)Target Price52 Week rangeMarket Cap (m)USD 12.79USD 17.40USD 7.38 - 16.00EURm 5,474USDm 7,029P/BV (x)FCF Yield (%)Dividend Yield (%)EV/Sales (x)EV/EBITDA (x)EV/EBIT (x)0.71nm0.02.765.6nm1.356.30.01.48.731.81.772.00.01.88.414.92.090.50.02.09.115.91.813.20.01.77.912.81.557.00.01.46.69.9Company ProfileIncome Statement (USDm)Melco Crown is one of the six licensed gaming operatorsin Macau. It operates two casinos, (i) City of Dreams, anintegrated resort in Cotai, with about 440 gaming tables,1,400 slot machines and 1,400 hotel rooms, and (ii) Altira,a VIP-focused casino, and a chain of slot lounges calledMocha Clubs. Melco Crown also owns 60% of anotherproject in Cotai, which is scheduled to open in 2015.Melco Intl (0200.HK) and Crown Ltd (CWN.AX) each own34% of the company.Price Performance20161284Sales revenueGross profitEBITDADepreciationAmortisationEBITNet interest income(expense)Associates/affiliatesExceptionals/extraordinariesOther pre-tax income/(expense)Profit before taxIncome tax expenseMinoritiesOther post-tax income/(expense)Net profitDB adjustments (including dilution)DB Net profit1,333565614473-162-4000-107-309000-3080-3082,64243043024370117-1030-3-20-10100-113-73,83181081027180459-1250-34-12287-2-60295343294,06288388328197505-10400-14387-1-7039503954,68798298228294606-9300-2049300049304935,3991,1101,11028291737-8100-2063600063606360Sep 10Dec 10Mar 11Jun 11Sep 11Dec 11Mar 12Jun 12Cash Flow (USDm)Cash flow from operations792884737297981,038Melco CrownMargin Trends3020100HANG SENG INDEX (Rebased)Net CapexFree cash flowEquity raised/(bought back)Dividends paidNet inc/(dec) in borrowingsOther investing/financing cash flowsNet cash flowChange in working capital-835-75638402710-102101-12915900410200-33-36311011604860712-183-695340040217290-66-57022800-41719010-5454930001906830-10-200910 11EBITDA Margin12E13EEBIT Margin14EBalance Sheet (USDm)Cash and other liquid assetsTangible fixed assetsGoodwill/intangible assets4492,7871,2436092,6721,1671,1582,6551,6241,8643,0411,6261,8653,3201,5332,5473,5741,442Growth & ProfitabilityAssociates/investmentsOther assets04220437083205290629062912010080602015105Total assetsInterest bearing debtOther liabilitiesTotal liabilities4,9001,7995922,3914,8841,8405212,3616,2702,3267563,0827,0602,3668473,2127,3461,9498472,7958,1921,9498472,79540200-2009101112E13E14E0-5-10-15Shareholders equityMinoritiesTotal shareholders equityNet debt2,50902,5091,3502,52302,5231,2312,9562313,1881,1683,3644843,8485023,8776744,551844,5328645,396-599Sales growth (LHS)ROE (RHS)Key Company MetricsSolvencySales growth (%)DB EPS growth (%)-5.9na98.297.945.0na6.017.815.425.215.228.960402010864EBITDA Margin (%)EBIT Margin (%)Payout ratio (%)ROE (%)Capex/sales (%)4.2-12.1nm-12.562.716.34.4nm-0.44.921.112.00.010.89.521.712.40.012.517.120.912.90.013.612.220.613.60.015.110.10-2009101112E13E14E20Capex/depreciation (x)Net debt/equity (%)Net interest cover (x)3.853.8nm0.448.81.11.036.63.71.813.04.81.51.86.51.5-11.19.1Net debt/equity (LHS)Karen TangNet interest cover (RHS)Source: Company data, Deutsche Bank estimates+852 2203 6141Page Deutsche Bank AG/Hong Kong26%(# of27 September 2012Hotels / Leisure / GamingMelco CrownDB survey on Macaus minimum bet sizeThe following section is an extract from our report “Macau: Focus on premium mass”,published on 17 September 2012.On Fridays, average min bet is now almost HK$1,300 in MacauUnder the twin constrains of table cap and slower VIP growth, casinos have beenfocusing on raising mass table yield (revenue per table). In 2Q12, Macaus massrevenue per table reached US$8,239/day, up 27% yoy. A key investor question iswhether this mass market growth rate is sustainable. For the next two years, we thinkmass market growth should be sustainable at 24% per year, as rising average min bet,which has been a key driver for the past two years, has more room to grow.Mapping the distribution of