As mentioned above, Macau casino and hotel operator Melco (MPEL, Financial) gained 22% in the fourth quarter but remained among the Fund’s largest detractors for the year, down 31%. The stock benefited from improved sentiment regarding Macau during the quarter among indications that the higher margin mass market is stabilizing. In addition to relaxation of transit visa, the Macau government softened its stance on the smoking ban on the gaming floors. While Beijing will continue its anti-corruption campaign (which has hurt VIP business in Macau), the mass-focused infrastructure spending (high speed trains, ferry terminal, bridge from the HK airport, light rail) continues unabated. More than 90% of Melco Crown’s earnings before interest, taxes, depreciation and amortization (EBITDA) comes from mass business, where margins are 4X that of VIP business. Melco Crown opened its new mass-focused casino Studio City in late October, which helped increase market share in the all-important mass segment. This $3.2 billion project (relative to Melco’s market cap of $9 billion) has just started generating cash flow. We expect Studio City to receive an additional 50 table allocation in early 2016 in addition to its initial 200 table allocation. With a strong balance sheet, increasing EBITDA, and declining capital expenditure profile, the company is well positioned to buy back shares or buy out minority owners of Studio City. Melco International CEO, Lawrence Ho, bought about $25 million worth of shares in the fourth quarter.
From Longleaf Partners' International Fund commentary on the fourth quarter 2015.
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