Melco Crown Entertainment (ADR):Above expectations on Manila’s mass volume and win-rate;Neutral

What surprised us.

MPEL’s 4Q16 corporate EBITDA grew 4% qoq to US$272mn, above ourestimate mainly due to CoD Manila’s strong mass/slot GGR (+9% qoq) andfavorable impact from luck. Macau EBITDA also grew 4% qoq. Adjusted forluck, group EBITDA would have been $290mn (+11% qoq) with Manila +29%and Macau +10%. As flagged earlier, Sand’s stagnant market share growthsuggests likely resilient performance for other Cotai properties. CoD/MSCreported 7%/10% qoq mass GGR growth in 4Q, broadly in line with industry.

Despite addition of 30 VIP tables at MSC in early November, MPEL’s rollingvolume growth of 11% qoq still lags 17% for the industry. Overall, MPEL’sGGR share dropped by 1% qoq to 14.7% (VIP rolling -1.3pp to 14.8%, mass+0.2pp to 17.1%). Key takeaways: (1) Management is encouraged to seecontinuous strength in both VIP and mass market during CNY, and attributedthe former to smaller impact from anti-corruption campaign in China andincreased willingness of junkets to extend credit since 4Q16. That said, theycautioned the market in turning overly bullish and still expects mid-to-highsingle-digit market growth for 2017. (2) With recently cited mgmt changes,MPEL is now targeting to optimize their database to maximize efficiency inorder to drive further table yield improvement at MSC. With less disruptionfrom the light rail construction site next to MSC, we model MPEL’s mass tableyield to improve to $8.7k in 2017 ($8.1k in 4Q), in line with that of Venetian. Weestimate each $1k change in table yield could lead to 4% change to 2017Egroup EBITDA. (3) Melco International’s acquisition of 13.4% stake in MPEL iscomplete. For Melco to repay its outstanding debt related to the acquisition,more dividend increases from MPEL are possible, to help uplift cash to Melco(see Special DPS to provide capital for Melco; focus on 4Q result, Jan 13, ‘17).

What to do with the stock.

Factoring in better vol. for Manila and special DPS paid on Feb 10, we raiseour 17E-18E EBITDA by 4% and introduce 19E, but cut 12m SOTP-based TP to$19.5 (from $20.7). At 12.6x EV/EBITDA, slight discount to sector avg. of 13.6xon less growth potential, in our view. Neutral. Risks: (+/-) MSC ramp-up.