F-1 1 df1.htm FORM F-1 Form F-1
Table of Contents

As filed with the Securities and Exchange Commission on October 18, 2007

Registration No. 333-                    

 


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 


Melco PBL Entertainment (Macau) Limited

(Exact name of registrant as specified in its charter)

Not Applicable

(Translation of Registrant’s name into English)

 


 

Cayman Islands
  7011
  Not Applicable
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

36th Floor, The Centrium

60 Wyndham Street

Central

Hong Kong

(852) 2598-3600

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 


CT Corporation System

111 Eighth Avenue

New York, New York 10011

(212) 664-1666

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 


Copies to:

 

Thomas M. Britt III, Esq.

Debevoise & Plimpton LLP

13th Floor, Entertainment Building

30 Queen’s Road Central

Hong Kong SAR

(852) 2160-9800

 

Jonathan B. Stone, Esq.

Edward Lam, Esq.

Skadden, Arps, Slate, Meagher & Flom

42nd Floor, Edinburgh Tower, The Landmark

15 Queen’s Road Central

Hong Kong SAR

(852) 3740-4703

 


Approximate date of commencement of proposed sale to the public:  As soon as practicable after the effective date of this registration statement

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨                      

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨                      

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨                      

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.  ¨

 


CALCULATION OF REGISTRATION FEE

 


Title of each class of

securities to be registered(1)

  

Proposed maximum
aggregate

offering price(2)

   Amount of
registration fee

Ordinary shares, par value US$0.01 per ordinary share

   $800,000,000    $24,560

(1)   American depositary shares evidenced by American depositary receipts issuable upon deposit of the ordinary shares registered hereby have been registered under a separate registration statement on Form F-6 (Registration No. 333-139159). Each American depositary share represents three ordinary shares.
(2)   Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended (the “Securities Act”).

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 



Table of Contents

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION,

PRELIMINARY PROSPECTUS DATED [· ], 2007

LOGO

Melco PBL Entertainment (Macau) Limited

(incorporated in the Cayman Islands with limited liability)

 


[·] American Depositary Shares

Representing [·] Ordinary Shares

 


Melco PBL Entertainment (Macau) Limited is offering [·] American Depositary Shares, or ADSs. Each ADS represents three ordinary shares par value US$0.01 per share.

Our ADSs are listed on the Nasdaq Global Market under the symbol “MPEL.” The last reported sale price of our ADSs on the Nasdaq Global Market on [·], 2007 was US$[·] per ADS.

See “ Risk Factors” beginning on page 17 to read about the risks you should consider before buying the ADSs.

 

    Per ADS   Total ADS

Public Offering Price

  US$[            ]   US$[            ]

Underwriting Discount

  US$[            ]   US$[            ]

Proceeds, before expenses, to us

  US$[            ]   US$[            ]

The underwriters may also purchase up to an additional [            ] ADSs from us at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments.

The ADSs will be ready for delivery on or about [            ], 2007.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

UBS Investment Bank

    

Deutsche Bank Securities

 

Citi

The date of this prospectus is [·], 2007


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

 

RISK FACTORS

   17

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

   43

USE OF PROCEEDS

   45

MARKET PRICE INFORMATION FOR OUR ADSS

   46

CAPITALIZATION

   47

DILUTION

   48

DIVIDEND POLICY

   49

EXCHANGE RATE INFORMATION

   50

ENFORCEABILITY OF CIVIL LIABILITIES

   51

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

   53

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   55

OUR INDUSTRY

   84

OUR BUSINESS

   92

GAMING REGULATIONS

   110

MANAGEMENT

   115

PRINCIPAL SHAREHOLDERS

   124

RELATED PARTY TRANSACTIONS

   128

DESCRIPTION OF SHARE CAPITAL

   133

DESCRIPTION OF AMERICAN DEPOSITARY SHARES

   145

SHARES ELIGIBLE FOR FUTURE SALE

   155

TAXATION

   157

UNDERWRITING

   162

EXPENSES RELATED TO THIS OFFERING

   167

LEGAL MATTERS

   168

EXPERTS

   168

WHERE YOU CAN FIND ADDITIONAL INFORMATION

   169

 


You should rely only on the information contained in this prospectus or to which we have referred you. We have not authorized anyone to provide you with information that is different. This prospectus may only be used where it is legal to sell these securities. The information in this prospectus is current only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of the ADSs.

We have not taken any action to permit a public offering of the ADSs outside the United States or to permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to the offering of the ADSs and the distribution of the prospectus outside the United States.

 

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PROSPECTUS SUMMARY

Melco PBL Entertainment (Macau) Limited

You should read the following summary together with the entire prospectus, including the more detailed information regarding us, the ADSs being sold in this offering, and our financial statements and related notes appearing elsewhere in this prospectus. See “Risk Factors” beginning on page 17 to read about the risks you should consider before investing in the ADSs.

Unless the context otherwise requires, in this prospectus, “we,” “us,” “our company” and “MPBL Entertainment” refer to Melco PBL Entertainment (Macau) Limited and its predecessor entities and consolidated subsidiaries, including Melco PBL Gaming (Macau) Limited, or MPBL Gaming, a Macau company and holder of a gaming subconcession in Macau.

Overview

We are a developer, owner and, through our subsidiary MPBL Gaming, operator of casino gaming and entertainment resort facilities focused exclusively on the Macau market. MPBL Gaming is one of six companies licensed, through concessions or subconcessions, to operate casinos in Macau. We were initially formed as a 50/50 joint venture between Melco International Development Limited, or Melco, and Publishing and Broadcasting Limited, or PBL, as their exclusive vehicle to carry on casino, gaming machines and casino hotel operations in Macau. On December 18, 2006, we completed our initial public offering of ADSs, raising approximately US$1.2 billion of net proceeds, which includes the proceeds from the exercise of an over-allotment option by the underwriters in January 2007. Our ADSs are listed on the Nasdaq Global Market under the symbol “MPEL”.

We have chosen to focus on the Macau gaming market because we believe that Macau is well positioned to be one of the largest gaming destinations in the world. In 2006 and the six months ended June 30, 2007, Macau generated approximately US$7.0 billion and US$4.7 billion of revenue from table games and slot machine games, or gaming revenue, respectively, according to the Macau Gaming Inspection and Coordination Bureau, or the DICJ, compared to the US$6.5 billion and US$3.3 billion of gaming revenue, respectively, generated on the Las Vegas Strip, according to the Nevada Gaming Control Board, and compared to the US$5.2 billion and US$2.4 billion, respectively, generated in Atlantic City, according to the New Jersey Casino Control Commission. Gaming revenue in Macau has increased at a five-year compounded annual growth rate, or CAGR, from 2001 to 2006 of 24.9% compared to a CAGR of 7.3% and 3.9% for the Las Vegas Strip and Atlantic City, respectively. Macau benefits from its proximity to one of the world’s largest pools of existing and potential gaming patrons and is currently the only market in Greater China, and one of only several in Asia, to offer legalized casino gaming.

Through our existing operations and projects currently under development and construction, we will cater to a broad spectrum of potential gaming patrons, including wealthy high-end patrons, who seek the excitement of high stakes gaming, as well as mass market patrons, who wager lower stakes and are more casual gaming patrons seeking a broader entertainment experience. We will seek to attract these patrons from throughout Asia and in particular from Greater China.

Our existing operations and development projects consist of:

 

   

Crown Macau. The Crown Macau Hotel Casino, or Crown Macau, offers a luxurious premium hotel and casino resort experience by offering premium entertainment, elegant facilities, high quality service and rich décor, and aims to exceed the average five-star hotel in Macau catering primarily to the high-end gaming market. Gaming venues traditionally available to high stakes patrons in Macau have not offered the luxurious accommodation and facilities we offer at Crown Macau, instead focusing primarily on intensive gaming during day trips and short visits to Macau. The property features a 38-story tower

 

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including approximately 183,000 sq.ft of gaming space with approximately 220 gaming tables and more than 500 gaming machines and a luxury premium hotel with approximately 216 deluxe hotel rooms, including 24 suites and eight villas. Crown Macau held its grand opening on May 12, 2007 and became fully operational in July 2007.

 

   

City of Dreams. The City of Dreams integrated casino resort complex, or City of Dreams, is being developed to be a “must-see” integrated casino and entertainment resort primarily catering to mass market patrons. City of Dreams will be located in Cotai, an area that has been master-planned to feature a series of major new developments in the style of the Las Vegas Strip. City of Dreams is planned to feature three hotels ranging from four-stars to more luxurious ones designed with the aim of exceeding the average five-star hotel in Macau, a 420,000 sq. ft casino with approximately 450 gaming tables and 2,500 gaming machines, a purpose-built wet stage performance theatre, upscale shopping consisting of approximately 145,000 sq.ft of retail space and a wide variety of mid to high-end food and beverage outlets. The first phase of the complex is currently targeted to open before the end of March 2009. This first phase is expected to include substantial completion of the casino, retail space, food and beverage outlets and two hotels, which are expected to be operated under the Crown Towers and Hard Rock brands. The purpose-built wet stage performance theatre is scheduled for completion by the end of March 2009 with opening night expected before the year-end 2009, following four to six months of rehearsals. The twin-tower hotel under the Grand Hyatt brand with approximately 1,000 rooms and suites is scheduled to open in September 2009. The approximately 800-unit apartment hotel complex integrated within the City of Dreams footprint is expected to be completed by December 2009 and to be marketed in advance of project completion, subject to compliance with legal and regulatory provisions. We plan to finance the construction of the apartment hotel complex separately from the rest of the City of Dreams project, including with a portion of the proceeds from this offering. The budgeted cost of the City of Dreams project, including the casino, the Hard Rock hotel, the Crown Towers hotel, the Grand Hyatt twin-tower hotel, the purpose-built wet stage performance theatre, retail space together with food and beverage outlets is approximately US$2.1 billion, consisting primarily of construction costs, design and consultation fees, and excluding the cost of land. The additional budgeted cost of the apartment hotel complex planned for development at the City of Dreams is approximately US$330 million, excluding the cost of land.

 

   

Mocha Clubs. Our seven Mocha Clubs feature a total of approximately 1,100 gaming machines, and comprise the largest non-casino-based operations of electronic gaming machines in Macau. By combining machine-based gaming with an upscale décor and cafe ambiance, we aim to improve on Macau’s historically limited service to mass market and casual gaming patrons, including local residents and day-trip customers, outside the conventional casino setting, and to capitalize on the significant growth opportunities for machine-based gaming in Macau.

 

   

Macau Peninsula Site. In May 2006, we entered into a conditional agreement to acquire a third development site, which is located on the shoreline of Macau peninsula near the current Macau Ferry Terminal, or Macau Peninsula site. The Macau Peninsula site is approximately 6,480 square meters (approximately 1.6 acres) and the acquisition price is HK$1.5 billion (US$192.8 million), of which we have paid a deposit of HK$100 million (US$12.9 million). We expect to pay a land premium of approximately HK$205 million (US$26.3 million) to the Macau government for this site. The agreement completion deadline was first extended in January 2007 and again in July 2007 when we negotiated an extension of the completion deadline for the conditional agreement to the end of July 2008 in order to benefit from additional flexibility in the timing of the purchase, which is subject to various closing conditions. Other than the extension of the purchase completion deadline, all other provisions of the agreement remain in force, and there were no fees associated with the extension. Completion of the purchase remains subject to (i) significant conditions in the control of third parties unrelated to us and the seller of the property, and (ii) the approval of the Macau government. We are currently considering plans to develop the Macau Peninsula site into a mixed-use hotel, serviced apartment and casino facility aimed primarily at day-trip gaming patrons. If we acquire the site, we are targeting the middle of 2010

 

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as our opening date. Based on preliminary estimates and conceptual designs, we have currently budgeted approximately US$750 million for the total project costs of the Macau Peninsula project consisting primarily of land and construction costs, land premium costs, design and consultation fees.

Mocha Clubs had been our sole source of revenue until the opening of Crown Macau in May 2007. In 2006, Mocha Clubs generated revenues of US$36.1 million, while our consolidated operating costs and expenses totaled US$93.8 million in 2006, including amortization of land use rights of US$12.4 million for the Crown Macau and City of Dreams sites. For the six months ended June 30, 2007, Mocha Clubs and Crown Macau generated revenues of US$39.5 million and US$25.9 million, respectively, with Crown Macau’s revenue deriving from approximately one and a half months of partial operations of its facilities, and our consolidated operating costs and expenses totaled US$177.9 million, including amortization of land use rights of US$8.5 million for the Crown Macau and City of Dreams sites. For 2006, Mocha Clubs generated Operating EBITDA of US$13.2 million. For the six months ended June 30, 2007, Mocha Clubs and Crown Macau together generated a negative Adjusted EBITDA of US$4.9 million. Prior to MPBL Gaming obtaining a Macau gaming subconcession in September 2006, our subsidiary Mocha Slot Management Limited, or Mocha Slot, provided management services to Mocha Clubs under a services agreement with Sociedade de Jogos de Macau, S.A., or SJM, pursuant to which Mocha Slot provided all of the gaming machines at Mocha Clubs and auxiliary services to SJM, and received service fees of 31% of gaming machine win. After obtaining a subconcession through MPBL Gaming and terminating this services agreement, we now reflect as our revenues all of the gaming machine win at Mocha Clubs, which are subject to Macau taxes and other government dues currently totaling approximately 39%.

In September 2007, we entered into a US$1.75 billion senior secured credit facility, or the City of Dreams Project Facility, to finance primarily the development and construction of City of Dreams, of which the Hong Kong dollar equivalent of US$500 million was drawn down as of the date of this prospectus. In September 2006, MPBL Gaming entered into a US$500 million term loan facility, or the Subconcession Facility, all of which was drawn down to pay the remaining part of the US$900 million due to Wynn Macau for the subconcession. This US$500 million loan was repaid in full in December 2006 with a portion of the proceeds from our initial public offering. In February 2006, we entered into a HK$1.28 billion (US$164.5 million) term loan facility to finance the development and construction costs of Crown Macau. This facility was not drawn down, and was cancelled in June 2007.

Our Major Shareholders

We believe one of our greatest strengths is the combined resources of our major shareholders, Melco and PBL.

Melco is a long-established company listed on the Main Board of the Hong Kong Stock Exchange. Its major business is the leisure, gaming and entertainment business in Macau carried on by us. Among the listed companies in Hong Kong, Melco was one of the first to tap the rapidly growing leisure and entertainment market in Macau. In June 2004, Melco established Macau gaming as a principal activity with the acquisition of interests in Mocha Slot Group Limited, or Mocha, and in September of the same year, Melco announced its participation in a hotel development project in Taipa, Macau, which subsequently evolved to become Crown Macau.

Through the leadership and reputation of Mr. Lawrence Ho, our Co-Chairman and Chief Executive Officer and the Chairman and Chief Executive Officer of Melco, Melco has cultivated a broad network of business relationships in Macau, Hong Kong and elsewhere in Greater China. We believe these relationships have been and will continue to be important to the successful development and operation of our gaming business in Macau. Melco is the originator of most of our existing projects in Macau and its local relationships helped it to initially secure our interests in Mocha and the Crown Macau and City of Dreams projects. In addition, Melco’s relationships have helped us identify sites for Mocha Club venues on attractive economic terms and helped expand Mocha Clubs into the largest non-casino based operations of gaming machines in Macau, with approximately 20% market share by gross gaming machine revenue for the six months ended June 30, 2007, based in part on the figures from the DICJ. Dr. Stanley Ho, Mr. Lawrence Ho’s father, controls the entities that, together, were the monopoly operator of casino gaming in Macau from 1962 to 2002, and was a director and the chairman of Melco until he resigned from those positions in March 2006.

 

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In connection with forming the joint venture between Melco and PBL in March 2005 and in exchange for its ownership interest in us, Melco contributed to our then 80%-owned subsidiary Melco PBL Entertainment (Greater China) Limited, or MPBL (Greater China) (in which Melco held the remaining 20% interest), its 80% interest in Mocha, which was then the holding company for the Mocha Clubs. Melco also contributed to MPBL (Greater China) a 50.8% interest in the City of Dreams project, and a 70% interest in the Crown Macau project. We later acquired the remaining 20% interest in Mocha from Dr. Stanley Ho, the remaining 30% interest in the Crown Macau project from Sociedade de Turismo e Diversões de Macau, or STDM, and the remaining 49.2% interest in the City of Dreams project from a company controlled by a discretionary trust formed for the benefit of members of the Ho family. In October 2006 after the subconcession was granted to MPBL Gaming and we obtained a controlling interest in MPBL Gaming, all the interests in Mocha Clubs, the Crown Macau and the City of Dreams projects were transferred to MPBL Gaming.

Melco also has extensive experience in the restaurant business, operating the well-known Jumbo Kingdom floating restaurants in Hong Kong and the Chua Lam Gourmet Kitchen in Macau. In addition, Melco provides gaming IT infrastructure and solutions as well as online financial trading and related systems and services to its customers through its subsidiaries, Elixir Group (Macau) Limited and iAsia Online Systems Limited, and carries on investment banking and financial services businesses through its Hong Kong Stock Exchange listed subsidiary, Value Convergence Holdings Limited.

PBL is Australia’s largest listed diversified media and entertainment company. PBL owns and operates the Crown Entertainment Complex, or Crown Casino Melbourne, in Melbourne, Australia and the Burswood Entertainment Complex, or Burswood Casino, in Perth, Australia, which brings us significant experience in developing and operating casino resorts and in branding and marketing as well as providing access to its international high-end gaming clientele, particularly in the Asia region. PBL has made an offer to acquire (in a 50/50 joint venture with Macquarie Bank Limited) Gateway Casinos, which operates several casino and hotel properties in Western Canada. The Gateway Casinos transaction is proceeding by way of a public takeover offer, which is subject to regulatory approval.

In May 2007, PBL acquired a 37.5% interest in LVTI LLC which plans to develop and build a casino and hotel property in Las Vegas. In June 2007, PBL acquired a 19.6% interest in Fontainebleau Resorts LLC, which is currently building the Fontainebleau Las Vegas casino/hotel property expected to open in 2009.

Through the successful operation of Crown Casino Melbourne and Burswood Casino, we believe that PBL has a proven track record in both high-end and mass market gaming operations, as well as in providing other leisure services and facilities. PBL successfully operates a total of more than 400 high-end and mass market table games and more than 4,000 electronic gaming machines at these two casinos. In addition to gaming facilities, these properties feature a total of approximately 1,650 luxury hotel rooms, more than 100,000 sq. ft of conference and event facilities at Burswood Conventions & Events Center and Crown Conference Center, over 50 dining facilities offering a variety of global cuisines, highly acclaimed entertainment venues with total seating capacity for more than 26,000 and a host of resort and recreational facilities, including an exclusive championship 18-hole golf course. In October 2007, Crown Melbourne Limited announced its intention to construct a third hotel at Crown Melbourne with approximately 658 rooms which is projected to be operational by May 2010. Crown operates its successful “Crown Club” gaming loyalty program. We are leveraging PBL’s operating skills, its international experience and its high standards and reputation to strengthen our operations in Macau. For example, PBL assists us in:

 

   

implementing customer relationship management systems to facilitate our loyalty programs;

 

   

adapting our gaming product analytics systems to maximize revenue potential;

 

   

implementing management reporting practices and operating procedures to ensure accuracy and consistency in our internal control;

 

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training staff in high quality customer service; and

 

   

adopting a community and government relations framework to promote efficient working relationships with government authorities and compliance with rules and regulations.

PBL assists us by recommending candidates for employment and seconding employees to us or our subsidiaries from time to time, providing management information systems and policy and procedure guidelines, facilitating training and appointing directors to our board of directors.