mass market tables by different min betsIn order to analyze the potential for higher min bets, we spent two Friday afternoons &evenings (June 29 & Sept 7) walking the mass gaming floors of the 7 biggest casinos inMacau. From 2pm to 8pm, we tallied the min bet size of over 1,000 tables on eachoccasion. We were able to enter most of the high-limit and premium mass areas. Forsome of the private lounges which we could not enter, we either make an estimatebased on our experience from previous casino tours or check with the casinomanagement afterwards. To be consistent, we counted only open baccarat tables. Weexclude other games, such as blackjack or sci-bo, which are not consistent withbaccarat play limits. On average, we estimate that the average mass market min bet inthe Big 7 casinos has risen from HK$1,236 in late June by 5% to HK$1,297 in earlySept.Based on our Sept table count, 27% of tables are in premium mass (min bets HK$2,000or above), 22% are in high-limit mass (HK$1,000-1,500), 50% are in middle-mass, andless than 2% are in grind mass (HK$200 or less).Figure 1: Distribution of mass market tables by minimumbet sizeFigure 2: Mass table yield (revenue per table per day,US$)Avg min bet: HK$1,236+5%HK$1,2972Q12 +27% yoy1,200tables counted)1,00027%Premium massHK$2,0009,0008,0007,0006,273 6,4676,8497,6588,177 8,23980060023%22%High limit massHK$1,000-HK$1,5006,0005,0004,0004,2554,7685,1315,701400200-50%2%June 29, Friday50%2%Sept 7, FridayMiddle massHK$300-HK$800Grind MassHK$2003,0002,0001,000-1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12Source: Deutsche Bank estimatesSource: Company data, Macau governmentWhich casinos have the highest exposure to premium mass?Every casino has a different definition for their premium mass segment. To beconsistent, we use the following categorization for this study:Premium mass: min bet HK$2,000 or above;High-limit mass: min bet HK$1,000-1,500;Deutsche Bank AG/Hong KongPage 327 September 2012Hotels / Leisure / GamingMelco CrownMiddle mass: min bet HK$300-800;Grind mass: min bet HK$200 or below.Figure 3 shows the distribution of mass market tables in the Big 7 casinos by their minbet limits. Key observations include:City of Dreams has the highest exposure to premium mass (53%);Galaxy Macau has the second highest exposure to premium mass (36%);Sands Cotai Central currently has the lowest % of tables at HK$2,000 min (8%);Grand Lisboa has the highest exposure to grind mass (8%);Venetian Macaus strength is in the middle mass (HK$300-800 min bet);MGM & Wynns ability to grow premium mass is constrained by its limitedstock of hotel rooms.Figure 3: Distribution of mass market tables by min betsize (Sept 7, Friday)Figure 4: Premium / high limit mass market areaGrind massMiddle massHigh limit mass Premium massOpening CasinoPremium / high limit# ofHK$200HK$300-HK$800HK$1000-HK$1,500HK$2,000datemass areatablesCity of Dreams 13%Galaxy MacauGrand Lisboa 8%MGM Grand34%46%58%35%18%53%53%36%17% 18%12%2Q 2010 Wynn Macau4Q 2010 MGM Macau1Q 2011 City of DreamsWynn Encore / Wynn ClubSupreme LoungeHigh limit West2415-2015-20Sands Cotai Central 3%Venetian Macau64%61%24%18%8%21%4Q 2011 MGM Macau1Q 2012 Venetian MacauPlatinum LoungeVenetian high limits area15-2066Wynn Macau 3%Big 7 casino avg 2%0%57%50%25%50%15%22%75%26%27%100%2Q 2012 Galaxy Macau2Q 2012 City of DreamsPavilion Clubnear Grand Hyatt entrance2320Source: Deutsche Bank estimatesSource: Company data, Press reports, Deutsche Bank site visitsWhich casino has been attacking the premium mass segment most aggressively?Between our June & Sept table counts, we found that City of Dreams added the mosttables with min bets at HK$2,000 or above (from 43% to 53% of its mass tables). Wethink City of Dreams new premium lounge near the Grand Hyatt lobby had attractedmany premium mass players who used to play at Wynn Encore. The two areas share afew