Melco Crown Gets Off Schneid At Macquarie

Shares of Melco Crown Entertainment Ltd (ADR) MPEL rose more than 3 percent after Macquarie upgraded the rating of the casino operator to Neutral from Underperform. "We upgrade Melco Crown from Underperform to Neutral, on: 1) an increase in adjusted EBITDA margin forecast for Studio City; and 2) assumption of a slower decline in the sector'sFY16E GGR, of 6% vs our previous assumption of 13% ," analyst Kai Tan wrote in a note to clients. The analyst noted that the ramp-up of Studio City is crucial for Melco. Studio City, opened in October 2015, delivered 10.2 percent adjust EBITDA margin in the fourth quarter, significantly lower than the 28.7 percent achieved at City of Dreams. Studio City has to ramp-up quickly in the first half of 2016 before the new casinos currently under construction are completed (WynnPalace, Louis XIII, Parisian and MGM Cotai) between the second half of 2016 and the first quarter of 2017. "Assuming that Studio City's adjusted EBITDA margin can expand to high-teens in the next two quarters, the share price's 28% increase from the low recorded in February 2016 is justified, in our view," the analyst added. Meanwhile, Tan said the downside risk to his upgrade is the possibility of a fall in Studio City's margin in the second half of 2016 and the first quarter of 2017, when competition among operators is likely to intensify further. Studio City is still ramping up and management expects the adjusted EBITDA margin to expand. However, the analyst believes it will take a few quarters before reaching a reasonable level of >26%. "L-shaped trajectory is more likely than a V-shaped one. Management felt better about the market post CNY and saw stabilization of mass GGR in Macau, but "in terms of a V-shaped recovery, we are not seeing that," Tan noted. The pre-opening costs are high at Studio City and stood at $52 million in the fourth quarter or $131 million in fiscal 2015. The analyst believes that pre-opening cost will remain high in first quarter 2016, normalizing as Studio City may take a few quarters to ramp up. Tan raised his price target on MPEL to $15 from $13.50 due to earnings upgrades and a downward revision in net debt assumptions. Shares of MPEL were up 3 percent at $16.47. They have dropped 2.26 percent this year.