Melco and PBL have agreed with us under an amended and restated shareholders’ deed that we will be the exclusive vehicle of Melco and PBL to carry on casino, gaming machine and casino hotel operations in Macau. We have entered into a license agreement with Crown Melbourne Limited, a subsidiary of PBL, and obtained an exclusive and non-transferable license to use the Crown brand in Macau. In connection with the City of Dreams Project Facility, Melco and PBL have agreed to provide a contingent equity commitment, backed up by a letter of credit, for up to US$125 million each to support our payment obligations under this facility. In addition, as our founding shareholders, PBL and Melco have provided us with administrative support and technical expertise in connection with the development of the Crown Macau, the City of Dreams and the Macau Peninsula projects and the operation of the Mocha Clubs business, although we do not have contractual rights to have such services provided to us. We pay PBL and Melco for reasonable costs, determined on an arm’s length basis, in connection with this support and expertise.

On May 8, 2007, PBL announced its intention to separate into two Australian listed companies, namely Crown Limited, an entity that will hold all of PBL’s existing gaming assets, and Consolidated Media Holdings Limited, which will hold all of PBL’s media assets. On completion of the PBL separation, PBL Asia Investments Limited, which holds PBL’s interest in MPEL, will become a wholly-owned subsidiary of Crown Limited. The PBL separation is subject to shareholder and court approvals.

Industry Background

Macau is located in the Pearl River Delta region of China and is about an hour away from approximately 6.9 million people in Hong Kong via a 24-hour hydrofoil ferry system. All of the main population centers of China, as well as Taiwan, Japan, Korea, Thailand, Malaysia, Singapore, Indonesia and the Philippines lie approximately within a 2,500 mile radius of Macau. According to the Economist Intelligence Unit, these countries had a total population of almost two billion people in 2005, with China alone accounting for approximately 1.3 billion people. Like Hong Kong, Macau is a Special Administrative Region of China.

Between 2001 and 2006, visitation to Macau increased at a CAGR of 16.4% to approximately 22 million visitors according to the Macau Statistics and Census Services. We believe that visitation and gaming revenue growth for the Macau market have been driven by and will continue to be driven by a combination of factors, including:

 

   

proximity to major Asian population centers;

 

   

liberalization of travel restrictions in China under its “Facilitated Individual Travel Scheme”, enabling greater numbers of Chinese citizens from more provinces to visit Macau individually without being in a tour group (as was required previously), and liberalization of currency restrictions to permit Chinese citizens to take significantly larger sums of foreign currency out of China when they travel;

 

   

increasing regional wealth, leading to a large and growing middle class with more disposable income; and

 

   

planned infrastructure improvements such as an expanded and upgraded airport, new roads, tunnels and bridges, a light rail system and additional ferry access, which are expected to facilitate more convenient access to and travel within Macau.

 

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In addition, Macau is benefiting from an increasing supply of higher quality casino, hotel and entertainment offerings. For 40 years from 1962 to 2002, casino gaming in Macau was provided by a single monopoly operator, STDM and later STDM’s subsidiary SJM. Since the Macau government undertook a bidding process for three gaming concessions beginning in 2002, Macau has seen dramatic changes in its gaming industry caused by the intense competition among the three concession holders, SJM, Galaxy Casino, S.A., or Galaxy, and Wynn Macau, and, subsequently, three subconcession holders: (1) Venetian Macau S.A., or Venetian Macau, (2) MGM Grand Paradise Limited, a joint venture between MGM and Ms. Pansy Ho, the daughter of Dr. Stanley Ho and the sister of Mr. Lawrence Ho, and (3) our subsidiary MPBL Gaming. The Macau government has agreed under the three existing concession agreements that it will not grant any additional concessions before April 2009 and has publicly stated that only one subconcession may be issued under each concession. However, subject to Macau government approval, there is no limit on the number of casinos that can be operated by each concessionaire or subconcessionaire. We believe the rights and obligations of MPBL Gaming’s subconcession are substantively similar to those under Wynn Macau’s concession. Wynn Macau may not terminate MPBL Gaming’s subconcession unilaterally, although the Macau government may, after notifying Wynn Macau, terminate the subconcession under certain circumstances, including MPBL Gaming operating its business outside the business scope of the subconcession, suspension of operations of MPBL Gaming’s business without reasonable grounds for more than seven consecutive days or more than 14 non-consecutive days within one calendar year, failure to comply with decisions and recommendations of the Macau government, and bankruptcy or insolvency of MPBL Gaming.

The six concession and subconcession holders, including MPBL Gaming, and other major sponsors and developers are planning to build major hotel and casino projects in Macau. Wynn Macau, Galaxy StarWorld and Grand Lisboa casino hotels recently opened on the Macau peninsula, in addition to Crown Macau in Taipa. In Macau’s newest casino development zone in Cotai, The Venetian Macao opened in August 2007 and several additional “mega” casino projects are scheduled for opening through 2010. These developments include City of Dreams and other casino hotels developed by major casino operators, international hotel chains and other sponsors. All these new casino hotels are anticipated to offer patrons higher quality amenities and more upscale ambience than have been generally available in Macau in the past.

In conjunction with these factors, we believe that over time Macau will undergo a transition from a gaming-focused market into a leisure destination offering a greater breadth of gaming and non-gaming entertainment options and amenities. We believe that this development should help drive further growth in consumer demand and visitation to Macau, particularly from the emerging mass market segment. Historically, Macau has catered primarily to high-end patrons who generally play at baccarat tables requiring large minimum bets. The development of Las Vegas style casinos, which offer a broader gaming and entertainment experience to mass market patrons, should provide additional revenue opportunities from a larger demographic base. We believe that the build-out of world-class facilities in Macau, including both gaming-focused properties, as well as integrated casino resorts with entertainment, food and beverage and convention complexes, should help to make Macau a more attractive destination for longer multi-day stays for various customer segments, including families. At the same time, we believe that Macau will continue to support an active market for day-trip visitors from locations such as Hong Kong and Guangdong Province, China.

Our Strategies

Our objective is to become a leading provider of gaming, leisure and entertainment services that capitalizes on the expected growth opportunities in Macau. To achieve our objective, we have developed the following business strategies:

 

   

develop a targeted product portfolio of brands well-recognized for their quality and distinctive services;

 

   

leverage Melco’s and PBL’s proven operational experience, network of local relationships and recognized staff training and development capabilities to successfully develop and operate each of our projects;

 

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develop a comprehensive marketing program by leveraging the existing Crown and Mocha brands and capitalizing on the marketing resources of our founders;

 

   

focus on building first-class facilities by employing a highly experienced in-house project team and engaging qualified professionals with significant experience in construction projects and the gaming and leisure sector; and

 

   

utilize MPBL Gaming’s subconcession to maximize our business and revenue potential, for example, through arrangements with other entertainment complex operators who are not concession or subconcession holders, under which MPBL Gaming will operate the casino facilities within such entertainment complexes.

Our Challenges

The successful execution of our strategies is subject to certain risks, challenges and uncertainties, including the following:

 

   

Our early stage of development and construction. We are at an early stage of development and construction of our properties and businesses. We obtained our primary revenue generating business, Mocha Clubs, in March 2005, and opened our new hotel casino, Crown Macau, in May 2007. We are incurring substantial costs and expenses in connection with the City of Dreams project, which is in the early stages of construction. In addition, we have not completed the acquisition of the Macau Peninsula site which is subject to a number of conditions.

 

   

Intense competition in Macau and elsewhere in Asia. Our competitors in Macau include all the current concession and subconcession holders and many of the largest gaming, hospitality, leisure and resort development companies in the world. Our Macau operations currently compete with approximately 26 other existing casinos of varying sizes located in Macau. In addition, we expect competition to increase in the near future from local and foreign casino operators who are developing numerous hotel and casino projects in Macau, as well as other gaming destinations throughout Asia and globally.

 

   

Development and operations costs. All of our projects are subject to significant development and construction risks, which could have a material adverse impact on our project timetables and costs and our ability to complete our projects. We may exceed our budgeted costs or incur delays in opening one or more of our projects that reduces or delays our ability to generate operating revenue. For example, Crown Macau was not fully operational until two months after its opening, primarily due to construction delays.

 

   

Significant indebtedness. In September 2007, we entered into the US$1.75 billion City of Dreams Project Facility to finance primarily the development and construction of City of Dreams, of which the Hong Kong dollar equivalent of US$500 million has been drawn down as of the date of this prospectus.

See “Risk Factors” on page 17 for a discussion of these and other important risks, challenges and uncertainties.

Recent Developments

Some of our recent developments include:

 

   

in May 2007, the opening of our new luxurious premium hotel and casino resort, Crown Macau;

 

   

in July 2007, a further extension to the completion deadline for our conditional agreement for the acquisition of the Macau Peninsula site, effective until July 2008;

 

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in September 2007, entering into the US$1.75 billion City of Dreams Project Facility to finance primarily the development and construction of City of Dreams; and

 

   

in October 2007, the opening of our seventh Mocha Club.

Financial Performance for the three month period ended September 30, 2007

We expect to announce in early December 2007 our third quarter financial results as of and for the three months ended September 30, 2007. This three month period was our first full financial quarter of operations at Crown Macau, which became fully operational in July 2007. As a result, our revenue increased significantly from the prior quarter. Other new casinos were opened in Macau during the third quarter of 2007, growing the market and increasing competition.

Our month-on-month revenues increased sequentially in each of July and August 2007, due to a combination of increased market share of Crown Macau and a trend improvement in actual hold rate in our VIP gaming operations. However, during the month of September 2007 our revenues were adversely affected by a substantial fall in actual hold rate significantly below the long term market average (or theoretical) hold rate in our VIP gaming operations.

Revenues from VIP gaming operations are generally more volatile than for mass market gaming operations due to the combination of lower volume but higher value bets, which may result in a material difference between revenue based on actual hold rates as compared with revenue based on theoretical hold rates. We expect our month-on-month and quarter-on-quarter revenues to continue to be volatile, particularly during the period prior to the opening of City of Dreams.

Corporate Information

We were incorporated in December 2004 as an exempted company with limited liability under the laws of the Cayman Islands. Our ADSs are listed for quotation on the Nasdaq Global Market under the symbol “MPEL”.

Our principal executive offices are located at 36th Floor, The Centrium, 60 Wyndham Street, Central, Hong Kong. Our telephone number at this address is 852-2598-3600 and our fax number is 852-2537-3618.

You should direct all inquiries to us at the address and telephone number of our principal executive offices set forth above. Our website is www.melco-pbl.com. The information contained on our website does not form part of this prospectus. Our agent for service of process in the United States is CT Corporation System located at 111 Eighth Avenue, New York, New York 10011.

 

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CORPORATE STRUCTURE

Current Corporate Structure

We are a holding company for the following principal operating subsidiaries: MPBL Gaming, which is the holder of a gaming subconcession in Macau; Melco PBL (Crown Macau) Developments Limited (formerly known as Great Wonders Investments Limited), or MPBL Crown Macau Developments, the development company for Crown Macau, Melco PBL Hotel (Crown Macau) Limited, or MPBL Hotel Crown Macau, Melco PBL (COD) Developments Limited (formerly known as Melco Hotel and Resorts (Macau) Limited), or MPBL COD Developments, our subsidiary that is developing the City of Dreams project; and Melco PBL (Macau Peninsula) Developments Limited, or Macau Peninsula Developments, our subsidiary that will be the developer of the Macau Peninsula project, in the event we decide to acquire and develop the Macau Peninsula site.

At the time of our initial public offering, through three intervening holding company subsidiaries incorporated in the Cayman Islands and wholly-owned by us, (1) Melco PBL Holdings Limited, (2) Melco PBL International Limited, or MPBL International, and (3) Melco PBL Investments Limited, or MPBL Investments, we held all of the Class B shares of MPBL Gaming, representing 72% of the voting control of MPBL Gaming and the rights to virtually all the economic interests in MPBL Gaming. All of the Class A shares of MPBL Gaming, representing 28% of its outstanding capital stock, was owned by PBL Asia Limited, or PBL Asia (as to 18%) and, as required by Macau law, the managing director of MPBL Gaming (as to 10%). Mr. Lawrence Ho was appointed to serve as the managing director of MPBL Gaming. The Class A shares were entitled as a class to an aggregate of MOP 1 in dividends and MOP 1 in proceeds of any winding up or liquidation of MPBL Gaming. MPBL Investments, PBL Asia, the managing director of MPBL Gaming and MPBL Gaming entered into a shareholders’ agreement under which, among other things, PBL Asia agreed to vote its Class A shares in the same manner as the Class B shares on all matters submitted to a vote of shareholders of MPBL Gaming.

Prior to the financial close of the City of Dreams Project Facility, three more holding companies were incorporated through which we now hold our shares in MPBL Gaming: (1) Melco PBL Nominee One Limited, or MPBL Nominee One, a Cayman Island company, which is a 100% subsidiary of MPBL International, it now holds 100% of the shares in MPBL Investments which in turn holds approximately 90.0% of the shares in MPBL Gaming; (2) Melco PBL Nominee Three Limited, or MPBL Nominee Three, a 100% subsidiary of MPBL Nominee One, it now holds 1 class A share in MPBL Gaming; and (3) Melco PBL Nominee Two Limited, or MPBL Nominee Two, which holds a minority shareholding in MPBL Gaming’s Macau operating companies.

The above shareholding structure of MPBL Gaming was completed when PBL Asia transferred its 1,799,999 class A shares in MPBL Gaming to MPBL Investments and its 1 class A share to MPBL International on 12 June 2007 and when MPBL International transferred its one class A share in MPBL Gaming to MPBL Nominee Three on 13 August 2007. Mr. Lawrence Ho remains the managing director and 10% shareholder of MPBL Gaming.

We also incorporated a direct wholly-owned subsidiary in Hong Kong, Melco PBL Services Limited for the purpose of entering into various administrative contracts, including leases for administrative office space, in Hong Kong.

 

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The following chart sets forth our corporate structure immediately prior to this offering:

LOGO

 

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THE OFFERING

 

Price per ADS

US$[·] per ADS.

This Offering:

 

ADSs Offered by Us

[·] ADSs

 

ADSs Outstanding Immediately After This Offering

[·] ADSs (or [·] ADSs if the underwriters exercise the over-allotment option in full).

 

Ordinary Shares Outstanding Immediately After This Offering

[·] ordinary shares (or [·] ordinary shares if the underwriters exercise the over-allotment option in full).

 

Over-Allotment Option

We have granted to the underwriters an option, exercisable for [30] days from the date of this prospectus, to purchase up to an aggregate of [ ·] additional ADSs at the public offering price listed on the cover page of this prospectus, less underwriting discounts and commissions, for the purpose of covering over-allotments.

 

The ADSs

Each ADS represents three ordinary shares, par value US$0.01 per ordinary share.

 

 

The depositary will be the holder of the ordinary shares underlying the ADSs and you will have the rights of an ADS holder as provided in the deposit agreement.

 

 

You may surrender your ADSs to the depositary to withdraw the ordinary shares underlying your ADSs. The depositary will charge you a fee for such an exchange.

We may amend or terminate the deposit agreement for any reason without your consent. If an amendment becomes effective, you will be bound by the deposit agreement as amended if you continue to hold your ADSs.

To better understand the terms of the ADSs, you should carefully read the section in this prospectus entitled “Description of American Depositary Shares.” We also encourage you to read the deposit agreement, which is filed as an exhibit to the registration statement that includes this prospectus.

 

Dividend Policy

We currently intend to retain all of our earnings to finance the construction and development of our projects and to operate and expand our business and therefore do not intend to declare or pay cash dividends on our shares in the near to medium term.

 

Timing and settlement of ADSs

The ADSs are expected to be delivered against payment on [·] 2007. The ADRs evidencing the ADSs will be deposited with a custodian

 

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for, and registered in the name of Cede & Co., as nominee of The Depository Trust Company, or DTC, in New York, New York. DTC, and its direct and indirect participants, will maintain records that will show the beneficial interests in the ADSs and facilitate any transfer of beneficial interests.

 

Listing

Our ADSs are listed for quotation on the Nasdaq Global Market. Our ordinary shares will not be listed on any exchange or quoted for trading on any over-the-counter trading system.

 

Risk Factors

See “Risk Factors” and other information included in this prospectus for a discussion of the risks you should carefully consider before deciding to invest in the ADSs.

 

Nasdaq Global Market Symbol

“MPEL”

 

Depositary

Deutsche Bank Trust Company Americas.

 

Use of Proceeds

We will receive net proceeds from this offering of approximately US$[·] million, after deducting estimated underwriting discounts, commissions and estimated offering expenses payable by us.

 

 

We intend to use the net proceeds from this offering for any of the following:

 

   

project costs related to the construction of the apartment hotel complex at City of Dreams;

 

   

funding to our subsidiaries in relation to their development projects and operations, which may include a partial funding of the development and construction of the Macau Peninsula project; and

 

   

any other general corporate and working capital requirements.

 

 

We have not yet determined all of our anticipated expenditures and therefore cannot estimate the amounts to be used for each of the purposes discussed above. The amounts and timing of our expenditures will vary depending on the amount of cash generated by our operations, and the rate of progress in our development activities for the City of Dreams project and the acquisition and development of the Macau Peninsula site. Accordingly, our management will have significant discretion in the allocation of the net proceeds we will receive in this offering. Pending the use of such proceeds, we intend to place these proceeds in short-term bank deposits or other liquid investments.

Lock-up

We, our directors and executive officers and our existing shareholders have agreed with the underwriters not to sell, transfer or dispose of any ADSs, ordinary shares or similar securities for a period of [·] days after the date of this prospectus. See “Underwriting.”

 

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Conventions That Apply to This Prospectus

Unless otherwise indicated, references in this prospectus to:

 

   

“China,” “mainland China” and “PRC” are to the People’s Republic of China, excluding Hong Kong, Macau and Taiwan;

 

   

“gaming revenue” is to table games and slot machine games and excludes sports book and race book;

 

   

“Greater China” is to mainland China, Hong Kong, Macau and Taiwan, collectively;

 

   

“FF&E” is to furnitures, fixtures and equipment;

 

   

“HK$” and “H.K. dollars” are to the legal currency of Hong Kong;

 

   

“Hong Kong” is to the Hong Kong Special Administrative Region of the People’s Republic of China;

 

   

“Hong Kong Stock Exchange” is to The Stock Exchange of Hong Kong Limited;

 

   

“Macau” and the “Macau SAR” are to the Macau Special Administrative Region of the People’s Republic of China;

 

   

“Patacas” and “MOP” are to the legal currency of Macau;

 

   

“Renminbi” and “RMB” are to the legal currency of China; and

 

   

“US$”, “$” and “U.S. dollars” are to the legal currency of the United States.

Unless the context indicates otherwise, “we,” “us,” “our company” and “MPBL Entertainment” refer to Melco PBL Entertainment (Macau) Limited, a Cayman Islands exempted company with limited liability, and its predecessor entities and its consolidated subsidiaries; “Melco” refers to Melco International Development Limited, a Hong Kong listed corporation; “PBL” refers to Publishing and Broadcasting Limited, an Australian listed corporation; “MPBL Gaming” refers to our wholly-owned subsidiary, Melco PBL Gaming (Macau) Limited, a Macau company; and “our subconcession” refers to the Macau gaming subconcession held by MPBL Gaming.

Solely for your convenience, this prospectus contains translations of certain H.K. dollar amounts and Patacas into U.S. dollar amounts at the noon buying rate in The City of New York for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York. All translations from Hong Kong dollars to U.S. dollars were made at the rate of HK$7.80 = US$1.00. The noon buying rate reported by the Federal Reserve Bank of New York on December 29, 2006 was HK$7.78 = US$1.00. The noon buying rate reported by the Federal Reserve Bank of New York on October 12, 2007 was HK$7.75 = US$1.00. The Pataca is pegged to the Hong Kong dollar at a rate of HK$1.00 = MOP 1.03. All translations from Patacas to U.S. dollars were made at the exchange rate of MOP 8.03 = US$1.00. We make no representation that the H.K. dollar, Pataca, Australian dollar or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars, Patacas, H.K. dollars or Australian dollars, as the case may be, at any particular rate or at all. See “Exchange Rate Information.”