characteristics: (1) Both have easy access (adjacent to hotel lobby) but are awayfrom the busiest tourist entrance. (2) Both have relatively limited no. of tables (20-24tables) and therefore have a quieter atmosphere. (3) Both have tables with very highbetting limits, some with min bets as high as HK$10,000.For years, Wynn Macau had dominated in the premium mass segment, and had alwayshad the highest mass table yield (revenue per table). But in 2Q12, City of Dreams sawits mass table yield rising to US$11.4k/table/day, and overtook Wynn Macau for the firsttime. (Note: Plaza casino also overtook Wynn Macau in 2Q12 but we exclude it fromour comparison because it is a much smaller casino with only 36 mass market tables.)Page 4Deutsche Bank AG/Hong KongPropertyEBITDAmargin(HKGAAP)4.0%4.0%3.0%2.5%35%30%25%20%15%10%of27 September 2012Hotels / Leisure / GamingMelco CrownFigure 5: Mass table win/day (US$)Figure 6: Mass table win/day (US$) 2Q12City of Dreams overtook Wynn# of1,4001,0102,9054312,2002891,860Macau for the first time in 2Q12ro o ms: roomsroomsroomsrooms roomsroomsrooms14,00012,00010,000City of DreamsWynn Macau14,00012,00010,0008,00011,40010,8009,5009,1008,0007,3008,0006,0004,0002,0006,0004,0002,00004,20001Q112Q113Q114Q111Q122Q12City of Wynn Venetian GrandDreams Macau Macau LisboaGalaxyMacauSandsMacauSandsCotaiCentralSource: Company data, Deutsche Bank estimatesSource: Company data, Deutsche Bank estimatesFor City of Dreams, we think its focus on premium mass segment has been a key driverfor rising mass market hold percentage, and therefore EBITDA margins. Figure 8 plotsthe relationship between no. of hotel rooms and mass market hold percentage. Themore hotel rooms a casino has, the better its ability to attract premium mass customersby offering them free hotel rooms as “comps”. For Galaxy Macau, since it has only juststarted its premium mass program in 2Q12, we believe it has more room to penetratethis segment by offering more of its 2,200 hotel rooms as comps.Figure 7: Mass market hold vs. EBITDA margin (2Q12)Figure 8: Promo allowances (as % of gross gamingrevenue)Sands Macau(289 rooms)Sands Cotai Central(1,860 rooms)Venetian Macau(2,905rooms)Wynn Macau(1,010 rooms)City of Dreams(1,400 rooms)MGM Macau(587 rooms)Galaxy MacauStarWorld (2,200 rooms)(509 rooms)4.5% GGR 1H11 2H11 1H123.8%Most aggressive: 3.6%3.5% +50bps hoh 3.4%3.3% 3.1%2.6% 2.6% 2.6% 2.7%2.5% 2.4%2.1%2.0% 2.0%1.5%3.0%5%0%Altira(216 rooms)1.0%0.5%15%20%25%Mass market hold %30%35%0.0%MelcoMGMSandsWynnAverageCrownChinaChinaMacauSource: Company data, Deutsche Bank estimatesSource: Company data, Deutsche Bank calculationsBut higher comps lead to higher promo allowancesGiven MPELs aggressive push into the premium mass segment, we have also noticed acorresponding increase in the companys promotional allowances, i.e. expenses oncomps. Among the operators, MPEL saw the highest jump in promo allowances, from2.1% of gross gaming revenue in 2H11 to 2.6% in 1H12.Deutsche Bank AG/Hong KongPage 5(200)27 September 2012Hotels / Leisure / GamingMelco CrownValuation & risksOur SOTP target price is based on 9x 2013E EV/EBITDA plus US$0.6/shr for the Cotaiproject (which is 50% of the projects value enhancement based on our estimates). Ourtarget EV/EBITDA multiple is at a discount to the average trading multiple of its peers(10 x) which we think is fair given the historical volatility in quarterly earnings.Figure 9: Melco Crown SOTP valuation2013ETargetValuationUS$mEBITDAmultiple (x)US$mUS$/shr% of EVAltiraCity of DreamsMocha ClubsCorporate expensesEnterprise value128 x895 x48 x(89) x982 x99999=1,0857,606411(755)8,3472.013.80.7(1.4)15.213%91%5%-9%100%Net debtCotai land (60% stake)Target valuationBy 2013E50% of full value of US$1.2/shr5566649,5671.00.617.4Source: Deutsche Bank estimatesKey downside risks are: i) significant market share loss at the City of Dreams after