Melco Slumps Amid Taiwan Indictments as Earnings Decline

Melco Crown Entertainment Ltd. (MPEL) fell to an 11-month low in Hong Kong trading after posting earnings that missed analyst estimates and saying its Taiwan branch was indicted on foreign-exchange violations.

Melco Crown, a Macau casino operator controlled by Lawrence Ho and Australian billionaire James Packer, dropped 3.9 percent to HK$75.55, the lowest level since September. American depository receipts sank 4.9 percent, also an 11-month low, in U.S. trading yesterday.

The company’s second-quarter adjusted property earnings before interest, taxes, depreciation and amortization fell 11 percent from a year earlier to $313.6 million as high-stakes gambling volume and win rate dropped, Melco said in a filing to the Hong Kong stock exchange yesterday. That lagged behind an average estimate of $358.5 million from eight analysts compiled by Bloomberg.

“Lower luck and higher staff costs affected the number, but the main culprit was again diminishing operating leverage,” Praveen Choudhary, a Hong Kong-based analyst at Morgan Stanley, wrote in a research note today. Melco’s growth in mass market table win per day slowed to single digits in second quarter, below the average of above 40 percent between 2011 and 2013, he said.

Melco, along with Wynn Macau Ltd. (1128) and Galaxy Entertainment Group Ltd. (27), declined in Hong Kong trading yesterday after Macau’s July casino revenue breakdown showed mass-market growth of 17 percent from a year earlier, “the lowest result since we started tracking the data in 2010,” Cameron McKnight, a U.S.- based analyst at Wells Fargo & Co., wrote in a note.

Alleged Violations

The Taipei District Prosecutors Office indicted Melco’s Taiwan branch office and some employees for alleged violations of banking and foreign-exchange laws, according to yesterday’s filing, which came after the Hong Kong market’s close.

“We will defend vigorously any indictment brought against us, as based on Taiwan legal advice received, we believe our operations in Taiwan are in compliance with Taiwan laws,” Melco said in the filing.

EBITDA margins were impacted by more than $10 million sequential increase in wage-related expenses, including the impact of staff retention plans, Chief Financial Officer Geoffrey Davis said on a conference call yesterday. The company expects an additional quarterly labor expense of about $10 million in both third and fourth quarters of 2014.

The company’s board has also approved a plan to buy back as much as $500 million in stock, according to a filing.

Melco Crown is expanding overseas in the face of land and labor constraints in the former Portuguese colony. The company partnered with Belle Corp., which holds one of four casino licenses in the Philippines, to develop a resort in Manila. The property will open later this year, the company said.

It is also on track to open in mid-2015 its third Macau resort, a $2.9 billion Hollywood-themed Studio City on Cotai Strip, according to a statement.

To contact the reporters on this story: Joshua Fellman in New York at jfellman@bloomberg.net; Vinicy Chan in Hong Kong at vchan91@bloomberg.net

To contact the editors responsible for this story: Stephanie Wong at swong139@bloomberg.net Daryl Loo

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