Unless we indicate otherwise, all information in this prospectus: (1) does not reflect any exercise by the underwriters of their over-allotment option to purchase up to [·] additional ADSs representing [·] ordinary shares; and (2) does not include the ordinary shares (including ordinary shares with restricted voting and dividend rights) that have been or may in the future be granted under our 2006 share incentive plan.

 

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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA

The following summary historical consolidated statement of operations data for the period from January 1, 2004 to June 8, 2004 (predecessor), the period from June 9, 2004 to December 31, 2004 (successor), and the years ended December 31, 2005 and 2006, and the summary historical consolidated balance sheet data as of December 31, 2005 and 2006 have been derived from our audited financial statements included elsewhere in this prospectus. The selected historical consolidated balance sheet data as of December 31, 2004 have been derived from our audited financial statements not included in this prospectus. Our audited consolidated financial statements are prepared and presented in accordance with United States generally accepted accounting principles, or U.S. GAAP. For a description of the basis of presentation of these financial statements see note 2 to our audited consolidated financial statements. The following summary consolidated statement of operations data for the six months ended June 30, 2006 and 2007 and the summary consolidated balance sheet data as of June 30, 2007 have been derived from our unaudited financial statements prepared in accordance with U.S. GAAP and included elsewhere in this prospectus. We have prepared the unaudited information on the same basis as the audited consolidated financial statements, and have included, in our opinion, all adjustments, consisting only of normal and recurring adjustments that we consider necessary for a fair presentation of the financial information set forth in those statements. You should read the summary consolidated historical financial data in conjunction with those financial statements and the accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our historical results do not necessarily indicate results expected for any future periods.

From June 9, 2004 for Mocha, July 20, 2004 for MPBL COD Developments and November 9, 2004 for MPBL Crown Macau Developments through March 7, 2005, the financial statements reflect the consolidated financial statements of Mocha, MPBL COD Developments and MPBL Crown Macau Developments because they were under common control for this period. The contributions by Melco of its 80% interest in Mocha, 70% interest in MPBL Crown Macau Developments and 50.8% interest in the City of Dreams project to MPBL (Greater China), a company 80% indirectly owned by us and 20% owned by Melco, and cash contributions by PBL of US$163 million, which were completed on March 8, 2005, were accounted for as the formation of a joint venture for which a carryover basis of accounting has been adopted.

The consolidated financial statements of Mocha for the period from January 1, 2004 to June 8, 2004 have been prepared for the purpose of presenting the financial information of our predecessor. Mocha is considered our predecessor because we succeeded to substantially all of the business of Mocha and our own operations prior to the succession were insignificant relative to the operations assumed or acquired.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

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    For the period
from January 1,
2004 to June 8,
2004
(predecessor)
   

For the period
from June 9, 2004
to December 31,
2004

(successor)

    For the year
ended
December 31,
2005
(successor)
    For the year
ended
December 31,
2006
(successor)
   

For the six
months ended
June 30,

2006
(successor)

   

For the six
months ended
June 30,

2007

(successor)

 
    (in thousands of US$, except share and per share data and operating data)  

Consolidated statement of operations data:

           

Revenues

  $ 1,896     $ 6,071     $ 17,328     $ 36,101     $ 10,944     $ 65,439  
                                               

Total operating costs and expenses

    (1,286 )     (7,001 )     (21,050 )     (93,754 )     (28,209 )     (177,879 )
                                               

Operating (loss) income

  $ 610     $ (930 )   $ (3,722 )   $ (57,653 )   $ (17,265 )   $ (112,440 )
                                               

Net income (loss)

  $ 494     $ (1,007 )   $ (3,259 )   $ (73,479 )   $ (12,789 )   $ (96,409 )
                                               

Income/(Loss) per share

           

—Ordinary

    *       (0.002 )     (0.006 )     (0.116 )     (0.026 )     (0.080 )

—ADS(1)

    *       (0.005 )     (0.019 )     (0.348 )     (0.077 )     (0.240 )

Shares used in calculating loss per share

           

—Basic

    *       625,000,000       522,945,205       633,228,439       500,000,000       1,206,995,096  

Selected operating data:

           

Weighted average number of gaming machines(2)

    125       513       634       937       972       974  

Average daily net win per machine(3)

    284.5       171.5       229.1       209.8       193.8       222.0  

Other data:

           

Operating/Adjusted EBITDA(4)

  $ 771     $ 1,119     $ 7,430     $ 13,178     $ 5,305     $ (4,871 )

*   Figures not provided as the number of shares of our predecessor Mocha and our company are not directly comparable.
(1)   Each ADS represents three ordinary shares.
(2)   Weighted average number of gaming machines for any period represents the sum of the number of gaming machines in service at Mocha Clubs on each day during such period divided by the number of days in such period. Weighted average number of gaming machines does not include the data from Crown Macau as we believe it may not be indicative of a “steady-state” average, as Crown Macau has only been open since May 12, 2007 and its facilities have only been partially operational through June 30, 2007.
(3)   Average daily net win per machine for any period represents the average total daily gaming machine win during such period divided by the weighted average number of gaming machines in service during such period. Gaming machine win is the excess of the amount of money deposited by players into the gaming machine over the amount of money paid out of the gaming machine to players. Prior to MPBL Gaming obtaining its subconcession in September 2006, Mocha Slot provided management services to the Mocha Clubs under service agreements with SJM. Mocha Slot received 31% of gaming machine win as its net revenue from gaming at the Mocha Clubs, while SJM retained 31% of gaming machine win, and Macau taxes and other government dues accounted for the remaining 38%. Since our subconcession was granted and these service agreements were terminated with effect from September 21, 2006, we now reflect all the gaming machine win as our net revenue from gaming at the Mocha Clubs, but we are subject to Macau taxes and other government dues currently totaling 39% of gaming machine win. Average daily net win per machine does not include the data from Crown Macau as we believe it may not be indicative of a “steady-state” average, as Crown Macau has only been open since May 12, 2007 and its facilities have only been partially operational through June 30, 2007.

 

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(4)   Prior to the opening of Crown Macau in May 2007, our management used Operating EBITDA of Mocha Slot to measure our operating performance, as Mocha Slot was our sole business until May 2007. Subsequent to the opening of Crown Macau in May 2007, our management used Adjusted EBITDA of Mocha Slot and Crown Macau to measure their operating performance as they are the two primary operating businesses of the Company.

The following table presents a summary of our balance sheet data as of December 31, 2005 and 2006 and June 30, 2007:

 

     As of December 31,    As of June 30,
     2005
(successor)
   2006
(successor)
   2007
(successor)
     (in thousands of US$)

Balance Sheet Data:

        

Cash and cash equivalents

   $ 19,769    $ 583,996    $ 275,147

Total assets

     421,208      2,279,920      2,362,617

Amounts due to affiliated companies/person

     31,518      10,611      5,685

Amounts due to shareholders(1)(2)

     94,577      212,506      115,892

Capital lease obligations(3)

     11      16      13

Total current liabilities

     138,741      207,613      350,417

Total liabilities

     163,024      389,554      410,049

Minority interest

     19,492      —        —  

Total shareholders’ equity

     238,692      1,890,366      1,952,568

 

(1)   Includes amounts due to shareholders within one year of US$94.6 million, US$96.9 million and US$115.9 million as of December 31, 2005, 2006 and June 30, 2007, respectively, and amounts due to shareholders after one year of nil, US$115.6 million and nil as of December 31, 2005, 2006 and June 30, 2007, respectively.

 

(2)   The balance of the outstanding term loan from Melco and PBL amounting to approximately US$115.6 million as of December 31, 2006 was repayable in May 2008 and carries interest at a floating rate equal to three months HIBOR. Subsequently in September 2007, the final maturity date was extended to May 2009.

 

(3)   Includes capital lease obligations, due within one year of US$3,000, US$6,000 and US$5,000 as of December 31, 2005 and 2006 and June 30, 2007, respectively, and capital lease obligations, due after one year of US$8,000, US$10,000 and US$8,000 as of December 31, 2005 and 2006 and June 30, 2007, respectively.

 

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RISK FACTORS

An investment in the ADSs involves significant risks. You should carefully consider the risks described below before you decide to buy the ADSs. In particular, as we are a non-U.S. company, there are risks associated with investing in the ADSs that are not typical with investments in the shares of U.S. companies. If any of the following risks actually occurs, our business, prospects, financial condition and results of operations would likely suffer, the trading price of the ADSs could decline and you could lose all or part of your investment.

Risks Relating to Our Early Stage of Development

We are in an early stage of development of our business and properties, and so we are subject to significant risks and uncertainties. Our limited operating history may not serve as an adequate basis to judge our future operating results and prospects.

In significant respects we remain in a developmental phase of our business and there is limited historical information available about our company upon which you can base your evaluation of our business and prospects. In particular, we only recently opened Crown Macau and are still in the process of constructing City of Dreams. The Macau Peninsula project is at an even more preliminary stage of development, and we have not completed the acquisition of the site. The Mocha Club business, which we acquired in 2005, did not commence operations until 2003. MPBL Gaming only recently acquired its subconcession and previously did not have any direct experience operating casinos in Macau. As a result, you should consider our business and prospects in light of the risks, expenses and challenges that we will face as an early-stage company seeking to develop and operate major new development projects and gaming businesses in a rapidly growing and intensely competitive market.

Among other things, we are still in the process of:

 

   

obtaining the financing for the apartment hotel complex in the City of Dreams project;

 

   

completing the construction contracts for the City of Dreams project;

 

   

obtaining the formal grant of a land concession from the Macau government for the City of Dreams site on terms that are acceptable to us;

 

   

obtaining the approval from the Macau government to increase the developable gross floor area of the City of Dreams site; and

 

   

acquiring an ownership interest in the company that owns the Macau Peninsula site, which is subject to significant conditions in the control of third parties unrelated to us and the seller and to Macau governmental approvals, and obtaining financing commitments for the acquisition and development of the Macau Peninsula project.

We have encountered and will continue to encounter risks and difficulties frequently experienced by early-stage companies, and those risks and difficulties may be heightened in a rapidly developing market such as the gaming market in Macau. Some of the risks relate to our ability to:

 

   

complete our construction projects within their anticipated time schedules and budgets;

 

   

obtain a land concession for the City of Dreams project on terms that are acceptable to us;

 

   

obtain formal occupancy licenses for City of Dreams;

 

   

identify suitable locations and enter into new lease agreements for new Mocha Clubs;

 

   

renew lease agreements for existing Mocha Clubs;

 

   

attract and retain customers and qualified employees;

 

   

operate, support, expand and develop our operations and our facilities;

 

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maintain effective control of our operating costs and expenses;

 

   

raise additional capital, as required;

 

   

fulfill conditions precedent to draw down funds from current and future credit facilities;

 

   

develop and maintain internal personnel, systems and procedures to assure compliance with the extensive regulatory requirements applicable to the gaming business as well as regulatory compliance as a public company;

 

   

respond to changes in our regulatory environment; and

 

   

respond to competitive market conditions.

If we are unable to complete any of these tasks, we may be unable to complete those of our projects that are currently under development and operate our businesses in the manner we contemplate and generate revenues from such projects in the amounts and by the times we anticipate. We may also be unable to meet the conditions to draw on our existing financing facilities in order to fund our development, construction and acquisition activities or may suffer a default under our financing facilities. If any of these events were to occur, it would cause a material adverse effect on our business and prospects, financial condition, results of operation and cash flows.

We could encounter problems that substantially increase the costs to develop our projects and delay or prevent the opening of one or more of our projects.

The budget estimated for the City of Dreams project is based on preliminary projections and budgets, conceptual design documents and schedule estimates that we have prepared with the assistance of our architects and contractors and are subject to change as the plans and design documents are finalized. The current estimated cost of the City of Dreams project including the casino, the Hard Rock hotel, the Crown Towers hotel, the Grand Hyatt twin-tower hotel, the purpose-built wet stage performance theatre, retail space, together with the food and beverage outlets is approximately US$2.1 billion, consisting primarily of construction costs, design and construction fees, but excluding the cost of land. The additional budgeted cost of the apartment hotel complex planned for development at City of Dreams is approximately US$330 million, excluding the cost of land. We have currently budgeted approximately US$750 million for the total project costs of the Macau Peninsula project, consisting primarily of land and construction costs, land premium costs, design and consultation fees, but this budget is based on preliminary estimates and conceptual designs. We expect to revise our estimated project costs as we firm up our design plans and hire architects and contractors for this project. In addition, we cannot provide you any assurances that we will be successful in completing the acquisition of the Macau Peninsula site, given the conditions that are beyond our control.

All our projects are subject to significant development and construction risks, which could have a material adverse impact on our project timetables and costs and our ability to complete the projects. These risks include the following:

 

   

changes to plans and specifications;

 

   

engineering problems, including defective plans and specifications;

 

   

shortages of, and price increases in, energy, materials and skilled and unskilled labor, and inflation in key supply markets;

 

   

delays in obtaining or inability to obtain necessary permits, licenses and approvals;

 

   

changes in laws and regulations, or in the interpretation and enforcement of laws and regulations, applicable to gaming, leisure, residential, real estate development or construction projects;

 

   

labor disputes or work stoppages;

 

   

disputes with and defaults by contractors and subcontractors;

 

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environmental, health and safety issues, including site accidents;

 

   

weather interferences or delays;

 

   

fires, typhoons and other natural disasters;

 

   

geological, construction, excavation, regulatory and equipment problems; and

 

   

other unanticipated circumstances or cost increases.

The occurrence of any of these development and construction risks could increase the total costs, delay or prevent the construction or opening or otherwise affect the design and features of our projects that are under development, which could materially adversely affect our results of operations and financial condition. For example, primarily as a result of changes and improvements in the designs for Crown Macau, our construction costs increased and we negotiated with the general contractor, Paul Y. Construction Company Limited, or Paul Y. Construction, for an amendment of the total contract price from the original HK$1,448.0 million (US$186.1 million) to approximately HK$2.1 billion (US$269.9 million). In addition, we originally anticipated that the total project development costs (inclusive of land, construction, FF&E, pre-opening expenses, capitalized fees and finance costs, and initial working capital requirements (including cage cash)) for Crown Macau would be US$512.6 million. However, we incurred additional costs of approximately US$71 million on the Crown Macau project for a total of US$583.6 million. The increase in budgeted costs was in three principal areas: pre-opening and property marketing expenses; FF&E expenses for the casino operations; and design and fit-out expenses for the hotel and casino areas. We cannot guarantee that our construction costs or total project costs for our other projects will not also increase.

Costs of key construction inputs are increasing in Macau and we believe they are likely to continue to increase during the construction periods of our projects, primarily due to the significant increase in building activity in Macau. Our contractors may not be able to secure lower cost labor and other inputs from mainland China on a timely basis and in an adequate amount, as they will need to obtain required licenses from the Macau government to do so. The application for such licenses, if granted at all, may take several weeks or months. Continuing increases in input costs of construction in Macau will increase the risk that contractors will fail to perform under their contracts on time, within budget, or at all, and could increase the costs of any new contracts that we may enter into for the City of Dreams and the Macau Peninsula projects.

We may be required to incur significant additional indebtedness or sell convertible bonds, ADSs or other equity or equity-linked securities. Our ability to obtain additional financing may be limited, which could delay or prevent the opening of one or more of our projects.

We may require more debt and equity funding to complete our projects, fund initial operating activities and debt service payments and depending on whether our projects are completed within budget, the timing of completion and commencement of revenue generating operations at our projects, any further investments and/or acquisitions we may make, and the amount of cash flow from our operations. If delays and cost overruns were significant, the additional funding we would require could be substantial. The raising of additional debt funding by us, if required, would result in increased debt service obligations and could result in additional operating and financing covenants, or liens on our assets, that would restrict our operations. The sale of additional equity securities could result in additional dilution to our shareholders.

Our ability to obtain required capital on acceptable terms is subject to a variety of uncertainties, including:

 

   

limitations on our ability to incur additional debt, including as a result of prospective lenders’ evaluations of our creditworthiness and pursuant to restrictions on incurrence of debt in our existing and anticipated credit facilities, which currently prohibits MPBL Gaming and our other subsidiaries from incurring additional indebtedness with only limited exceptions, and the fact that our senior creditors have pledges over our operating assets, including Crown Macau and Mocha Clubs;

 

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limitations on our ability to raise capital from the credit markets, especially if the current turmoil in the credit markets originating from the negative conditions in the U.S. subprime mortgage market continues. For example, this recent turmoil led to us to restructure the US$2.75 billion commitment announced in June 2007 to the sum of US$1.75 billion available under the City of Dreams Project Facility;

 

   

investors’ and lenders’ perception of, and demand for, debt and equity securities of gaming, leisure and hospitality companies, as well as the offerings of competing financing and investment opportunities in Macau by our competitors;

 

   

whether it is necessary to provide credit support or other assurances from Melco and PBL on terms and conditions and in amounts that are commercially acceptable to them;

 

   

MPBL Gaming’s ability to obtain consent from the Macau government as required under our subconcession contract;

 

   

conditions of the U.S., Macau, Hong Kong, and other capital markets in which we may seek to raise funds;

 

   

our future results of operations, financial condition and cash flows;

 

   

requirements for approval for certain transactions from Macau, Hong Kong or Australian authorities, the Hong Kong Stock Exchange, the Nasdaq and/or shareholders of Melco and/or PBL, among others;

 

   

Macau governmental regulation of gaming in Macau; and

 

   

economic, political and other conditions in Macau, China and the Asian region.

Without necessary capital, we may not be able to:

 

   

complete the development of our existing projects or acquire and develop new projects;

 

   

pay the land premium for our sites;

 

   

acquire necessary rights, assets or businesses;

 

   

expand our operations in Macau;

 

   

hire, train and retain employees;

 

   

market our programs, services and products; or

 

   

respond to competitive pressures or unanticipated funding requirements.

We cannot assure you that the necessary financing will be available in the future in the amounts or on terms acceptable to us, or at all. If we fail to raise additional funds in such amounts and at such times as we may need, we may be forced to reduce our expenditures and growth to a level that can be supported by our cash flow and delay the development of our projects, which may result in our inability to meet drawing conditions under our loan facilities or default and exercise of remedies by the lenders under our loan facilities, whose loans we expect to be secured by liens on substantially all the shares and assets of our subsidiaries. In that event, we would be unable to complete our projects under construction and could suffer a partial or complete loss of our investments in our projects.

Servicing the debt of our subsidiaries requires a significant amount of cash, and our subsidiaries may not generate a sufficient level of cash flow from their businesses to make scheduled payments on their debt.

Our subsidiaries’ ability to make scheduled payments of the principal of, to pay interest on or to refinance their indebtedness depends on our subsidiaries’ future performance, which is subject to certain economic, financial, competitive and other factors beyond our control. Our subsidiaries may not generate cash flow from

 

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operations in the future sufficient to service their debt and make necessary capital expenditures. If they are unable to generate such cash flow, our subsidiaries may be required to adopt one or more alternatives, such as selling assets, restructuring debt, incurring additional indebtedness or obtaining additional equity capital on terms that may be onerous or highly dilutive. For example, we are currently using our City of Dreams Project Facility to service some portion of our periodic debt obligations. Our subsidiaries’ ability to refinance their indebtedness will depend on the financial markets and their financial condition at such time. Our subsidiaries may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our subsidiaries’ debt obligations and a material adverse effect on the value of our ADSs.

Even if our development projects are completed as planned, they may not be financially successful, which would limit our cash flow and would adversely affect our operations and our ability to repay our debt.

Even if our development projects are completed as planned and new Mocha Clubs are opened, they still may not be financially successful ventures or generate the cash flows that we anticipate. We may not attract the level of patronage that we are seeking. If any of our projects does not attract sufficient business, this will limit our cash flow and would adversely affect our operations and our ability to service payments under our loan facilities.

Risks Relating to the Completion and Operation of Our Projects

For the City of Dreams project, we are directly negotiating and entering into contracts with all our construction partners and vendors, which may increase the risk of delay and cost overruns.

