Why Deutsche Bank Is Still Selling Melco Crown -- Studio City Is The Key

In a report issued Wednesday, Deutsche Bank analyst Karen Tang reiterated a Sell rating and $20.00 price target on shares of Melco Crown Entertainment Ltd (ADR) MPEL. The rating and price target come after the company announced that Studio City International, a joint venture that is 60 percent owned by the Melco, has appointed investment bank Moelis & Co MC to help with contingency planning as table allocation for the resort’s gaming area may be lower than an expected.

While investors might view the appointment “as a precursor potentially leading to MPEL's buyout of the minority partners' 40% stake,” Deutsche Bank experts think “the discussion of the parties will still take a while.” In fact, “the deal may be done because Studio City’s US$1.4bn project loan facility has a covenant stating that the project should have at least 400 tables available for operation by Oct 2016.”

Management assured on Tuesday that the project remains on track open as scheduled, on October 27, 2015. However, Deutsche Bank’s channel checks suggest the venture may only receive a 100 to 150-table quota. If this was eventually the case, investors who believe “the project can help lead Macau's GGR recovery” will be highly disappointed.

The analysts note that Melco’s 60 percent ownership of Studio City might end up restricting their ability to move tables from its wholly owned properties -- City of Dreams and Altira. The firm estimates that, if Studio City actually gets a 100-150 table quota, 70-110 tables will be allocated to mass players, 10-40 to premium mass & direct VIPs, and essentially none to junkets.

Aside from gaming tables, Studio City expects to have 1,000 slots and 200 live dealer multi-terminal stations at opening. The resort will also count with many non-gaming offerings that will help it attract “mainly the grind and middle-mass customers.” These include:

• 1,600 hotel rooms (compared to City of Dreams’ 1,400 rooms)
• The globe’s highest Ferris wheel,
• A 5,000-seat entertainment center
• A Batman virtual reality ride
• A night club
• A shopping mall with 350k square feet
• A TV studio