The performance was on track, and the VIP turnover was weak only due to a high win rate. Gambling table+passenger flow drove the mid-market Hong Kong stock city of Xinhao International Development (200.HK), a subsidiary of the US stock company, MLCO.US (MLCO.US), released its 19Q1 financial report:
Net revenue was $1.36 billion, up 4% year over year, lower than the forecast of $1.38 billion; property EBITDA reached $407 million, up 1% year over year, lower than the forecast of $4.2 billion. Macau gaming business (excluding Manila): Gross gaming revenue -1%, VIP -8%, midfield +9%, compared to 0.5% of the industry, -13.4%, +17.2%, while non-gaming increased 16% year-on-year this season, driving EBITDA to maintain positive growth. On the VIP side, although the company added 10 gambling tables year over year this season, sales were weaker and fell 23% year on year, while the company's win rate this season was high (19Q1 3.5% V.S. 18Q1) narrowed gross revenue to -8%, and daily table revenue fell 13% year over year. It is worth noting that the company's VIP win rate of 3.3% and 3.5% for two consecutive quarters in 18Q4-19Q1 was 3.3% and 3.5%, compared to the historical average of 2.9%. On the midfield side, the company added 30 new gambling tables this season, which also attracted regular midfield traffic. The win rate remained flat, and the gross revenue increased 8% and 9% year-on-year respectively, but it was still weaker than the industry. Among them, the high-end midfield was weaker.
City of Dreams added 40 new tables, but the revenue and transcoding was average; City of Dreams was affected by the imminent closure of VIP casinos. On the casino side, City of Dreams added 40 tables this season, but the revenue and property EBITDA increased 11% and 10%, respectively. Among them, VIP turnover fell 8% year on year, but this season's VIP win rate was high (3.4% in 19Q1, 3.0% of V.S.18Q1), which increased gross revenue by 4% year on year. The renovation of new VIP intermediary casinos this season had an impact in January, but the new casinos in Suncity and Dejin were renovated and reopened on January 18 and February 12, respectively. City of Dreams midmarket turnover and gross revenue increased 11% and 9%, respectively, but the high-end midmarket was weaker, and overall daily table revenue was only flat year over year. The overall weakness of Studio City, VIP turnover and gross revenue fell 59% and 50%, respectively. Given that Studio City will close VIP casinos in 2020, leading to loss of customers; midfield turnover increased only 3% year over year, but this season's midfield win rate was high (28.4% in 19Q1 V.S.18Q1, 27.4% of V.S.18Q1), which increased gross midfield revenue 7% year over year.
In terms of other properties, although Xinhaofeng's VIP and midmarket turnover were -11% and 0%, respectively, the high win rate of VIP and midmarket continued to increase gross revenue by 13% and 15% year-on-year. On the international side, Manila's VIP sales were also weak this season. VIP turnover fell 18% year over year, and the win rate narrowed gross revenue to -9%. Midfield turnover and gross revenue were -2% and -11%, respectively. Boya Shinhori is still actively laying out gambling cards in Osaka, Japan, but the extent of progress has not yet been announced. Furthermore, the parent company, City of Dreams, will open 2 satellite casinos in Cyprus this year. The existing 2 satellite casinos have yet to announce substantial performance contributions, which are expected to be reflected in the 19H1 semi-annual report; the Cyprus flagship casino City of Dreams (City of Dreams Mediterranean) project began in April and is expected to open in 2021.
Relying on repurchases but with consistent performance, City of Dreams International (200.HK) TP was raised from HK$16 to HK$18, and MLCO.US (MLCO.US) was raised from $20 to $23, from “holding” to “increasing holdings”
We believe that the VIP turnover of the City of Dreams has been weak this season. It is only relied on Gaowin to keep the overall gambling performance in line with regulations. Coupled with the company's recent active repurchase policy, it is expected to support the Hong Kong stock City of Dreams International (200.HK) and the US stock of Xinhao Boya (MLCO.US). Looking back at the repurchase history of City of Dreams International (200.HK) since '17, the company has often been boosted by continuous repurchases of HK$14-16 (such as May 17 and November '18), while the company spent HK$96 million on repurchases for 3 consecutive days from May 21 to 23, with an average price of HK$15.9. Furthermore, the three-year 500 million US dollar repurchase plan approved by the US stock company in November 18 still has an amount of 450 million US dollars, and the US stock dividend policy this season is also quite active (this season's dividend was 72 million US dollars, higher than 18Q1's 0.67 million US dollars).
Although City of Dreams's VIP business may be marginal improvements brought about by the completion of intermediary casino renovations, the performance pressure of Studio City of Dreams due to the closure of VIP casinos will continue in 2019. Currently, the 12mFORWARD EV/EBITDA of Boya Boya 9.1x is lower than the historical average of 11.2x. We forecast that 2019 EBITDA will drop 7% year over year to 1.27 billion US dollars, giving 2019 10.0x EV/EBITDA. Compared with Bloomberg 9.4x, we raised the target price of the US stock MLCO.US (MLCO.US) from $20.0 to $23, from “holding”
It was raised to the “increase in holdings” rating. At the same time, influenced by the repurchase of Hong Kong stocks, we think that the parent company, City of Dreams International (200.HK),'s discount compared to City Hall Boa may have narrowed from the current 45% to 35%, and the corresponding target price was raised from HK$16 to HK$18, and raised from “hold” to a “increase in holdings” rating.
Risk warning: policy tightening, diversion of VIP and midmarket business competition, weakening of repurchases, etc.