In contrast to the Crown Macau project in which our general contractor was responsible for negotiating, entering into and managing all contractual relationships with subcontractors and construction vendors, we are directly negotiating and entering into contracts, with the exception of certain contracts that are related to common temporary site services which are entered into and managed by the construction manager, with our construction partners and vendors for the City of Dreams project, with the support of our construction manager. This approach increases the administrative burden of negotiating, entering into and managing construction contracts, and the risk of construction delays and cost overruns. If we are ineffective in directly overseeing the contractual relationship with our construction partners and vendors, we may experience delays and increases in construction costs in connection with the City of Dreams project.

Our insurance coverage may not be adequate to cover all losses that we may suffer from our projects. In addition, our insurance costs may increase and we may not be able to obtain the same insurance coverage in the future.

If we incur loss or damage for which we are held liable for amounts exceeding the limits of our insurance coverage, or for claims outside the scope of our insurance coverage, our business and results of operations could be materially and adversely affected. For example, certain casualty events, such as labor strikes, nuclear events, acts of war, loss of income due to cancellation of conventions or room reservations arising from fear of terrorism, deterioration or corrosion, insect or animal damage and pollution may not be covered under our policies. As a result, certain acts and events could expose us to significant uninsured losses. In addition to the damages caused directly by a casualty loss such as fire, natural disasters, acts of war or terrorism, we may suffer a disruption of our business as a result of these events or be subject to claims by third parties who may be injured or harmed. While we intend to carry business interruption insurance and general liability insurance, such insurance may not be available on commercially reasonable terms, or at all, and, in any event, may not be adequate to cover all losses that may result from such events.

For the construction of City of Dreams, we have obtained insurance policies providing coverage for construction risks that we believe are typically insured in the construction of gaming and hospitality projects in Macau and Hong Kong. However, this insurance coverage excludes certain types of loss and damage, such as loss or damage from acts of terrorism or liability for death or illness caused by contagious or infectious diseases. If loss or damage of those types were to occur, we could suffer significant uninsured losses. The cost of coverage, however, may in the future become so high that we may be unable to obtain the insurance policies we

 

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deem necessary for the construction and operation of our projects on commercially practicable terms, or at all, or we may need to reduce our policy limits or agree to certain exclusions from our coverage. We cannot assure you that any such insurance policies we may obtain will be adequate to protect us from material losses.

Construction at our projects is subject to hazards that may cause personal injury or loss of life, thereby subjecting us to liabilities and possible losses, which may not be covered by insurance.

The construction of large scale properties such as our development projects can be dangerous. Construction workers at our projects are subject to hazards that may cause personal injury or loss of life, thereby subjecting the contractor and us to liabilities, possible losses, delays in completion of the projects and negative publicity. In June 2006, a construction worker died after falling from a high floor of Crown Macau during construction which is now completed. As a result, we stopped construction on the Crown Macau site for several days to allow for safety inspections and investigations. A floor of Crown Macau also collapsed while under construction, causing injuries to construction workers. We believe that we and our contractors take safety precautions that are consistent with industry practice, but these safety precautions may not be adequate to prevent serious personal injuries or further loss of life, damage to property or delays. If further accidents occur during the construction of our projects, we may be subject to delays, including delays imposed by regulators, liabilities and possible losses, which may not be covered by insurance, and our business, prospects and reputation may be materially and adversely affected.

We may encounter all of the risks associated with the development and construction of the Crown Macau project in the development and construction of the City of Dreams and the Macau Peninsula projects.

In connection with the development and construction of Crown Macau, we encountered a number of risks, including risks related to construction delays, budget overruns, construction contract disputes, failure to obtain, or not obtaining in a timely manner, the necessary government concessions, licenses, permits and approvals, among others. We also experienced increased holding costs as a result of delays. We are and expect to continue to be exposed to similar risks in the development and construction of City of Dreams, which will be substantially larger and more complex, and the Macau Peninsula project, which is at an early stage of land acquisition and design. We have not yet entered into all of the definitive contracts necessary for the construction and development of the City of Dreams and the Macau Peninsula projects. We cannot assure you that we will be able to enter into definitive contracts with contractors with sufficient skill, financial strength and experience on commercially reasonable terms, or at all. We have not, and may not be able to, obtain guaranteed maximum price or fixed contract price terms on the construction contracts for the City of Dreams project, which could cause us to bear greater risks of cost overruns and construction delays. If we are unable to enter into satisfactory construction contracts for the City of Dreams project or are unable to closely control the construction costs and timetable for the City of Dreams project, our business, financial condition and prospects may be materially and adversely affected.

We are developing City of Dreams on land for which we have not yet been granted a formal concession by the Macau government on terms acceptable to us. If we do not obtain a land concession on terms acceptable to us, we could forfeit all or a part of our investment in the site and the design and construction of City of Dreams and would not be able to open and operate that facility as planned.

Land concessions in Macau are issued by the Macau government and generally have a term of 25 years, which is renewable for further consecutive periods of up to 10 years each until December 19, 2049 in accordance with Macau law. The specific terms are determined in the relevant land concession contracts, and there are common formulas generally used to determine the cost of these land concessions. On May 10, 2005, we accepted in principle the Macau government’s offer of a land concession to MPBL COD Developments consisting of approximately 113,325 square meters (28 acres) of land in Cotai for the site of City of Dreams. However, we do not currently have a definitive timetable for finalizing our negotiations with the Macau government and cannot assure you that we will be able to finalize our negotiations with the Macau government and obtain this land

 

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concession on terms that are acceptable to us, or at all. If we do not obtain a land concession for the City of Dreams site, we would not meet the existing conditions to draw additional sums under the City of Dreams Project Facility and may not be able to complete and operate City of Dreams and we could lose all or a substantial part of our investment in City of Dreams. If the land concession when granted contains terms unacceptable to us and we are unable to seek amendments to such land concession, we may not be able to complete and operate City of Dreams as planned and we could lose all or a substantial part of our investments in City of Dreams. As of June 30, 2007, we had paid approximately US$201 million of the project costs (excluding the cost of land) for the City of Dreams project, primarily for construction costs and design and consultation fees. The majority of the development and construction costs for hotel and casino projects are typically spent closer to the completion of such projects and we expect that a large portion of our remaining expenditures budgeted for the City of Dreams project, as well as potential additional amounts in excess of the budgeted amounts, will be spent in the months leading up to the expected opening date of City of Dreams. In addition, our current plans for the City of Dreams project involve obtaining approval from the Macau government for an increase in the developable gross floor area of the City of Dreams site. There is no guarantee that we will obtain such approval.

Simultaneous planning, design, construction and development of our two major projects may stretch our management time and resources, which could lead to delays, increased costs and other inefficiencies in the development of one or more of our projects.

We expect some portions of the planning, design and construction of the City of Dreams and the Macau Peninsula projects to proceed simultaneously. Since there is a significant overlap of the planning, design, development and construction periods of these projects involving the need for intensive work on each of the projects, members of our senior management will be involved in planning and developing of both projects at the same time, in addition to overseeing day-to-day operations of the Crown Macau and the Mocha Clubs. Our management may be unable to devote sufficient time and attention to our development and construction projects, as well as our operating properties, and that may delay the construction or opening of one or both of our projects, cause construction cost overruns or cause the performance of our operating properties to be lower than expected, which could have a material adverse effect on our business, financial condition and results of operations.

We will need to recruit a substantial number of new employees before each of our projects can open and competition may limit our ability to attract qualified management and personnel.

We required extensive operational management and staff to open and operate Crown Macau. Accordingly, we undertook a major recruiting program before the Crown Macau opening and expect to do so again before each of the City of Dreams and the Macau Peninsula projects opens. The pool of experienced gaming and other skilled and unskilled personnel in Macau is severely limited. Many of our new personnel will occupy sensitive positions requiring qualifications sufficient to meet gaming regulatory and other requirements or will be required to possess other skills for which substantial training and experience may be needed. Moreover, competition to recruit and retain qualified gaming and other personnel is likely to intensify further as competition in the Macau casino hotel market increases. Other major casino hotels, such as GalaxyWorld, are expected to open in Macau at or around the same time as City of Dreams. In addition, we are not currently allowed under Macau government policy to hire non-Macau resident dealers and croupiers. We cannot assure you that we will be able to attract and retain a sufficient number of qualified individuals to operate our projects or that costs to recruit and retain such personnel will not increase. The loss of the services of any of our senior managers or the inability to attract and retain qualified employees and senior management personnel could have a material adverse effect on our business.

Our contractors may face difficulties in finding sufficient labor at acceptable cost, which could cause delays and increase construction costs of our projects.

The contractors we retain to construct our projects may also face difficulties and competition in finding qualified construction laborers and managers as more projects commence construction in Macau and as substantial construction activity continues in China. Immigration and labor regulations in Macau may cause our contractors to be unable to obtain sufficient laborers from China to make up any gaps in available labor in Macau and to help reduce costs of construction, which could cause delays and increase construction costs of our projects.

 

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Our business depends substantially on the continuing efforts of our senior management, and our business may be severely disrupted if we lose their services or their other responsibilities cause them to be unable to devote sufficient time and attention to our company.

We place substantial reliance on the gaming, project development and hospitality industry experience and knowledge of the Macau market possessed by members of our senior management team, including our Co-Chairman and Chief Executive Officer, Mr. Lawrence Ho. The loss of the services of one or more of these members of our senior management team could hinder our ability to effectively manage our business and implement our growth and development strategies. Finding suitable replacements for Mr. Lawrence Ho or other members of our senior management could be difficult, and competition for personnel of similar experience could be intense in Macau. We do not currently carry key person insurance on any members of our senior management team.

Because we will depend upon a limited number of properties for a substantial portion of our cash flow, we will be subject to greater risks than a gaming company with more operating properties.

We will be primarily dependent upon Mocha Clubs, Crown Macau, City of Dreams and the Macau Peninsula project for our cash flow. Given that our operations will be conducted based on a small number of principal properties, we will be subject to greater risks than a gaming company with more operating properties due to our limited diversification of our businesses and sources of revenue.

Risks Relating to Our Operations in the Gaming Industry in Macau

Because our operations will face intense competition in Macau and elsewhere in Asia, we may not be able to compete successfully and we may lose or be unable to gain market share.

Our competitors in Macau and elsewhere in Asia include many of the largest gaming, hospitality, leisure and resort companies in the world. Some of these current and future competitors are significantly larger than us and have significantly larger capital and other resources to support their developments and operations in Macau and elsewhere.

The hotel, resort and casino businesses are highly competitive in Macau and we expect to encounter intense and increasing competition as other developers and operators develop and open new projects in coming years. Our Macau operations compete with approximately 26 other existing casinos of varying sizes located in Macau as of June 30, 2007. In addition, we expect competition to increase in the near future from local and foreign casino operators who are developing numerous hotel and casino projects in Macau. By the time our City of Dreams project is ready for opening, we expect several new casinos to be in operation, including the MGM and other hotels in Cotai.

SJM is one of the three concessionaires in Macau and operates 18 casinos. SJM is controlled by Dr. Stanley Ho, who through SJM and, its parent entity STDM, controlled the monopoly concession on gaming operations in Macau from 1962 to 2002. In addition, Dr. Stanley Ho is the father of Mr. Lawrence Ho, our Co-Chairman and Chief Executive Officer. Dr. Stanley Ho was a director and the chairman of Melco until he resigned from those positions in March 2006. Dr. Stanley Ho remains a shareholder of Melco, and we believe that, for purposes of Rule 13d-3 under the Securities Exchange Act of 1934, as amended, he was deemed to beneficially own approximately 1.77% of Melco’s outstanding ordinary shares as of October 12, 2007.

In February 2007, SJM opened the Grand Lisboa, a resort next to the Hotel Lisboa, one of our main competitors in Macau gaming. It also announced the construction of Oceanus, a new casino complex near the Macau Ferry Terminal. Las Vegas Sands opened the Sands Macao in May 2004 and, in August 2007, opened the Venetian Macao Resort, an all-suites hotel, casino and convention center complex, with a Venetian-style theme similar to that of their Las Vegas property. Galaxy operates five casinos and is currently building GalaxyWorld in Cotai. Wynn Macau opened the Wynn Macau casino hotel project in September 2006 and has announced plans

 

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to build up to three resorts in Cotai. The joint venture between MGM-Mirage and Ms. Pansy Ho, Dr. Stanley Ho’s daughter and the sister of Mr. Lawrence Ho, is building the MGM Grand Macau, a resort on the Macau peninsula adjacent to the Wynn Macau which is scheduled to open in late 2007. Other casinos are expected to be opened by other hotel and entertainment development companies in conjunction with concessionaires who will operate the casino operations.

We also compete to some extent with casinos located in other countries, such as Malaysia, North Korea, South Korea, the Philippines and Cambodia, as well as in Australia, New Zealand and elsewhere in the world, including Las Vegas and Atlantic City. In addition, certain countries, such as Singapore, have now legalized casino gaming and others may in the future legalize casino gaming, including Japan, Taiwan and Thailand. Singapore awarded one casino license to Las Vegas Sands and a second casino license to Genting International Bhd. in 2006. We also compete with cruise ships operating out of Hong Kong and other areas of Asia that offer gaming. The proliferation of gaming venues in Southeast Asia could significantly and adversely affect our financial condition, results of operations or cash flows.

Our regional competitors also include PBL’s Crown Casino Melbourne and Burswood Casino in Australia and other casino resorts that Melco and PBL may develop elsewhere in Asia outside Macau. Melco and PBL may develop different interests and strategies for projects in Asia under their joint venture which conflict with the interests of our business in Macau or otherwise compete with us for Asian gaming and leisure customers.

Gaming is a highly regulated industry in Macau and adverse changes or developments in gaming laws or regulations could be difficult to comply with or significantly increase our costs, which could cause our projects to be unsuccessful.

Gaming is a highly regulated industry in Macau. Current laws, such as licensing requirements, tax rates and other regulatory obligations, including for anti-money laundering, could change or become more stringent resulting in additional regulations being imposed upon the gaming operations in the Crown Macau and the City of Dreams casinos, the Macau Peninsula site and the Mocha Clubs or a further liberalization of competition being introduced in the gaming industry. Any such adverse developments in the regulation of the gaming industry could be difficult to comply with and significantly increase our costs, which could cause our projects to be unsuccessful.

Current Macau laws and regulations concerning gaming and gaming concessions and matters such as prevention of money laundering are, for the most part, fairly recent and there is little precedent on the interpretation of these laws and regulations. We believe that our organizational structure and operations are currently in compliance in all material respects with all applicable laws and regulations of Macau, but we are still in the process of building our internal staff, systems and procedures for the operation of our gaming businesses in compliance with gaming regulatory requirements and standards in Macau. These laws and regulations are complex and a court or an administrative or regulatory body may in the future render an interpretation of these laws and regulations, or issue new or modified regulations, that differ from our interpretation, which could have a material adverse effect on our financial condition, results of operations or cash flows.

Our activities in Macau are subject to administrative review and approval by various agencies of the Macau government. For example, our activities are subject to the administrative review and approval by the Health Department, Labour Bureau, Public Works Bureau, Fire Department, Finance Department and Macau Government Tourism Office. We cannot assure you that we will be able to obtain all necessary approvals that may materially affect our business and operations. Macau law permits redress to the courts with respect to administrative actions. However, such redress is largely untested in relation to gaming regulatory issues.

In addition to complying with Macau’s local requirements and standards, we may conduct our gaming operations in Macau by implementing certain of the policies and procedures followed by PBL in compliance with Australian gaming regulations, modified where necessary to meet Macau’s local requirements and standards.

 

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Those Australian requirements may be more restrictive than those in Macau. This may negatively affect our flexibility and our ability to engage in some activities that would otherwise be permissible in Macau and increase the expenses we incur in connection with regulatory compliance.

Under MPBL Gaming’s subconcession, the Macau government may terminate the subconcession under certain circumstances without compensation to MPBL Gaming, which would prevent it from operating casino gaming facilities in Macau and could result in defaults under our indebtedness and a partial or complete loss of our investments in our projects.

Under MPBL Gaming’s gaming subconcession, the Macau government has the right, after notifying Wynn Macau, to unilaterally terminate the subconcession in the event of non-compliance by MPBL Gaming with its basic obligations under the subconcession and applicable Macau laws. If such a termination were to occur, MPBL Gaming would be unable to operate casino gaming in Macau. We would also be unable to recover the US$900 million consideration paid to Wynn Macau for the issue of the subconcession.

The following termination events are included in the subconcession contract:

 

   

the operation of gaming without permission or operation of business which does not fall within the business scope of the subconcession;

 

   

abandonment of approved business or suspension of operations of our gaming business in Macau without reasonable grounds for more than seven consecutive days or more than 14 non-consecutive days within one calendar year;

 

   

transfer of all or part of MPBL Gaming’s operation in Macau in violation of the relevant laws and administrative regulations governing the operation of games of fortune or chance and other casino games in the Macau SAR and without Macau government approval;

 

   

failure to pay taxes, premiums, levies or other amounts payable to the Macau government;

 

   

failure to resume operations following the temporary assumption of operations by the Macau government;

 

   

repeated opposition to the supervision and inspection by the Macau government and failure to comply with decisions and recommendations of the Macau government, especially those of the DICJ applicable to us;

 

   

refusal or failure to provide or supplement the guarantee deposit or the guarantees specified in the subconcession within the prescribed period;

 

   

bankruptcy or insolvency of MPBL Gaming;

 

   

fraudulent activity harming the public interest;

 

   

serious and repeated violation of the applicable rules for carrying out casino games of chance or games of other forms or damage to the fairness of casino games of chance or games of other forms;

 

   

systematic non-compliance with the Macau Gaming Law’s basic obligations;

 

   

the grant to any other person of any managing power over the gaming business of MPBL Gaming or the grant of a subconcession or the entering into any agreement to the same effect; or

 

   

failure by a controlling shareholder in MPBL Gaming to dispose of its interest in MPBL Gaming, within ninety days, following notice from the gaming authorities of another jurisdiction in which such controlling shareholder is licensed to operate casino games of chance to the effect that such controlling shareholder can no longer own shares in MPBL Gaming.

 

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These events could lead to the termination of MPBL Gaming’s subconcession without compensation to it. In many of these instances, the subconcession contract does not provide a specific cure period within which any such events may be cured and, instead, we would rely on consultations and negotiations with the Macau government to remedy any such violation. MPBL Gaming has entered into a service agreement with New Cotai Entertainment (Macau) Limited, or New Cotai Entertainment, and New Cotai Entertainment, LLC pursuant to which MPBL Gaming will operate the casino premises in its hotel casino resorts. If New Cotai Entertainment, or other parties with whom we may, in the future, enter into similar agreements were to be found unsuitable or were to undertake actions that are inconsistent with MPBL Gaming’s subconcession terms and requirements, we could suffer penalties, including the termination of the subconcession.

Based on information from the Macau government, proposed amendments to the legislation with regard to reversion of casino premises are being considered. We expect that if such amendments take effect, on the expiry or any termination of MPBL Gaming’s subconcession, unless MPBL Gaming’s subconcession were extended, the portion of casino premises within our developments to be designated with the approval of the Macau government, including all gaming equipment, would revert to the Macau government automatically without compensation to us. Until such amendments come into effect, all our casino premises and gaming equipment would revert automatically without compensation to us.

The subconcession contract contains various general covenants, obligations and other provisions as to which the determination of compliance is subjective. For example, compliance with general and special duties of cooperation, special duties of information, and with obligations foreseen for the execution of our investment plan may be subjective. We cannot assure you that we will perform such covenants in a way that satisfies the requirements of the Macau government and, accordingly, we will be dependent on our continuing communications and good faith negotiations with the Macau government to ensure that we are performing our obligations under the subconcession in a manner that would avoid any violations.

