Wynn, Sands, and MGM Should Be Very Worried About Melco Crown's Q2 Earnings

Medco Crown Entertainment turned in another disappointing quarter at its new Studio City resort, as well as at its other Macau-based operations, undoubtedly causing concern at rivals that will be opening their own venues soon. Image source: Studio City.

Casino operator Melco Crown Entertainment (NASDAQ: MPEL) reported higher earnings for the second quarter, but you won't find industry peers such as Las Vegas Sands (NYSE: LVS) or Wynn Resorts (NASDAQ: WYNN) cheering the results, and not because of any competitive jealousy, either. The Asian resort operator's better performance wasn't the result of its primary Macau-based casinos, which continued to disappoint, but rather its City of Dreams Manila resort hit a hot streak. That means those operators planning to open new resorts in China's island oasis in the days and weeks ahead still have a lot to worry about.

Macau, of course, has been on a well-publicized 26-month skein of ever lower gambling revenues, and though the decline seems to be nearing a bottom, there aren't any indications it's reached an inflection point. Worse, the big bets casinos are making on turning the Cotai Strip into a Las Vegas-like market of family-friendly entertainment with mass appeal isn't paying off as expected.

Beijing's crackdown on luxury and corruption, while at the same time forcing casinos to introduce more mass -market table games, has adversely affected China's gambling mecca. The VIP gamblers that were the mainstay of Macau and made it the third richest locale in the world are now looking elsewhere for gambling opportunities, causing monthly gambling revenues to fall by nearly half from their peak two years ago. Yet the investments the casinos made for gambling and entertainment that would appeal to a broader segment of the Chinese population hasn't made up the difference.

Data source: Gaming Inspection and Coordination Bureau. Chart by author.

In Melco Crown's second-quarter report, it said mass-market table game drop at its Macau City of Dreams fell 14% to just over $1 billion and was down 25% at Altira Macau, while its new Studio City on Cotai, which went all in on mass market entertainment by excluding all VIP table games from the resort, generated a disappointing $184 million in net revenues, its second straight quarter of poor performance since opening last October.

The results have alarmed executives enough that they've switched a few VIP tables into Studio City to help bolster its performance.

City of Dreams Manila, on the other hand, saw mass-market table game drop jump 15% from last year.

That's got to worry Wynn Resorts, since its new Palace opens on Aug. 22 and it has warned that it may not get any more than 100 table games allotted it by the island's gambling regulators. That's half the number Melco Crown got for Studio City before it opened (it was granted another 50 games afterwards), which is the same asGalaxy Entertainment got for its casino that had previouslyopened.

The sparse numbers were what caused Melco Crown to initially say it wouldn't have any VIP tables at Studio City, figuring it couldn't afford to give up any mass-market tables, which tend to be more profitable.

Las Vegas Sands must also be troubled by the results, because its mass market-oriented Parisian resort will follow the Palace and open in September, and it, too, has to wonder just how many tables it will be assigned. MGM Resorts (NYSE: MGM) recently announced that it was now delaying the opening of its mass-market MGM Cotai until the second quarter of 2017.

Of course, as more non-gambling entertainment venues open there's the chance they'll create a critical mass of demand that meets the burgeoning supply. One or two attractions might not be enough of a draw, where a half-dozen or more could very well be the ticket to more tourism. But there's also a massive amount of capacity being added that, with China's slowing economy, could just as likely -- maybe even more so -- end up being a drag.

Having invested billions into their projects there's nothing Las Vegas Sands, Wynn Resorts, or MGM Resorts can do other than ride it out, but Melco Crown Entertainment's quarterly results can't be giving them much comfort, either.

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