Melco Crown:Pleasant 3Q;Studio City to start VIP business in Nov

Accelerated ramp-up in Studio City.

    3Q16 MPEL’s net revenue grew 22% YoY, 8% QoQ to US$1,153mn. EBITDA of Studio City jumped impressively at 115% QoQ on 25% QoQ GGR growth with increased traffic. CoD Manila and Altira delivered solid EBITDA with 23% and 706% QoQ growth, while City of Dreams lagged due to the weaker-than-expected performance of mass. Overall, Studio City was the major beating factor for MPEL’s 3Q results and 3Q16 EBITDA margin improved 2.4ppts QoQ to 22.8%.

    More upside for profitabilityimprovement.

    1) Traffic flow to Studio City improved since Parisian’s opening freed up construction site. While it is hard to tell the impact from Parisian, mgmt. highlighted Studio City itself has more room for improvement. 2) Studio City will introduce 30-table direct VIP/junket area this weekend/mid next week. All tables are brought from Altira and CoD. 3) Cost control continues to be a key area to focus on. CoD’s daily opex was guided to stay at US$1.2-1.3mn level, while management targeted to lower Studio City’s opex from its current US$1.0mn level.

    Studio Cityencouraging, betterROE to cause re-rating.

    Melco Crown trades at 49x FY17E P/E and 12x EV/EBITDA. Studio City’s ramp-up will accelerate further by introducing in-house premium players, given that the property has already built up its database for premium mass business. After a rally with strong 3Q16 results, we believe improvement in ROE from the ramp-up of existing properties without capex pressure will be key to re-rate the stock. Our TP of US$19.10 is based on the average of 45x FY17E P/E and 13x EV/EBITDA, which are in line with its five year averages.