Under the subconcession contract, we are required to make a minimum investment in Macau of MOP 4.0 billion (US$499.2 million), including investment in developing the Crown Macau and the City of Dreams projects, by December 2010. We expect to satisfy this requirement through our investments in the Crown Macau and the development of City of Dreams. If we do not meet the required deadline for completing this minimum investment and other conditions in the subconcession contract, for example, due to delays in construction or the inability to finance the completion of the City of Dreams project, we may lose the right to continue operating our properties developed under the subconcession or suffer the termination of the subconcession by the Macau government.

Under MPBL Gaming’s subconcession, the Macau government is allowed to request various changes in the plans and specifications of our Macau properties and to make various other decisions and determinations that may be binding on us. For example, the Chief Executive of the Macau SAR has the right to require that we increase MPBL Gaming’s share capital or that we provide certain deposits or other guarantees of performance with respect to the obligations of our Macau subsidiaries in any amount determined by the Macau government to be necessary. MPBL Gaming is limited in its ability to raise additional capital by the need to first obtain the approval of the Macau gaming and governmental authorities before raising certain debt or equity. MPBL Gaming’s ability to incur debt or raise equity may also be restricted by our loan facilities. As a result, we cannot assure you that we will be able to comply with these requirements or any other requirements of the Macau government or with the other requirements and obligations imposed by the subconcession.

Furthermore, pursuant to the subconcession contract, we are obligated to comply not only with the terms of that agreement, but also with laws, regulations, rulings and orders that the Macau government might promulgate in the future. We cannot assure you that we will be able to comply with any such laws, regulations, rulings or orders or that any such laws, regulations, rulings or orders would not adversely affect our ability to construct or operate our Macau properties. If any disagreement arises between us and the Macau government regarding the interpretation of, or our compliance with, a provision of the subconcession contract, we will be relying on the consultation and negotiation process with the applicable Macau governmental agency described above. During any such consultation, however, we will be obligated to comply with the terms of the subconcession contract as interpreted by the Macau government.

 

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MPBL Gaming’s failure to comply with the terms of its subconcession in a manner satisfactory to the Macau government could result in the termination of its subconcession. We cannot assure you that MPBL Gaming would always be able to operate gaming activities in a manner satisfactory to the Macau government. The loss of its subconcession would prohibit MPBL Gaming from conducting gaming operations in Macau which would have a material adverse effect on our financial condition, results of operations and cash flows and could result in defaults under our indebtedness and a partial or complete loss of our investments in our projects.

Currently, there is no precedent on how the Macau government will treat the termination of a concession or subconcession upon the occurrence of any of the circumstances mentioned above. Some of the laws and regulations summarized above have not yet been applied by the Macau government. Therefore, the scope and enforcement of the provisions of Macau’s gaming regulatory system cannot be fully assessed at this time.

The Macau government could grant additional rights to conduct gaming in the future, which could significantly increase the already intense competition in Macau and cause us to lose or be unable to gain market share.

MPBL Gaming is one of six companies authorized by the Macau government to operate gaming activities in Macau. Although the Macau government has agreed under the existing concession agreements that it will not grant any additional concessions before April 2009 and has publicly stated that only one subconcession may be issued under each concession, we cannot assure you that the Macau government will not change its policies to issue additional concessions or subconcessions at any time in the future. If the Macau government were to allow additional competitors to operate in Macau through the grant of additional concessions or the approval of additional subconcessions, we would face additional competition, which could significantly increase the already intense competition in Macau and cause us to lose or be unable to maintain or gain market share.

MPBL Gaming’s subconcession contract expires in 2022 and if we were unable to secure an extension of its subconcession in 2022 or if the Macau government were to exercise its redemption right in 2017, we would be unable to operate casino gaming in Macau.

MPBL Gaming’s subconcession contract expires in 2022. Based on information from the Macau government, proposed amendments to the legislation with regard to reversion of casino premises are being considered. We expect that if such amendments take effect, on the expiry or any termination of MPBL Gaming’s subconcession, unless MPBL Gaming’s subconcession were extended, the portion of casino premises within our developments to be designated with the approval of the Macau government, including all gaming equipment, would automatically revert to the Macau government without compensation to us. Until such amendments come into effect, all our casino premises and gaming equipment would revert automatically without compensation to us. Under the subconcession contract, beginning in 2017, the Macau government has the right to redeem the subconcession contract by providing us with at least one year’s prior notice. In the event the Macau government exercises this redemption right, we would be entitled to fair compensation or indemnity. The amount of such compensation or indemnity would be determined based on the gross revenue generated by City of Dreams during the tax year immediately prior to the redemption, multiplied by the remaining term of the subconcession. We would not receive any further compensation (including for consideration paid to Wynn Macau for the subconcession). We cannot assure you that MPBL Gaming would be able to renew or extend its subconcession contract on terms favorable to us, or at all. We also cannot assure you that if MPBL Gaming’s subconcession were redeemed, the compensation paid would be adequate to compensate us for the loss of future revenues.

While MPBL Gaming will not initially be required to pay corporate income taxes on income from gaming operations under the subconcession, this tax exemption will expire in 2011, and it may not be extended.

The Macau government has granted to MPBL Gaming the benefit of a corporate tax holiday on gaming income in Macau for the period starting on May 12, 2007, the date the gaming operations began at Crown Macau, and expiring at the end of 2011. When this tax exemption expires, we cannot assure you that it will be extended beyond the expiration date.

 

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Furthermore, the Macau Government has granted to our subsidiary Melco PBL Hotel (Crown Macau) Limited the declaration of utility purposes benefit, pursuant to which, for a period of 12 years, it is entitled to a vehicle and property tax holiday on any vehicles and immovable property that it owns or has been granted. Additionally, under the tax holiday, this entity will also be allowed to double the maximum rates applicable regarding depreciation and reintegration for purposes of assessment of corporate income tax for the same period of time. We intend to apply for the same tax holiday for Melco PBL (COD) Hotels Limited, but we cannot assure you that it will be granted by the Macau Government on as favorable terms, or at all.

We extend credit to a portion of our customers, and we may not be able to collect gaming receivables from our credit customers.

We conduct our table gaming activities at our casinos to a limited degree on a credit basis, and expect to continue this practice in the future. This credit is often unsecured, as is customary in our industry. High-end patrons typically are extended more credit than patrons who tend to wager lower amounts.

We may not be able to collect all of our gaming receivables from our credit customers. We expect that we will be able to enforce our gaming receivables only in a limited number of jurisdictions, including Macau. As most of our gaming customers are visitors from other jurisdictions, we may not have access to a forum in which we will be able to collect all of our gaming receivables because, among other reasons, courts of many jurisdictions do not enforce gaming debts. We may encounter forums that will refuse to enforce such debts, or we may be unable to locate assets in other jurisdictions against which to seek recovery of gaming debts. The collectibility of receivables from international customers could be negatively affected by future business or economic trends or by significant events in the countries in which these customers reside. We may also in given cases have to determine whether aggressive enforcement actions against a customer will unduly alienate the customer and cause the customer to cease playing at our casinos. If we accrue large receivables from the credit extended to our customers, we could suffer a material adverse impact on our operating results if those receivables are deemed uncollectible. In addition, in the event a patron has been extended credit and has lost back to us the amount borrowed and the receivable from that patron is deemed uncollectible, Macau gaming tax will still be payable on the resulting gaming revenue notwithstanding our uncollectible receivable.

Our business may face a higher level of volatility due to our focus on the VIP and premium mass market segment of the gaming market.

We are currently and expect to be for the next few years heavily dependent on the gaming revenues generated from Crown Macau. Crown Macau caters primarily to VIP and premium mass market patrons. The revenues generated from the VIP and premium mass market segment of the gaming market is acutely volatile primarily due to high bets, and the resulting high winnings and losses. As a result, our business may be more volatile from quarter to quarter than that of our competitors and may require higher levels of cage cash in reserve to manage our losses.

We depend upon gaming junket operators for a portion of our gaming revenue and if we are unable to establish, maintain and increase the number of successful relationships with junket operators, our ability to attract high-end patrons may be adversely affected. If we are unable to ensure high standards of probity and integrity in the junket operators with whom we are associated, our reputation may suffer or we may be subject to sanctions, including the loss of MPBL Gaming’s subconcession.

Junket operators, who organize tours, or junkets, for high-end patrons to casinos in Macau, are responsible for a portion of our gaming revenues in Macau. With the rise in gaming in Macau, the competition for relationships with junket operators has increased. Currently we have agreements in place with approximately 20 junket operators. In addition, PBL has sales and marketing staff in Thailand, Hong Kong, China, Taiwan, Malaysia, Indonesia, Singapore and Macau devoted to attracting junket business to PBL’s existing casinos, Crown Casino Melbourne and Burswood Casino. There can be no assurance that we will be able to utilize PBL’s relationships with regional junket operators or enter into additional agreements with other junket operators. If we are unable to utilize and develop relationships with junket operators, our ability to grow our gaming revenues will be hampered and we will have to seek alternative ways to develop and maintain relationships with high-end patrons, which may not be as profitable as relationships developed through junket operators.

 

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In addition, the reputations of the junket operators we deal with are important to our own reputation and MPBL Gaming’s ability to continue to operate in compliance with its subconcession. While we endeavor to ensure high standards of probity and integrity in the junket operators with whom we are associated, we cannot assure you that the junket operators with whom we are associated will always maintain the high standards that we plan to require. If we were to deal with a junket operator whose probity was in doubt, this may be considered by regulators or investors to reflect negatively on our own probity. If a junket operator falls below our standards, we and our shareholders may suffer harm to our or their reputation, as well as worsened relationships with, and possibly sanctions from, gaming regulators with authority over our operations.

The expected future consolidation of junket operators in the VIP segment of the gaming market could increase commission rates we pay to junket operators, and the overall impact of consolidation on our business is uncertain and could have an adverse impact on our future prospects.

Some market observers believe that it is likely that the junket operators in the VIP segment of the gaming market will experience a significant consolidation, as the leading junket operators are beginning to recognize superior economics and negotiation leverage from operational scale and market aggregation. If the relatively fragmented junket operators successfully consolidate their operations, they will increase their power to demand and receive significantly higher VIP commissions. If we become obligated to pay higher commissions to fewer junket operators as the industry consolidates, it could have an adverse effect on our results of operations and the price of our ADSs.

The expected consolidation in the junket operator segment may not occur. In addition, even if mega-junket operators emerge, they may be associated with our competitors and not us, and we could be required to pay increased rates of commissions without the benefit of increased volumes from a mega-junket relationship. Any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.

We cannot assure you that anti-money laundering policies that we have implemented, and compliance with applicable anti-money laundering laws, will be effective to prevent our casino operations from being exploited for money laundering purposes.

Macau’s free port, offshore financial services and free movements of capital create an environment whereby Macau’s casinos could be exploited for money laundering purposes. We have implemented anti-money laundering policies in compliance with all applicable anti-money laundering laws and regulations in Macau. However, we cannot assure you that any such policies will be effective to prevent our casino operations from being exploited for money laundering purposes. Any incidents of money laundering, accusations of money laundering or regulatory investigations into possible money laundering activities involving us, our employees, our junket operators or our customers could have a material adverse impact on our reputation, business, cash flows, financial condition, prospects and results of operations. See “Gaming Regulations—Anti-Money Laundering Regulations in Macau.”

If Macau’s transportation infrastructure does not adequately support the development of Macau’s gaming and leisure industry, visitation to Macau may not increase as currently expected, which may cause our projects to be unsuccessful.

Macau consists of a peninsula and two islands and is connected to China by two border crossings. Macau has an international airport and connections to China and Hong Kong by road, ferry and helicopter. To support Macau’s planned transformation into a mass-market gaming and leisure destination, the frequency of bus, plane and ferry services to Macau must increase significantly. In addition, Macau’s internal road system is prone to congestion and must be substantially improved to support projected increases in traffic. While various projects are under development to improve Macau’s internal and external transportation links, these projects may not be approved, financed or constructed in time to handle the projected increase in demand for transportation or at all, which could impede the expected increase in visitation to Macau and cause our projects to be unsuccessful.

Risks Relating to Our Indebtedness

Our current, projected and potential future indebtedness could impair our financial condition, which could further exacerbate the risks associated with our significant leverage.

We have incurred and expect to incur, based on current budgets and estimates, secured long-term indebtedness, including the following:

 

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approximately US$1.75 billion under the City of Dreams Project Facility primarily for the development and construction of City of Dreams, of which the Hong Kong dollar equivalent of US$500 million has been drawn down as of the date of this prospectus;

 

   

financing for the construction cost of the apartment hotel complex in City of Dreams; and

 

   

financing for a significant portion of the acquisition cost of the Macau Peninsula site, as well as a significant portion of the other costs of developing that project, which are as yet undetermined.

Our significant indebtedness could have important consequences to you. For example, it could:

 

   

increase our vulnerability to general adverse economic and industry conditions;

 

   

impair our ability to obtain additional financing in the future for working capital needs, capital expenditures, acquisitions or general corporate purposes;

 

   

require us to dedicate a significant portion of our cash flow from operations to the payment of principal and interest on our debt, which would reduce the funds available to us for our operations;

 

   

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

   

subject us to higher interest expense in the event of increases in interest rates to the extent a portion of our debt will bear interest at variable rates;

 

   

cause us to incur additional expenses by hedging interest rate exposures of our debt and exposure to hedging counterparties’ failure to pay under such hedging arrangements, which would reduce the funds available for us for our operations; and

 

   

in the event we or one of our subsidiaries were to default, result in the loss of all or a substantial portion of our and our subsidiaries’ assets, over which our lenders have taken or will take security.

We currently do not generate sufficient cash flow to service our existing and projected indebtedness and we may not be able to generate sufficient cash flow to meet our debt service obligations because our ability to generate cash depends on many factors beyond our control.

Our ability to make scheduled payments due on our existing and anticipated debt obligations and to fund planned capital expenditures and development efforts will depend on our ability to generate cash in the future. Our current operations are insufficient to support the debt service on our current and anticipated debt. We will require timely completion and generation of operating cash flow from our projects to service our current and future projected indebtedness. Our ability to obtain cash to service our existing and projected debt is subject to a range of economic, financial, competitive, legislative, regulatory, business and other factors, many of which are beyond our control. If we do not generate sufficient cash flow from operations to satisfy our existing and projected debt obligations, we may have to undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments or seeking to raise additional capital. We cannot assure you that any refinancing or restructuring would be possible, that any assets could be sold, or, if sold, of the timing of the sales or the amount of proceeds that would be realized from those sales. We cannot assure you that additional financing could be obtained on acceptable terms, if at all, or would be permitted under the terms of our various debt instruments then in effect. Our failure to generate sufficient cash flow to satisfy our existing and projected debt obligations, or to refinance our obligations on commercially reasonable terms, would have an adverse effect on our business, financial condition and results of operations.

The terms of our and our subsidiaries’ indebtedness may restrict our current and future operations and harm our ability to complete our projects and grow our business operations to compete successfully against our competitors.

The City of Dreams Project Facility and associated facility and security documents that MPBL Gaming has entered into also contain a number of restrictive covenants that impose significant operating and financial restrictions on MPBL Gaming, and therefore, effectively on us. The covenants in the City of Dreams Project Facility restrict or limit, among other things, our and our subsidiaries’ ability to:

 

   

incur additional debt, including guarantees;

 

   

create security or liens;

 

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dispose of assets;

 

   

make certain acquisitions and investments;

 

   

pay dividends, including to us, during the construction of the City of Dreams project;

 

   

make other restricted payments or apply revenues earned in one part of our operations to fund development costs or operating losses in another part of our operations;

 

   

enter into sale and leaseback transactions;

 

   

engage in new businesses;

 

   

issue preferred stock; and

 

   

enter into transactions with shareholders and affiliates.

In addition, the restrictions under the City of Dreams Project Facility contain financial covenants, including requirements that we satisfy certain tests or ratios such as:

 

   

maximum capital expenditures test;

 

   

minimum interest and debt service coverage ratios; and

 

   

a maximum leverage ratio.

These covenants may restrict our ability to operate and restrict our ability to incur additional debt or other financing we may require and impede our growth.

Our failure to comply with the covenants contained in our or our subsidiaries’ indebtedness, including failure as a result of events beyond our control, could result in an event of default that could materially and adversely affect our cash flow, operating results and our financial condition.

If there were an event of default under one of our or our subsidiaries debt facilities, the holders of the debt on which we defaulted could cause all amounts outstanding with respect to that debt to be due and payable immediately. In addition, any event of default or declaration of acceleration under one debt facility could result in an event of default under one or more of our other debt instruments, with the result that all of our debt would be in default and accelerated. We cannot assure you that our assets or cash flow would be sufficient to fully repay borrowings under our outstanding debt facilities, either upon maturity or if accelerated upon an event of default, or that we would be able to refinance or restructure the payments on those debt facilities. Further, if we are unable to repay, refinance or restructure our indebtedness at our subsidiaries that own or operate our properties, the lenders under those debt facilities could proceed against the collateral securing that indebtedness, which will constitute substantially all the assets and shares of our subsidiaries. In that event, any proceeds received upon a realization of the collateral would be applied first to amounts due under those debt instruments. The value of the collateral may not be sufficient to repay all of our indebtedness, which could result in the loss of your investment as a shareholder.

Risks Relating to Our Business and to Operating in Macau

Conducting business in Macau has certain political and economic risks that may lead to significant volatility and have a material adverse effect on our results of operations.

All of our operations are in Macau. Accordingly, our business development plans, results of operations and financial condition may be materially adversely affected by significant political, social and economic developments in Macau and in China and by changes in government policies or changes in laws and regulations or the interpretations of these laws and regulations. In particular, our operating results may be adversely affected by:

 

   

changes in Macau’s and China’s political, economic and social conditions;

 

   

changes in policies of the government or changes in laws and regulations, or the interpretation of these laws and regulations;

 

   

changes in foreign exchange regulations;

 

   

measures that may be introduced to control inflation, such as interest rate increases; and

 

   

changes in the rate or method of taxation.

 

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Our operations in Macau are also exposed to the risk of changes in laws and policies that govern operations of Macau-based companies. Tax laws and regulations may also be subject to amendment or different interpretation and implementation, thereby adversely affecting our profitability after tax. Further, certain terms of our gaming subconcession may be subject to renegotiations with the Macau government in the future, including amounts we will be obligated to pay the Macau government in order to continue operations. MPBL Gaming’s obligations to make certain payments to the Macau government under the terms of its subconcession include a fixed annual premium per year and a variable premium depending on the number and type of gaming tables and gaming machines that we operate. The results of those renegotiations could have a material adverse effect on our results of operations and financial condition.

Former Secretary for Transport and Public Works of Macau, Mr. Ao Man-Long, was arrested in December 2006 by Macau’s Commission against Corruption on charges involving bribery and irregular financial activities according to the Macau Government Official Statement. Those detained together with Mr. Ao are related to local companies to whom several major public works contracts were awarded. During the investigation, additional individuals related to local Macau companies to whom land had been granted in land exchange procedures were detained and charged. The investigation is ongoing. After the arrest and Mr. Ao’s removal from his post as Secretary for Transport and Public Works of Macau, which gave him jurisdiction over all land grants and public works and infrastructure projects in Macau, the Chief Executive of Macau personally assumed such role until Mr. Lao Sio-Io was appointed the new Secretary for Transport and Public Works in March 2007. The Macau government has granted us a lease for a plot of land for Crown Macau, and has offered to grant us a lease for the development rights for two adjacent land parcels in Cotai for the City of Dreams site. However, we have yet to receive either a formal grant of a land concession or an occupancy permit for the City of Dreams site. We have applied for the revision of the purpose of land use and will apply for approval from the Macau government to increase the developable gross floor area of the City of Dreams site after the site is granted to us. In addition, the Macau Peninsula project is at an even earlier stage of development, and if we acquire the site we would need to obtain similar land concession modifications and development approvals from the Macau government. We cannot predict whether Mr. Ao’s removal and prosecution, and any further investigations or prosecutions, will adversely affect the functioning of the Macau Land, Public Works and Transports Bureau, any approvals or land concession grants that are pending before it, or for which applications may be made in the future (including with respect to our projects), or will give rise to additional scrutiny or review of any approvals or land concessions, including those for City of Dreams, that were previously approved or granted through this Bureau and the Secretary for Transport and Public Works of Macau.