theSands Cotai Central ramps up, ii) higher-than-expected bad debt provisions as a resultof greater working capital support to junket operators and iii) cost overruns orconstruction delays of its Cotai project.Figure 10: Consensus 12-month forward EV/EBITDA (x)Figure 11: EBITDA growth trend20.015.0Melco CrownSector average+1 Std Div(US$m)1,4001,2001,000Corp expenses City of DreamsAltira Mocha Clubs2013E +11% yoy810 8839821,11010.0Avg 9.9x8005.0-01/08 07/08 01/09 07/09 01/10 07/10 01/11 07/11 01/12 07/12-1 Std Div600400200-564302009201020112012E2013E2014ESource: Bloomberg Finance LP, DataStream, Deutsche BankFigure 12: Macau gaming valuation compsSource: Company data, Deutsche Bank25/09/2012TickerPriceMktEV/EBITDAPEEBITDAEPSPEGDivcap(x)(x)growthgrowth(x)Yieldlocal cur US$m2012E 2013E 2012E 2013E2012E 2013E2012E 2013E 2012E 2012EMacauGalaxy0027.HK24.9 13,40711.09.014.912.267%16%77%22%0.70.0%Melco CrownMGM ChinaMPEL.OQ2282.HK12.813.17,0296,4319.18.67.97.817.811.314.210.39%11%11%8%18%14%25%9%0.71.20.0%7.1%Sands ChinaSJMWynn Macau1928.HK0880.HK1128.HK28.6 29,70216.3 11,94120.8 13,91816.59.513.412.19.012.920.913.516.216.612.614.822%12%2%34%6%7%17%15%0%25%7%9%0.81.82.04.8%5.6%6.2%Macau simple average11.39.815.813.521%14%23%16%1.23.9%Source: Deutsche Bank, DatastreamPage 6Deutsche Bank AG/Hong Kong27 September 2012Hotels / Leisure / GamingMelco CrownFigure 13: Melco Crown earnings forecasts summaryUS$m20111Q122Q123Q12E4Q12E2012E1Q13E2Q13E3Q13E4Q13E2013E2014EMarket shareGroup- Altira- City of Dreams15%5%9%14%4%9%13%3%9%13%3%9%13%3%9%13%3%9%13%3%9%13%3%10%13%3%10%13%3%10%13%3%10%14%3%10%Operating StatisticsVIP rollingyoy130,000-41%30,1004%29,30010%29,74511%30,3477%119,4928%31,1730%31,8170%34,0300%35,5380%132,558-11%151,705-14%qoq-7%-3%2%2%3%2%7%4%- Altira- City of DreamsJunket VIP rolling (DB est)Direct VIP rolling (DB est)Direct VIP rolling %VIP holdMass market dropyoy51,20078,800119,40410,6148%2.9%3,52145%10,90019,20026,7283,37211%3.0%1,01629%10,20019,10026,2693,03110%2.9%9627%9,69020,05526,8402,90510%2.9%1,01816%9,69020,65727,3582,98910%2.9%1,10315%40,48079,012107,19512,29610%2.9%4,09916%9,69021,48328,2832,8909%2.9%1,1330%9,69022,12728,8442,9739%2.9%1,1790%9,69024,34030,7693,26110%2.9%1,2300%9,98125,55732,1163,42210%2.9%1,2840%39,05193,508120,01212,5469%2.9%4,82618%41,120110,584136,91814,78710%2.9%5,63717%qoq6%-5%6%8%3%4%4%4%- Altira- City of DreamsMass holdSlot handleSlot hold5822,93923%4,7786%15086527%1,4265%13982327%1,4205%13987928%1,4915%14695728%1,5285%5743,52428%5,8655%14998428%1,6625%1491,03028%1,6715%1681,06228%1,8665%1681,11528%2,0065%6344,19228%7,2065%7744,86328%8,4375%No. of tables (avg)- VIP tables- Mass tablesNo. of slotsNo. of hotel rooms3632583,0221,6163672603,4741,6163702613,4791,6163702613,4791,6163702613,4791,6163682613,4781,6163752613,4791,6163702613,4791,6163702613,6171,6163702613,6171,6163702613,5481,6163702613,6171,616Table win (US$/table/day)- Blended VIP & mass- VIP tables- Mass tablesSlot win (US$/slot/day)RevPAR (avg)20,30528,6138,61024016021,05427,66911,73124617819,34525,19811,06223616919,67325,17811,88124516520,21925,40812,87524917120,05425,87011,85824517121,11826,32413,64928018521,62726,93214,11727817822,95328,80514,66929617423,71729,75415,17231417922,34127,97414,36729317925,69632,01516,751337195Revenues by segment- VIP gross revenues- Mass revenues- Slot revenuesGross gaming revenuesyoy3,7938112644,86844%914275771,26619%848263751,186-3%848283781,209-9%865310811,255-1%3,4751,1303114,9161%888321881,297-73%907336881,3315%970349981,41719%1,0133651061,48323%3,7781,3713805,52812%4,3241,5984456,36715%qoq0%-6%2%4%3%3%6%5%Net revenue by property- Altira- City of Dreams- Mocha ClubsNet revenues (US GAAP)yoy1,1742,4911323,83145%261717371,02727%20968435939-2%213777381,027-3%214818381,0696%8962,9951484,0395%216847411,1048%215874411,13020%218934461,19917%224980511,25517%8733,6351794,68716%9394,2572035,3991