As we expect a significant number of patrons to come to our properties from China, general economic conditions and policies in China could have a significant impact on our financial prospects. Any slowdown in economic growth or reversal of China’s current policies of liberalizing restrictions on travel and currency movements could adversely impact the number of visitors from China to our properties in Macau as well as the amounts they are willing to spend in our casinos.

Because we depend upon our properties in one market for all of our cash flow, we will be subject to greater risks than a gaming company that operates in more markets.

We will be primarily dependent upon Mocha Clubs, Crown Macau, City of Dreams and the Macau Peninsula project for our cash flow. Given that our operations are and will be conducted only at properties in Macau and that any future developments will be in Macau, we will be subject to greater risks than a gaming company with operating properties in several markets. These risks include:

 

   

dependence on the gaming and leisure market in Macau and limited diversification of our businesses and sources of revenue;

 

   

a decline in economic, competitive and political conditions in Macau or generally in Asia;

 

   

inaccessibility to Macau due to inclement weather, road construction or closure of primary access routes;

 

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a decline in air or ferry passenger traffic to Macau due to higher ticket costs, fears concerning travel or otherwise;

 

   

changes in Macau governmental laws and regulations, or interpretations thereof, including gaming laws and regulations;

 

   

natural and other disasters, including typhoons, outbreaks of infectious diseases or terrorism, affecting Macau;

 

   

that the number of visitors to Macau does not increase at the rate that we have expected; and

 

   

a decrease in gaming activities at our properties.

Any of these conditions or events could have a material adverse effect on our business, cash flows, financial condition, results of operations and prospects.

Our gaming operations could be adversely affected by restrictions on the export of the Renminbi and limitations of the Pataca exchange markets.

Gaming operators in Macau are currently prohibited from accepting wagers in Renminbi, the currency of China. There are currently restrictions on the export of the Renminbi outside of mainland China, including to Macau. For example, Chinese traveling abroad for six months or less are only allowed to take the equivalent of up to US$5,000 out of China. Restrictions on the export of the Renminbi may impede the flow of gaming customers from China to Macau, inhibit the growth of gaming in Macau and negatively impact our operations.

Our revenues in Macau are denominated in H.K. dollars and Patacas, the legal currency of Macau. Although currently permitted, we cannot assure you that H.K. dollars and Patacas will continue to be freely exchangeable into U.S. dollars. Also, because the currency market for Patacas is relatively small and undeveloped, our ability to convert large amounts of Patacas into U.S. dollars over a relatively short period of time may be limited. As a result, we may experience difficulty in converting Patacas into U.S. dollars.

Terrorism and the uncertainty of war, economic downturns and other factors affecting discretionary consumer spending and leisure travel may reduce visitation to Macau and harm our operating results.

The strength and profitability of our business depends on consumer demand for casino resorts and leisure travel in general. Changes in consumer preferences or discretionary consumer spending could harm our business. Terrorist acts, negative developments in the conflict in Iraq and other events could have a negative impact on international travel and leisure expenditures, including lodging, gaming and tourism. We cannot predict the extent to which the recent or future terrorist acts may affect us, directly or indirectly, in the future. In addition to fears of war and future acts of terrorism, other factors affecting discretionary consumer spending, including general economic conditions, amounts of disposable consumer income, fears of recession and lack of consumer confidence in the economy, may negatively impact our business. Consumer demand for hotel casino resorts and the type of luxury amenities we plan to offer are highly sensitive to downturns in the economy. An extended period of reduced discretionary spending and/or disruptions or declines in airline travel could significantly harm our operations.

An outbreak of the highly pathogenic avian influenza caused by the H5N1 virus (“avian flu” or bird flu”), Severe Acute Respiratory Syndrome (“SARS”) or other contagious disease may have an adverse effect on the economies of certain Asian countries and may adversely affect our results of operations.

During 2004, large parts of Asia experienced unprecedented outbreaks of avian flu which, according to a report of the World Health Organization, or WHO, in 2004, placed the world at risk of an influenza pandemic with high mortality and social and economic disruption. As of October 8, 2007, the WHO has confirmed a total of 202 fatalities in a total number of 330 cases reported to the WHO, which only reports laboratory confirmed

 

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cases of avian flu since 2003. In particular, Guangdong Province, PRC, which is located across the Zhuhai Border from Macau, has confirmed several cases of avian flu. Currently, no fully effective avian flu vaccines have been developed and there is evidence that the H5N1 virus is evolving so there can be no assurance that an effective vaccine can be discovered in time to protect against the potential avian flu pandemic. In the first half of 2003, certain countries in Asia experienced an outbreak of SARS, a highly contagious form of atypical pneumonia, which seriously interrupted economic activities and caused the demand for goods and services to plummet in the affected regions. There can be no assurance that an outbreak of avian flu, SARS or other contagious disease or the measures taken by the governments of affected countries against such potential outbreaks, will not seriously interrupt our gaming operations or visitation to Macau, which may have a material adverse effect on our results of operations. The perception that an outbreak of avian flu, SARS or other contagious disease may occur again may also have an adverse effect on the economic conditions of countries in Asia.

Macau is susceptible to severe typhoons that may disrupt our operations.

Macau is susceptible to severe typhoons. Macau consists of a peninsula and two islands off the coast of mainland China. In the event of a major typhoon or other natural disaster in Macau, our properties and business may be severely disrupted and our results of operations could be adversely affected. Although we or our operating subsidiaries do carry insurance coverage with respect to these events, our coverage may not be sufficient to fully indemnify us against all direct and indirect costs, including loss of business, that could result from substantial damage to, or partial or complete destruction of, our properties or other damages to the infrastructure or economy of Macau.

Any fluctuation in the value of the H.K. dollar, U.S. dollar or Pataca may adversely affect our expenses and profitability.

Although we will have certain expenses and revenues denominated in Patacas in Macau, our revenues and expenses will be denominated predominantly in Hong Kong dollars and in connection with most of our indebtedness and certain expenses, U.S. dollars. We expect to incur significant debt denominated in U.S. dollars, and the costs associated with servicing and repaying such debt will be denominated in U.S. dollars. The value of the H.K. dollar and Patacas against the U.S. dollar may fluctuate and may be affected by, among other things, changes in political and economic conditions. Although the exchange rate between the H.K. dollar to the U.S. dollar has been pegged since 1983 and the Pataca is pegged to the H.K. dollar, we cannot assure you that the H.K. dollar will remain pegged to the U.S. dollar and that the Pataca will remain pegged to the H.K. dollar. Any significant fluctuations in the exchange rates between H.K. dollars or Patacas to U.S. dollars may have a material adverse effect on our revenues and financial condition. For example, to the extent that we are required to convert U.S. dollar financings into H.K. dollars or Patacas for our operations, fluctuations in the exchange rates between H.K. dollars or Patacas against the U.S. dollar would have an adverse effect on the amounts we receive from the conversion. We have not used any forward contracts, futures, swaps or currency borrowings to hedge our exposure to foreign currency risk.

Risks Relating to Our Corporate Structure and Ownership

Our existing shareholders will have a substantial influence over us and their interests in our business may be different than yours.

Melco and PBL together own the substantial majority of our outstanding shares, with each beneficially holding 41.4% of our outstanding ordinary shares as of the date of this prospectus. Melco and PBL have entered into a shareholders deed regarding the voting of their shares of our company under which each will agree to, among other things, vote its shares in favor of three nominees to our board designated by the other. As a result, Melco and PBL, if they act together, will have the power, among other things, to elect directors to our board, including six of ten directors who are designated nominees of PBL and Melco, appoint and change our management, affect our legal and capital structure and our day-to-day operations, approve material mergers,

 

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acquisitions, dispositions and other business combinations and approve any other material transactions and financings. These actions may be taken in many cases without the approval of independent directors or other shareholders and the interests of these shareholders may conflict with your interests as minority shareholders. If Melco or PBL provides shareholder support to us in the form of shareholder loans or provides credit support by guaranteeing our obligations, they may become our creditors with different interests than shareholders with only equity interests in us. The concentration of controlling ownership of our shares may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our ADSs.

On May 8, 2007, PBL announced its intention to separate into two Australian listed companies. The PBL separation is subject to shareholder and court approvals. On July 27, 2007, a variation deed was entered into to provide for the amendment and restatement of the shareholders deed between Melco and PBL in relation to us to contemplate the separation of PBL into separate listed gaming and media companies and the fact that PBL Asia Investments Limited (which holds PBL’s interest in MPEL) will, on completion of the PBL separation, become a wholly-owned subsidiary of Crown Limited, an entity which will be listed on the Australian Stock Exchange and which will own all of the gaming assets and investments currently owned by PBL. The effective date of the amended and restated shareholders’ deed will be such date on which the PBL separation takes effect.

Melco and PBL may pursue additional casino projects in Asia, which, along with their current operations, may compete with our projects in Macau and could divert management time and resources and have adverse consequences to us and the interests of our minority shareholders.

Melco and PBL may take action to construct and operate new gaming projects located in other countries in the Asian region, which, along with their current operations, may compete with our projects in Macau and could have adverse consequences to us and the interests of our minority shareholders. For example, another joint venture entity of Melco and PBL (in which we do not have any interest) participated in a consortium that submitted a bid for one of two licenses to operate casinos in Singapore in 2006. Although the consortium did not win such bid, Melco and PBL may seek other gaming projects in Asia through joint venture entities (in which we will not have any interest). We could face competition from these other gaming projects, including competition for management time and resources. We also face competition from regional competitors, which include PBL’s Crown Casino Melbourne and Burswood Casino in Australia. We expect to continue to receive significant support from both Melco and PBL in terms of their local experience, operating skills, international experience and high standards. Specifically, we have support arrangements with Melco and PBL under which they provide us administrative support and technical expertise in connection with the development of the City of Dreams and the Macau Peninsula projects and the operations of the Crown Macau and the Mocha Clubs businesses. In addition, PBL has seconded to our subsidiaries several of their key project development personnel to form our core interim project management team and intends to second additional management employees when our development projects are in operation. Should Melco or PBL decide to focus more attention on casino gaming projects located in other areas of Asia that may be expanding or commencing their gaming industries, or should economic conditions or other factors result in a significant decrease in gaming revenues and number of patrons in Macau, Melco or PBL may make strategic decisions to focus on their other projects rather than us, which could adversely affect our growth. We cannot guarantee you that Melco and PBL will make strategic and other decisions which do not adversely affect our business.

Business conducted through joint ventures involves certain risks.

We were initially formed as a 50/50 joint venture between Melco and PBL as their exclusive vehicle to carry on casino, gaming machines and casino hotel operations in Macau. We will not hold interests in any gaming and leisure related businesses and properties outside Macau. As a joint venture controlled by Melco and PBL, there are special risks associated with the possibility that Melco and PBL may: (1) have economic or business interests or goals that are inconsistent with ours or that are inconsistent with each other’s interests or

 

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goals, causing disagreement between them or between them and us which harms our business; (2) have operations and projects elsewhere in Asia that compete with our businesses in Macau and for available resources and management attention within the joint venture group; (3) take actions contrary to our policies or objectives; (4) be unable or unwilling to fulfill their obligations under the relevant joint venture or shareholders’ agreements; or (5) have financial difficulties. In addition, there is no assurance that the laws and regulations relating to foreign investment in Melco’s or PBL’s governing jurisdictions will not be altered in such a manner as to result in a material adverse effect on our business and operating results.

Changes in our share ownership, including a change of control or a change in the amounts or relative percentages of our shares owned by Melco and PBL, could result in our inability to draw loans or events of default under our indebtedness.

The City of Dreams Project Facility includes provisions under which we may be unable to meet the conditions to draw loans or may suffer an event of default upon the occurrence of a change of control with respect to MPBL Gaming, or a decline in the aggregate indirect holdings of MPBL Gaming shares by Melco and PBL below certain thresholds. These provisions are most restrictive during the time when our projects have not commenced commercial operation. Any occurrence of these events could be outside our control and could result in defaults and cross-defaults which cause the termination and acceleration of up to all of our credit facilities and potential enforcement of remedies by our lenders, which would have a material adverse effect on our financial condition and results of operations.

We are a holding company and our only material sources of cash are and are expected to be dividends, distributions and payments under shareholder loans from our subsidiaries.

We are a holding company with no material business operations of our own. Our only significant asset is the capital stock of our subsidiaries. We conduct virtually all of our business operations through our subsidiaries. Accordingly, our only material sources of cash are dividends, distributions and payments with respect to our ownership interests in or shareholder loans that we may make to our subsidiaries that are derived from the earnings and cash flow generated by our operating properties. Our subsidiaries might not generate sufficient earnings and cash flow to pay dividends, distributions or payments under shareholder loans in the future. In addition, our subsidiaries’ debt instruments and other agreements, including those that we have entered into in connection with the City of Dreams project, limit or prohibit, or are expected to limit or prohibit, certain payments of dividends, other distributions or payments under shareholder loans to us.

PBL’s investment in our company is subject to Australian regulatory review, and if Australian regulators were to find that we, PBL or Melco failed to comply with certain regulatory requirements and standards, then PBL may be required to withdraw from the joint venture.

PBL, through its wholly owned subsidiary, Crown Melbourne Limited, owns and operates the Crown Casino Melbourne in Australia. Crown Melbourne Limited holds a casino license issued under legislation in the State of Victoria, Australia. PBL, through its wholly owned subsidiary, Burswood Nominees Limited, owns and operates the Burswood Casino in Perth, Australia. Burswood Nominees Limited holds a casino gaming license issued under legislation in the State of Western Australia, Australia.

The Victorian Commission for Gambling Regulation, or VCGR, has power under the Casino Control Act 1991 (Vic) to undertake general investigations of a gaming licensee and to report its findings to the Minister for Gaming in Victoria. Section 28 of the Casino Control Act requires Crown Melbourne Limited to seek the approval of the VCGR for any person who is to become an “associate” of Crown Melbourne Limited. An “associate” is a person or entity who by shareholding or directorship or managerial position is able to exercise significant influence over the management of the casino. The VCGR must satisfy itself that the “associate” is a suitable person to be associated with the management of the casino. PBL has been approved by the VCGR as an “associate” of Crown Melbourne Limited. Section 28A requires the VCGR to monitor “associates” to ensure that

 

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they continue to be suitable to be associated with the holder of a casino license. To that end the VCGR may investigate any person or entity who has a business association with PBL to determine if the business associate is of good repute and of sound financial resources. If, as a result of such investigation, the VCGR determines that, by reason of its business association, PBL has ceased to be suitable as an “associate” of Crown Melbourne Limited, then the VCGR can direct PBL to cease the business association or can direct PBL to terminate its “association” with Crown Melbourne Limited.

Similar to the situation in Victoria, the Western Australian Gaming and Wagering Commission, or the WAGWC, has power under the Casino Control Act 1984 (WA) to undertake general investigations of the holder of the Burswood Nominees Limited license and to report its findings to the Minister for Gaming in Western Australia. If the WAGWC were to determine that Burswood Nominees Limited had ceased to be a suitable person to hold its license, the WAGWC has powers similar to those of to the VCGR to issue a “show cause” notice and then can either suspend or cancel the Burswood Nominees Limited license. The WAGWC has similar obligations to the VCGR to approve and monitor “close associates” of Burswood Nominees Limited. “Close associates” in the Western Australian Act has a substantially similar meaning to “associates” in the Victorian Act, although the Western Australian Act makes no specific reference to business associates of “close associates” in the same way as the Victorian Act. PBL has been approved as a “close associate” of Burswood Nominees Limited. If the WAGWC were to determine that PBL had ceased to be a suitable entity to be such a “close associate”, then the WAGWC could direct PBL to terminate its “close association” with Burswood Nominees Limited.

The VCGR and WAGWC announced in August 2006 that, following the completion of their investigations, they have no objections to PBL’s joint venture with Melco. However, we cannot assure you that any future investigation by the VCGR or WAGWC would not result in a direction to either terminate the business association between PBL and Melco or to terminate the association between PBL, on the one hand, and Crown Melbourne Limited or Burswood Nominees Limited, on the other hand. If actions by us or our subsidiaries or by Melco or PBL fail to comply with Australian regulatory requirements and standards, or if there are changes in Australian gaming laws and regulations or the interpretation or enforcement of such laws and regulations, PBL may be required to withdraw from its joint venture with Melco or limit its involvement in one or more aspects of our gaming operations, which could have a material adverse effect on our business, financial condition and results of operations. Withdrawal by PBL from its joint venture with Melco could cause the failure of conditions to drawing loans under our credit facilities or the occurrence of events of default under our credit facilities or as contemplated by our founders under their joint venture arrangement.

Risks Relating to the ADSs

The trading price of our ADSs has been volatile and may continue to be volatile regardless of our operating performance.

The trading price of our ADSs has been and may continue to be subject to wide fluctuations. During the period from December 19, 2006, the first day on which our ADSs were quoted on Nasdaq, until October 12, 2007, the trading prices of our ADSs ranged from US$10.10 to US$22.20 per ADS and the closing sale price on October 12, 2007 was US$18.45 per ADS. The market price for our ADSs may continue to be volatile and subject to wide fluctuations in response to factors including the following:

 

   

uncertainties or delays relating to the financing, completion and successful operation of our projects;

 

   

developments in the Macau market or other Asian gaming markets, including the announcement or completion of major new projects by our competitors;

 

   

regulatory developments affecting us or our competitors;

 

   

actual or anticipated fluctuations in our quarterly operating results;

 

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changes in financial estimates by securities research analysts;

 

   

changes in the economic performance or market valuations of other gaming and leisure industry companies;

 

   

addition or departure of our executive officers and key personnel;

 

   

fluctuations in the exchange rates between the U.S. dollar, Hong Kong dollar, Pataca and Renminbi;

 

   

release or expiry of lock-up or other transfer restrictions on our outstanding ordinary shares or ADSs; and

 

   

sales or perceived sales of additional ordinary shares or ADSs.

In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also have a material adverse effect on the market price of our ADSs.

We currently do not intend to pay dividends, and we cannot assure you that we will make dividend payments in the future.

We may pay dividends to shareholders in the future; however, such payments will depend upon a number of factors, including our results of operations, earnings, capital requirements and surplus, general financial conditions, contractual restrictions and other factors considered relevant by our board of directors. We currently intend to retain all of our earnings to finance the development and expansion of our business. Accordingly, we do not intend to declare or pay cash dividends on our ordinary shares in the near to medium term. Except as permitted under the Companies Law and the common law of the Cayman Islands, we are not permitted to distribute dividends unless we have a profit, realized or unrealized, or a reserve set aside from profits which the directors of our company determine is no longer needed. We currently have no reserve set aside from profits for the payment of dividends. We cannot assure you that we will make any dividend payments on our ordinary shares in the future. Our ability to pay dividends, and our subsidiaries’ ability to pay dividends to us, may be further subject to restrictive covenants contained in the City of Dreams Project Facility, and in other facility agreements governing indebtedness we and our subsidiaries may incur. For a description of our loan facilities, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financing activities”.

Substantial future sales or perceived sales of our ADSs in the public market could cause the price of our ADSs to decline.

Sales of our ADSs or ordinary shares in the public market after this offering, or the perception that these sales could occur, could cause the market price of our ADSs to decline. Upon completion of this offering, we will have [·] ordinary shares outstanding, including [·] ordinary shares represented by [·] ADSs. All ADSs sold in this offering will be freely transferable without restriction or additional registration under the Securities Act. All of the ordinary shares beneficially held by Melco and PBL are available for sale, subject to volume and other restrictions, as applicable, under Rule 144 and Rule 701 under the Securities Act and subject to the terms of their shareholders’ deed. To the extent these shares are sold into the market, the market price of our ADSs could decline.

In July 2007 Melco and PBL, acting through a 50/50 special purpose vehicle, Melco PBL SPV Limited, offered an aggregate of US$250 million of exchangeable bonds due 2012. Under the terms of these exchangeable bonds, bond holders have the right, among other things, to exchange their bonds into ADSs during the period July 2008 through July 2012 at an initial exchange price of US$17.19 per ADS, subject to adjustment in certain

 

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circumstances. We are required to file a registration statement and have it declared effective by January 15, 2008 and keep such registration statement effective in connection with the exchange of such bonds to ADSs. To the extent that the holders of these bonds exchange them for ADSs, and sell those ADSs into the market, the market price of our ADSs could decline.

In addition, Melco and PBL have the right to cause us to register the sale of their shares under the Securities Act, subject to the terms of their shareholders’ deed, as do the holders of exchangeable bonds issued by Melco PBL SPV, Limited. Registration of these shares under the Securities Act would result in these shares becoming freely tradable as ADSs without restriction under the Securities Act immediately upon the effectiveness of the registration. Sales of these registered shares in the public market could cause the price of our ADSs to decline.

Holders of ADSs have fewer rights than shareholders and must act through the depositary to exercise those rights.

Holders of ADSs do not have the same rights of our shareholders and may only exercise the voting rights with respect to the underlying ordinary shares of the depositary and in accordance with the provisions of the deposit agreement. Under our amended and restated articles of association, the minimum notice period required to convene a general meeting is seven days. When a general meeting is convened, you may not receive sufficient notice of a shareholders’ meeting to permit you to withdraw your ordinary shares to allow you to cast your vote with respect to any specific matter. In addition, the depositary and its agents may not be able to send voting instructions to you or carry out your voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your ADSs. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if your ADSs are not voted as you requested. In addition, in your capacity as an ADS holder, you will not be able to call a shareholder meeting.

You may be subject to limitations on transfers of your ADSs.

Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deem it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings and you may not receive cash dividends if it is unlawful or impractical to make them available to you.

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights available to you in the United States unless we register the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. Also, under the deposit agreement, the depositary bank will not make rights available to you unless the distribution to ADS holders of both the rights and any related securities are either registered under the Securities Act, or exempted from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings.

In addition, the depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our ordinary shares or other deposited securities after deducting its fees and

 

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expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary may, at its discretion, decide that it is unlawful, inequitable or impractical to make a distribution available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property and you will not receive such distribution.

We are a Cayman Islands company and, because judicial precedent regarding the rights of shareholders is more limited under Cayman Islands law than that under U.S. law, you may have less protection for your shareholder rights than you would under U.S. law.

Our corporate affairs are governed by our amended and restated memorandum and articles of association, the Cayman Islands Companies Law (as amended) and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as that from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. In addition, some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands.

As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as shareholders of a U.S. public company.

You may have difficulty enforcing judgments obtained against us.

We are a Cayman Islands company and substantially all of our assets are located outside of the United States. All of our current operations, administrations and corporate functions are conducted in Macau and Hong Kong. In addition, substantially all of our directors and officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons are located outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon these persons. It may also be difficult for you to enforce in Cayman Islands, Macau and Hong Kong courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, most of whom are not residents in the United States and the substantial majority of whose assets are located outside of the United States. In addition, there is uncertainty as to whether the courts of the Cayman Islands, Macau or Hong Kong would recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state. In addition, it is uncertain whether such Cayman Islands, Macau or Hong Kong courts would be competent to hear original actions brought in the Cayman Islands, Macau or Hong Kong against us or such persons predicated upon the securities laws of the United States or any state. See “Enforceability of Civil Liabilities.”

We may be treated as a passive foreign investment company, which could result in adverse United States federal income tax consequences to U.S. Holders.

We believe that we were not in 2006, and we do not currently expect to be in 2007, a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes. However, because this determination is made annually at the end of each taxable year and is dependent upon a number of factors, some of which are beyond our control, including the value of our assets and the amount and type of our income, there can be no assurance that we will not become a PFIC or that the Internal Revenue Service will agree with our conclusion

 

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regarding our PFIC status. If we are a PFIC in any year, U.S. Holders of the ADSs or ordinary shares could suffer certain adverse United States federal income tax consequences. See “Taxation—United States Federal Income Taxation—Passive Foreign Investment Company.”

In the course of preparing our consolidated financial statements for the year ended December 31, 2006, several deficiencies in our internal control over financial reporting were noted. If we fail to maintain an effective system of internal control over financial reporting, our ability to accurately and timely report our financial results or prevent fraud may be adversely affected. As a result, investor confidence and the trading price of our ADSs may be adversely impacted.

In December 2006, we completed our initial public offering and became a public company in the United States and are subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, will require that we include a report of management on our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2007. In addition, our independent registered public accounting firm must report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may still issue a report that is qualified if it is not satisfied with our internal control or the level at which our control is documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. Our reporting obligations as a public company may place a significant strain on our management, operational and financial resources and systems for the foreseeable future.

Prior to our initial public offering in December 2006, we were a private company with limited resources with which to address our internal controls and procedures. Our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting; however, in connection with the audit of our consolidated financial statements for the year ended December 31, 2006, our independent registered public accounting firm identified four significant deficiencies in our internal control over financial reporting, as defined in the standards established by the Public Company Accounting Oversight Board (United States).

The significant deficiencies identified related to (i) our inadequate accounting resources with a good understanding of US GAAP and SEC reporting requirements, (ii) our failure to set up a formal policy to effectively address our obligations under the Foreign Corrupt Practices Act (“FCPA”), (iii) our failure to establish detailed financial closing and reporting policies and procedures, and (iv) our reliance on certain manual processes to prepare accounting records and information. We have implemented a number of measures to address the deficiencies that have been identified, including: (i) hiring additional accounting personnel with US GAAP and SEC reporting expertise, (ii) launching a FCPA compliance program, (iii) initiating formal monthly reporting procedures, and (iv) implementing additional month end control procedures. We are working to implement and update measures to ensure internal control compliance, although we cannot assure you that we will be able to achieve this.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains many forward-looking statements that reflect our current expectations and views of future events. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Our Business.” Known and unknown risks, uncertainties and other factors may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. See “Risk Factors” for a discussion of some risk factors that may affect our business and results of operations. These risks are not exhaustive. Other sections of this prospectus may include additional factors that could adversely impact our business and financial performance. Moreover, because we operate in a heavily regulated and evolving industry, will be highly leveraged, and will be operating in Macau, a market that is experiencing extremely rapid growth and intense competition, new risk factors may emerge from time to time. It is not possible for our management to predict all risk factors, nor can we assess the impact of these factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those expressed or implied in any forward-looking statement.

In some cases, forward-looking statements can be identified by words or phrases such as “may,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “potential,” “continue,” “is/are likely to” or other similar expressions. We have based the forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, among other things, statements relating to:

 

   

growth of the gaming market and visitation in Macau;

 

   

the completion of the construction of our City of Dreams project;

 

   

the formal grant of a land concession for the City of Dreams site on terms that are acceptable to us;

 

   

obtaining approval from the Macau government for an increase in the developable gross floor area of the City of Dreams site;

 

   

the formal grant of an occupancy permit for the City of Dreams;

 

   

our acquisition and development of the Macau Peninsula site;

 

   

the development of Macau Studio City;

 

   

construction cost budgets for our development projects;

 

   

increased competition and other planned casino hotel and resort projects in Macau and elsewhere in Asia, including in Macau from SJM, Venetian Macau, Wynn Macau, Galaxy and MGM Grand Paradise Limited, a joint venture between MGM-Mirage and Ms. Pansy Ho;

 

   

the completion of infrastructure projects in Macau;

 

   

government regulation of the casino industry, including gaming license approvals and the legalization of gaming in other jurisdictions;

 

   

our ability to raise additional financing;

 

   

the uncertainty of tourist behavior related to spending and vacationing at casino resorts in Macau;

 

   

our entering into new development and construction and new ventures;

 

   

the liberalization of travel restrictions and convertibility of the Renminbi by China;

 

   

fluctuations in occupancy rates and average daily room rates in Macau;

 

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our anticipated growth strategies; and

 

   

our future business development, results of operations and financial condition.

The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this prospectus and the documents that we referenced in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

 

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USE OF PROCEEDS

We will receive net proceeds from this offering of approximately US$[·] million, after deducting estimated underwriting discounts, commissions and estimated offering expenses payable by us.

We intend to use the net proceeds from this offering for any of the following:

 

   

project costs related to the apartment hotel complex at City of Dreams;

 

   

funding to our subsidiaries in relation to their development projects and operations, which may include a partial funding of the development and construction of the Macau Peninsula project; and

 

   

any other general corporate and working capital requirements.

We have not yet determined all of our anticipated expenditures and therefore cannot estimate the amounts to be used for each of the purposes discussed above. The amounts and timing of our expenditures will vary depending on the amount of cash generated by our operations, the rate of progress in our development activities for City of Dreams, and the acquisition and development of the Macau Peninsula site. Accordingly, our management will have significant discretion in the allocation of the net proceeds we will receive in this offering. Pending their use, we intend to place our net proceeds in short-term bank deposits or other liquid investments.

 

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MARKET PRICE INFORMATION FOR OUR ADSs

Our ADSs, each representing three ordinary shares, have been quoted on the Nasdaq Global Market since December 19, 2006. Our ADSs trade under the symbol “MPEL”. For the period from December 19, 2006 to October 12, 2007, the trading price of our ADSs on the Nasdaq Global Market has ranged from US$10.10 to US$22.20 per ADS. The following table provides the monthly high and low closing price for our ADSs on the Nasdaq Global Market for each of the eleven months since December 2006.

 

     Closing Price
         High            Low    
     US$    US$

2006

     

December (Since December 19)

   21.55    19.51

2007

     

January

   22.20    19.19

February

   20.42    16.60

March

   16.91    14.57

April

   19.07    16.00

May

   18.48    13.59

June

   14.00    11.55

July

   13.92    12.14

August

   13.75    10.10

September

   16.93    13.03

October (through October 12)

   18.92    17.77

 

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CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2007:

 

   

on an actual basis; and

 

   

as adjusted to reflect the issuance and sale of the ordinary shares in the form of ADSs offered hereby, in each case after deducting underwriting discounts, commissions and estimated offering expenses payable by us.

You should read this table together with our consolidated financial statements and the related notes included elsewhere in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

 

     As of June 30, 2007
     Actual     As Adjusted
     (in thousands of US$,
except for share numbers)
(unaudited)

Indebtedness

    

City of Dreams Project Facility(1)

   —       —  

Shareholder loans(2)

   115,892     115,892

Shareholders’ equity:

    

Ordinary shares,
US$0.01 each, 1,500 million shares authorized:

    

1,208 million shares issued and outstanding (actual); · million shares issued and outstanding (as adjusted)

   12,080    

Additional paid-in capital(3)

   2,118,865    

Accumulated other comprehensive loss

   (4,402 )  

Accumulated losses

   (173,975 )  
          

Total shareholders’ equity(3)

   1,952,568    
          

Total capitalization(3)

   2,068,460    
          

(1)   On September 5, 2007, MPBL Gaming entered into the US$1.75 billion City of Dreams Project Facility with certain lenders to finance primarily the development costs and construction of City of Dreams, of which the Hong Kong dollar equivalent of US$500 million has been drawn down as of the date of this prospectus. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
(2)   Pursuant to agreements entered into in March 2007 between us and each of Melco and PBL, the shareholder loans advanced by each of them to us were converted into term loans. In September 2007, the final maturity date of these term loans was extended from May 15, 2008 to May 15, 2009.
(3)   A US$1.00 increase (decrease) in the assumed offering price of US$· per ADS, would increase (decrease) each of additional paid-in capital, total shareholders’ equity and total capitalization by US$· million, assuming no change in the number of ADSs sold by us as set forth on the cover page of this prospectus and without deducting underwriting discounts and commissions and other offering expenses.

 

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DILUTION

If you invest in our ADSs, your interest will be diluted to the extent of the difference between the offering price per ADS and our net tangible book value per ADS after this offering. Dilution results from the fact that the offering price per ADS is substantially in excess of the book value per ADS attributable to the existing holders of our ADSs.

Our net tangible book value as of June 30, 2007 was approximately US$· million, or US$· per ADS. Net tangible book value represents the amount of our total consolidated tangible assets, minus the amount of our total consolidated liabilities. Without taking into account any other changes in such net tangible book value after June 30, 2007, other than to give effect to our sale of the ADSs offered in this offering at the assumed offering price of US$· per ADS, and after deduction of the underwriting discounts and commissions and estimated offering expenses of this offering payable by us, our adjusted net tangible book value as of June 30, 2007 would have increased to US$· million or US$· per ADS. This represents an immediate increase in net tangible book value of US$· per ADS, to the existing shareholder and an immediate dilution in net tangible book value of US$· per ADS, to investors purchasing ADSs in this offering. The following table illustrates such per ADS dilution:

 

Assumed offering price per ADS

   US$ ·

Net tangible book value per ADS as of June 30, 2007

   US$ ·

Increase in net tangible book value per ADS attributable to this offering

   US$ ·

Pro forma net tangible book value per ADS after giving effect to this offering

   US$ ·

Amount of dilution in net tangible book value per ADS to new investors in this offering

   US$ ·

A US$1.00 increase (decrease) in the assumed offering price of US$· per ADS would increase (decrease) our pro forma net tangible book value after giving effect to the offering by US$· million, the pro forma net tangible book value per ADS after giving effect to this offering by US$· per ADS and the dilution pro forma net tangible book value per ADS to new investors in this offering by US$· per ADS, assuming no charge to the number of ADSs offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and other offering expenses. The pro forma information discussed above is illustrative only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual offering price of our ADSs and other terms of this offering determined at pricing.

The following table summarizes, on a pro forma basis as of June 30, 2007, the differences between existing shareholders and the new investors with respect to the number of ordinary shares (in the form of ADSs or shares) purchased from us, the total consideration paid and the average price per ordinary share/ADS paid before deducting the underwriting discounts and commissions and estimated offering expenses. The total number of ordinary shares does not include ordinary shares underlying the ADSs issuable upon the exercise of the over-allotment option granted to the underwriters.

 

     Ordinary Shares
Purchased
    Total
Consideration
    Average
Price
Per
ADS
   Average
price per
Ordinary
Share
     Number    Percent     Amount    Percent       
     (in thousand of US$)

Existing shareholders

   ·    · %   US$ ·    · %   US$ ·    US$ ·

New investors

   ·    · %   US$ ·    · %   US$ ·    US$ ·

Total

   ·    · %   US$ ·    · %   US$ ·    US$ ·

 

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DIVIDEND POLICY

We have never declared or paid any dividends, nor do we have any present plan to pay any cash dividends on our ordinary shares in the near to medium term. We currently intend to retain most, if not all, of our available funds and any future earnings to finance the construction and development of our projects, to pay debt service and to operate and expand our business.

Our board of directors has complete discretion on whether to pay dividends, subject to the approval of our shareholders. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. If we pay any dividends, we will pay our ADS holders to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Description of American Depositary Shares.” Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.

The debt facilities of our subsidiaries contain, and debt facilities we expect to enter into in the future are also expected to contain, restrictions on payment of dividends to us, which is expected to affect our ability to pay dividends in the foreseeable future. See “Risk Factors—Risks Relating to the ADSs—We currently do not intend to pay dividends, and we cannot assure you that we will make dividend payments in the future.”

 

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EXCHANGE RATE INFORMATION

Although we will have certain expenses and revenues denominated in Patacas, our revenues and expenses will be denominated predominantly in Hong Kong dollars and in connection with a significant portion of our indebtedness and certain expenses, U.S. dollars. Periodic reports made to shareholders will be expressed in U.S. dollars using the then current exchange rates. The conversion of Hong Kong dollars into U.S. dollars in this prospectus is based on the noon buying rate in The City of New York for cable transfers of Hong Kong dollars as certified for customs purposes by the Federal Reserve Bank of New York. Unless otherwise noted, all translations from Hong Kong dollars to U.S. dollars and from U.S. dollars to Hong Kong dollars in this prospectus were made at a rate of HK$7.80 to US$1.00. The noon buying rate in effect as of October 12, 2007 was HK$7.7535 to US$1.00. We make no representation that any Hong Kong dollars or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Hong Kong dollars, as the case may be, at any particular rate, the rates stated below, or at all. On June 29, 2007, the noon buying rate was HK$7.8184 to US$1.00.

The Hong Kong dollar is freely convertible into other currencies (including the U.S. dollar). Since October 7, 1983, the Hong Kong dollar has been officially linked to the U.S. dollar at the rate of HK$7.80 to US$1.00. The link is supported by an agreement between Hong Kong’s three bank note-issuing banks and the Hong Kong government pursuant to which bank notes issued by such banks are backed by certificates of indebtedness purchased by such banks from the Hong Kong Government Exchange Fund with U.S. dollars at the fixed exchange rate of HK$7.80 to US$1.00 and held as cover for the bank notes issue. When bank notes are withdrawn from circulation, the issuing bank surrenders certificates of indebtedness to the Hong Kong Government Exchange Fund and is paid the equivalent amount in U.S. dollars at the fixed rate of exchange. Hong Kong’s three bank note-issuing banks are The Hongkong and Shanghai Banking Corporation Limited, Standard Chartered Bank and Bank of China (Hong Kong) Limited.

In May 2005, the Hong Kong Monetary Authority broadened the link from the original rate of HK$7.80 per US$1.00 to a rate range of HK$7.75 to HK$7.85 per US$1.00. No assurance can be given that the Hong Kong government will maintain the link at HK$7.75 to HK$7.85 per US$1.00 or at all.

The following table sets forth the noon buying rate for U.S. dollars in The City of New York for cable transfers in Hong Kong dollars as certified for customs purposes by the Federal Reserve Bank of New York.

 

     Noon Buying Rate

Period

   Period End    Average(1)    Low    High
     (Hong Kong dollar per US$1.00)

2002

   7.7988    7.7996    7.8095    7.7970

2003

   7.7640    7.7864    7.8001    7.7085

2004

   7.7757    7.7899    7.8010    7.7632

2005

   7.7533    7.7755    7.7999    7.7514

2006

   7.7771    7.7685    7.7928    7.7506

2007

           

May

   7.8087    7.8187    7.8236    7.8044

June

   7.8184    7.8142    7.8188    7.8062

July

   7.8264    7.8197    7.8264    7.8129

August

   7.7968    7.8155    7.8289    7.7968

September

   7.7689    7.7816    7.7947    7.7591

October (through October 12)

   7.7535    7.7590    7.7535    7.7694

(1)   Annual averages are calculated from month-end rates. Monthly averages are calculated using the average of the daily rates during the relevant period.

The Pataca is pegged to the Hong Kong dollar at a rate of HK$1.00 = MOP 1.03. All translations from Patacas to U.S. dollars were made at the exchange rate of MOP 8.034 = US$1.00. The Federal Reserve Bank of New York does not certify for custom purposes a noon buying rate for cable transfers in Patacas.

 

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ENFORCEABILITY OF CIVIL LIABILITIES

We are incorporated in the Cayman Islands to take advantage of certain benefits associated with being a Cayman Islands exempted company, such as:

 

   

political and economic stability;

 

   

an effective judicial system;

 

   

a favorable tax system;

 

   

the absence of exchange control or currency restrictions; and

 

   

the availability of professional and support services.

However, certain disadvantages accompany incorporation in the Cayman Islands. These disadvantages include:

 

   

the Cayman Islands has a less developed body of securities laws as compared to the United States and provides significantly less protection to investors; and

 

   

Cayman Islands companies do not have standing to sue before the federal courts of the United States.

Our constituent documents do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders, be arbitrated.

Substantially all of our current operations are conducted in Macau and Hong Kong, and substantially all of our assets are located in Macau. A majority of our directors and officers are nationals or residents of jurisdictions other than the United States and a substantial portion of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon us or such persons, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.

We have appointed CT Corporation System as our agent to receive service of process with respect to any action brought against us in the United States District Court for the Southern District of New York under the federal securities laws of the United States or of any state in the United States or any action brought against us in the Supreme Court of the State of New York in the County of New York under the securities laws of the State of New York.

Walkers, our counsel as to Cayman Islands law, and Manuela António Law Office, our counsel as to Macau law, have advised us, respectively, that there is uncertainty as to whether the courts of the Cayman Islands and Macau, respectively, would:

 

   

recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or

 

   

entertain original actions brought in each respective jurisdiction against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.

Walkers has further advised us that a judgment obtained in a foreign court will be recognised and enforced in the courts of the Cayman Islands without any re-examination of the merits (a) at common law, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, where the judgment is final and in respect of which the foreign court had jurisdiction over the defendant according to Cayman Islands conflict of law rules and which is conclusive, for a liquidated sum not in respect of penalties or taxes or a fine or similar fiscal or revenue obligations, and which was neither obtained in a manner, nor is of a kind enforcement of which is contrary to natural justice or the public policy of the Cayman Islands or (b) by statute, by registration in the Grand Court of the Cayman Islands.

 

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Manuela António Law Office has advised further that a final and conclusive monetary judgment for a definite sum obtained in a federal or state court in the United States would be treated by the courts of Macau as a cause of action in itself so that no retrial of the issues would be necessary, provided that: (1) such court had jurisdiction in the matter and the defendant either submitted to such jurisdiction or was resident or carrying on business within such jurisdiction and was duly served with process; (2) due process was observed by such court, with equal treatment given to both parties to the action, and the defendant had the opportunity to submit a defense; (3) the judgment given by such court was not in respect of penalties, taxes, fines or similar fiscal or tax revenue obligations; (4) in obtaining judgment there was no fraud on the part of the person in whose favor judgment was given or on the part of the court; (5) recognition or enforcement of the judgment in Macau would not be contrary to public policy; (6) the proceedings pursuant to which judgment was obtained were not contrary to natural justice; and (7) any interest charged to the defendant does not exceed three times the official interest rate, which is currently 9.75% per annum, over the outstanding payment (whether of principal, interest fees or other amounts) due.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following selected historical consolidated statement of operations data for the period from January 1, 2004 to June 8, 2004 (predecessor), the period from June 9, 2004 to December 31, 2004 (successor), and the years ended December 31, 2005 and 2006, and the selected historical consolidated balance sheet data as of December 31, 2005 and 2006 have been derived from our audited financial statements included elsewhere in this prospectus. The selected historical consolidated balance sheet data as of December 31, 2004 have been derived from our audited financial statements not included in this prospectus. The following selected consolidated statement of operations data for the six months ended June 30, 2006 and 2007 and the summary consolidated balance sheet data as of June 30, 2007 have been derived from our unaudited financial statements prepared in accordance with U.S. GAAP included elsewhere in this prospectus. We have prepared the unaudited information on the same basis as the audited consolidated financial statements, and have included, in our opinion, all adjustments, consisting only of normal and recurring adjustments that we consider necessary for a fair presentation of the financial information set forth in those statements. The selected historical consolidated statement of operations data for the period from March 20, 2003 (predecessor’s inception) to December 31, 2003, and the selected historical consolidated balance sheet data as of December 31, 2003, have been derived from the company’s unaudited consolidated financial statements not included in this prospectus. You should read the selected historical consolidated financial data in conjunction with those financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our historical consolidated financial statements are prepared and presented in accordance with U.S. GAAP. Our historical results do not necessarily indicate our results expected for any future periods.

From June 9, 2004 for Mocha, July 20, 2004 for MPBL COD Developments and November 9, 2004 for MPBL Crown Macau Developments through March 7, 2005, the financial statements reflect the consolidated financial statements of Mocha, MPBL COD Developments and MPBL Crown Macau Developments because they were under common control for this period. The contributions by Melco of its 80% interest in Mocha, 70% interest in MPBL Crown Macau Developments and 50.8% interest in the City of Dreams project to MPBL (Greater China), a company 80% indirectly owned by us and 20% owned by Melco, and cash contributions by PBL of US$163 million, which were completed on March 8, 2005, were accounted for as the formation of a joint venture for which a carryover basis of accounting has been adopted.

The consolidated financial statements of Mocha for the period from January 1, 2004 to June 8, 2004 have been prepared for the purpose of presenting the financial information of our predecessor. Mocha is considered as our predecessor because we succeeded to substantially all of the business of Mocha and our own operations prior to the succession were insignificant relative to the operations assumed or acquired.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

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    For the period
from March 20,
2003 (date of
incorporation) to
December 31, 2003
(predecessor)
    For the
period from
January 1,
2004 to
June 8, 2004
(predecessor)
   

For the period
from June 9,
2004

to December 31,
2004

(successor)

    For the year
ended
December 31,
2005
(successor)
    For the year
ended
December 31,
2006
(successor)
   

For the

six months
ended

June 30,

2006
(successor)

   

For the

six months

ended

June 30,

2007

(successor)

 
    (in thousands of US$, except share and per share data and operating data)  

Consolidated statement of operations data:

             

Revenues

  611     1,896     6,071     17,328     36,101     10,944     65,439  

Total operating costs and expenses

  (461 )   (1,286 )   (7,001 )   (21,050 )   (93,754 )   (28,209 )   (177,879 )
                                         

Operating income (loss)

  150     610     (930 )   (3,722 )   (57,653 )   (17,265 )   (112,440 )

Non-operating income (expenses):

             

—Interest income

  —       —       —       2,516     816     315     11,617  

—Interest expenses

  (10 )   (97 )   (217 )   (2,028 )   (11,184 )   (940 )   (1 )

—Written off of deferred financing costs

  —       —       —       —       (12,698 )   —       —    

—Foreign exchange gain (loss), net

  4     5     32     (570 )   55     119     2,508  

—Other, net

  21     2     54     146     285     130     147  
                                         

Income (loss) before income tax

  165     520     (1,061 )   (3,658 )   (80,379 )   (17,641 )   (98,169 )

Income tax (expense) credit

  (28 )   (26 )   (37 )   91     1,885     1,579     1,760  
                                         

Income (loss) before minority interest

  137     494     (1,098 )   (3,567 )   (78,494 )   (16,062 )   (96,409 )

Minority interests

  —       —       91     308     5,015     3,273     —    
                                         

Net income (loss)

  137     494     (1,007 )   (3,259 )   (73,479 )   (12,789 )   (96,409 )
                                         

Loss per share

             

—Ordinary

  *     *     (0.002 )   (0.006 )   (0.116 )   (0.026 )   (0.080 )
                                 

—ADS(1)

  *     *     (0.005 )   (0.019 )   (0.348 )   (0.077 )   (0.240 )
                                 

Shares used in calculating loss per share

             

—Basic

  *     *     625,000,000     522,945,205     633,228,439     500,000,000     1,206,995,096  
                                 

*   Figures not provided as the number of shares of our predecessor Mocha and our company are not directly comparable.
(1)   Each ADS represents three ordinary shares.

 

    December 31,   As of June 30,
    2003
(predecessor)
  2004
(successor)
  2005
(successor)
  2006
(successor)
  2007
(successor)
    (in thousands of US$, except share and per share data)

Balance Sheet Data:

         

Current Assets:

         

Cash and cash equivalents

  386   5,537   19,769   583,996   275,147

Accounts receivable

  5   45   37   414   33,042

Amounts due from affiliated companies

  217   1,085   1,398   152   152

Inventories

  —     15   87   196   1,877

Prepaid expenses and other current assets

  7   94   641   1,790   8,179

Total current assets

  615   6,776   21,932   586,548   318,397

Property and equipment, net

  1,332   10,613   67,794   279,885   661,624

Gaming subconcession, net

  —     —     —     885,691   854,875

Intangible assets, net

  —     12,118   11,089   4,220   4,209

Goodwill

  —     34,417   34,417   81,915   81,705

Other assets

  —     —     150,641   —     —  

Deposit for acquisition of land interest

  —     —     —     12,853   12,821

Land use right, net

  —     40,493   132,424   423,066   413,506

Deferred financing costs

  —     —     —     —     5,468

Total assets

  2,113   106,112   421,208   2,279,920   2,362,617

Total current liabilities

  1,863   17,524   138,741   207,613   350,417

Total liabilities

  1,976   23,845   163,024   389,554   410,049

Minority Interests

  —     35   19,492   —     —  

Total shareholders’ equity

  137   82,232   238,692   1,890,366   1,952,568

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section entitled “Selected Historical Consolidated Financial Data” and the historical consolidated financial statements of our company for the period from June 9, 2004 to December 31, 2004, the years ended December 31, 2005 and 2006, and the six months ended June 30, 2006 and 2007 and the historical predecessor financial statements of Mocha for the period from January 1, 2004 to June 8, 2004, and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of relevant events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

Our audited historical consolidated financial statements and audited historical financial statements of Mocha have been prepared in accordance with U.S. GAAP.

Overview

We are a holding company that, through our subsidiaries, develops, owns and operates casino gaming and entertainment resort facilities focused exclusively on the Macau market. We are a holding company of the following principal operating subsidiaries: MPBL Gaming, which is the holder of a gaming subconcession in Macau; MPBL Crown Macau Developments; MPBL Hotel Crown Macau, MPBL COD Developments, MPBL COD Hotels, and MPBL Macau Peninsula Developments. MPBL Crown Macau Developments, developed the Crown Macau, and MPBL Hotel Crown Macau has operated the property since it opened on May 12, 2007. MPBL COD Developments (formerly known as Melco Hotels and Resorts (Macau) Limited), our subsidiary that is developing the City of Dreams, has had no significant operations to date as the City of Dreams project is still under development and construction. In addition, other than entering into a conditional agreement to acquire a third development site on the Macau peninsula (the completion of which remains subject to significant conditions in the control of third parties unrelated to us and the seller of the site), Macau Peninsula Developments has had no operations to date. The Mocha Clubs, which are now held by MPBL Gaming and were previously held by our subsidiary Mocha, have had a limited operating history. Our future operating results are subject to significant business, economic, regulatory and competitive uncertainties and risks, many of which are beyond our control. See “Risk Factors—Risks Relating to Our Early Stage of Development.”

Existing operations

The Mocha Clubs have grown rapidly since the inception of Mocha in March 2003 and MPBL Gaming currently operates seven Mocha Clubs in Macau with an aggregate of approximately 1,100 gaming machines in operation. In 2006, we generated revenue of US$36.1 million, substantially all of which was from the Mocha Clubs operations. In the six months ended June 30, 2007, the Mocha Clubs generated gaming revenue of US$39.5 million, representing 60.4% of net revenue. The Mocha Clubs achieved an average daily net win per gaming machine of HK$1,632 (approximately US$210) for 2006 and HK$1,732 (approximately US$222) for the six months ended June 30, 2007, without taking into account deductions such as gaming taxes and shares of revenues retained by SJM under Mocha Slot’s previous services agreements with SJM, pursuant to which until September 21, 2006 Mocha Slot previously received only service fees of 31% of gaming machine win.

Mocha became our subsidiary in March 2005, when Melco transferred to us its 80% interest in Mocha as part of the formation of its joint venture with PBL. In connection with forming the joint venture between Melco and PBL in March 2005 and in exchange for its ownership interest in us, Melco contributed to MPBL (Greater China), our 80% owned subsidiary (in which Melco held the remaining 20% interest), an 80% interest in Mocha, a 50.8% interest in the City of Dreams project, and a 70% interest in MPBL Crown Macau Developments. The 80%

 

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interest of Mocha was valued at HK$359.7 million (US$46.1 million), based on the average market price of Melco shares as of two days before and after the announcement date of acquisition by Melco. In May 2006, we purchased the remaining 20% of Mocha from Dr. Stanley Ho for HK$250 million (US$32.1 million) and repaid in full a HK$45.7 million (US$5.9 million) shareholder loan from Dr. Stanley Ho. In October 2006, we reorganized our corporate structure after MPBL Gaming obtained the subconcession, the Macau government approved its transfer to us and the business operations and assets of Mocha were transferred to MPBL Gaming.

Crown Macau held its grand opening on May 12, 2007 and only became fully operational in July 2007. For the 50 days the property was open during the second quarter of 2007, net revenue at Crown Macau totaled US$25.9 million. Total non-gaming revenue from Crown Macau in the 50 days of partial operations of its facilities was US$1.7 million.

Development Projects

 

   

City of Dreams. We began site preparation of City of Dreams in the first quarter of 2006 and we currently target to open the initial phase of the complex before the end of March 2009. This first phase is expected to include substantial completion of the casino, retail space and two hotels, which are expected to be operated under the Crown Towers and Hard Rock brands. The first phase of the complex is currently targeted to open before the end of March 2009. This first phase is expected to include substantial completion of the casino, food and beverage outlets and two hotels, which are expected to be operated under the Crown Towers and Hard Rock brands. The purpose-built wet stage performance theatre is scheduled for completion by the end of March 2009 with opening night expected before year-end 2009, following four to six months of rehearsals. The twin-tower hotel under the Grand Hyatt brand with approximately 1,000 rooms and suites is scheduled to open in September 2009. The approximately 800-unit apartment hotel complex integrated within the City of Dreams footprint is expected to be completed by December 2009 and to be marketed in advance of project completion, subject to compliance with legal and regulatory provisions. We plan to finance the construction of the apartment hotel complex separately from the rest of the City of Dreams project, including with a portion of the proceeds from this offering. The budgeted cost of the City of Dreams project, including the casino, the Hard Rock hotel, the Crown Towers hotel, the Grand Hyatt twin-tower hotel, the purpose-built wet stage performance theatre, retail space together with food and beverage outlets is approximately US$2.1 billion, consisting primarily of construction costs, design and consultation fees, and excluding the cost of land. The additional budgeted cost of the apartment hotel complex planned for development at the City of Dreams is approximately US$330 million, excluding the cost of land. Approximately US$1.75 billion of the total cost of the City of Dreams is to be financed by the City of Dreams Project Facility, and the apartment hotel complex is expected to be financed from the proceeds of this offering.

 

   

Macau Peninsula Site. In May 2006, we entered into a conditional agreement to acquire a third development site, which is located on the shoreline of the Macau peninsula near the current Macau Ferry Terminal, or Macau Peninsula site. The Macau Peninsula site is approximately 6,480 square meters (approximately 1.6 acres) and the acquisition price is HK$1.5 billion (US$192.8 million), of which we have paid a deposit of HK$100 million (US$12.9 million). We expect to pay a land premium of approximately HK$205 million (US$26.3 million) to the Macau government for this site. The agreement completion deadline was first extended in January 2007 and again in July 2007 when we negotiated an extension to the conditional agreement in order to benefit from the additional flexibility in the timing of the purchase through July 2008, which is subject to various closing conditions. Other than the extension of the purchase completion deadline, all other provisions of the agreement remain in force, and there were no fees associated with the extension. Completion of the purchase remains subject to (i) significant conditions in the control of third parties unrelated to us and the seller of the property, and (ii) the approval of the Macau government. We are currently considering plans to develop the Macau Peninsula site into a mixed-use hotel, serviced apartment and casino facility aimed primarily at day-trip gaming patrons. If we acquire the site, we are targeting the middle of 2010 as our opening date. Based on preliminary estimates and conceptual designs, we have currently budgeted approximately US$750

 

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million for the total project costs of the Macau Peninsula project consisting primarily of land and construction costs, land premium costs, design and consultation fees.

Factors Affecting Our Operating Results

Obtaining a gaming subconcession

Prior to September 2006, MPBL Gaming did not hold a concession or subconcession to operate gaming activities in Macau. Therefore, revenue from the Mocha Club operations predominantly comprised fees for services provided to gaming machine lounges, which represented service fees that were based on a percentage of the Mocha Clubs’ gaming machine win. Under the previous services agreements with SJM, Mocha provided all of the gaming machines at the Mocha Clubs and auxiliary services to SJM and received service fees of 31% of gaming machine win before corporate income tax.

In March 2006, Mocha entered into termination agreements with SJM when PBL entered into its agreement with Wynn Macau to obtain the subconcession. Pursuant to the termination agreements, Mocha Slot’s services agreements with SJM were terminated on September 21, 2006, after the subconcession was issued to MPBL Gaming. We now reflect as our net revenue, all of the gaming machine win at the Mocha Clubs which are subject to Macau taxes and other government dues on gaming revenue currently totalling 39%. We previously incurred, and will continue to incur, all of the material labor and marketing costs at the Mocha Clubs. We injected all the business assets of Mocha into MPBL Gaming in October 2006. After entering into the termination agreement with SJM in March 2006, we incurred a one-time impairment loss of US$7.6 million as a result of the potential termination of the services agreements. The Macau government has granted to MPBL Gaming, a subconcessionaire, the benefit of a corporate tax holiday on gaming income in Macau for the period starting on May 12, 2007, the date gaming operations began at Crown Macau, and expiring at the end of 2011.

After we obtained a controlling interest in MPBL Gaming, the Mocha Club operating assets and business were transferred from Mocha and its subsidiaries to MPBL Gaming to be operated directly by MPBL Gaming as a subconcessionaire. MPBL Crown Macau Developments has entered into a lease agreement with MPBL Gaming under which MPBL Gaming operates the casinos and other gaming activities at the Crown Macau. We anticipate that MPBL COD Developments will enter into similar arrangements for the City of Dreams and, if built, MPBL Macau Peninsula Developments will enter into similar arrangements for the Macau Peninsula project.

Starting from the fourth quarter of 2006, we have incurred the following related charges as a result of having obtained the subconcession:

 

   

Amortization expense of the subconcession. We are required to amortize the US$900 million paid as consideration for the subconcession on a straight-line basis over the life of the subconcession contract, which is until 2022, and have charged the amortization expense to our statements of operations beginning from the date we obtained the subconcession.

Gaming and Leisure Market in Macau

Our business is and will be influenced most significantly by the growth of the gaming and leisure market in Macau. Such growth will be affected by visitation to Macau and whether Macau develops into a popular international destination for gaming patrons and other customers of leisure and hospitality services, as well as our ability to compete effectively against our existing and future competitors for market share.

Visitation to Macau

Visitation to Macau between 2001 and 2006 increased at a CAGR of 16.4% to approximately 22.0 million visitors and at a growth rate of 17.6% from 18.7 million visitors for 2005 to 22.0 million visitors for 2006 according to the Macau Statistics and Census Services. We believe that visitation and gaming revenue growth for the Macau market have been, and will continue to be, driven by a combination of factors, including Macau’s proximity to major Asian population centers; liberalization of restrictions on travel to Macau from China and liberalization of currency restrictions to permit Chinese citizens to take larger sums of foreign currency out of China when they travel; increasing regional wealth, leading to a large and growing middle class in Asia with more disposable income; infrastructure improvements that are expected to facilitate more convenient travel to and within Macau; and an increasing supply of better quality casino, hotel and entertainment offerings in Macau.

 

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Competition

The Macau gaming market is rapidly evolving and increasingly competitive. At present, there are a total of six licensed gaming operators, including our subsidiary MPBL Gaming, under concessions and subconcessions in Macau. The existing concessions and subconcessions do not place any limit on the number of gaming facilities that may be operated under each concession or subconcession. Each of the three concessionaires, SJM, Galaxy and Wynn Macau, as well as a subconcessionnaire, Venetian Macau, have already commenced operating facilities and have announced expansion plans to develop additional casinos in Macau. For example, SJM and Galaxy currently operate 18 and five casinos, respectively, throughout Macau. In August 2007, the Venetian Macao opened in Cotai. In October 2006, Galaxy opened the Galaxy StarWorld hotel and casino resort on the Macau peninsula next to Wynn Resorts Macau. In September 2006, Wynn Macau opened the Wynn Resorts Macau hotel casino, a resort complex on the Macau peninsula comprising of hotel, entertainment and gaming facilities. In May 2004, The Venetian Macau opened the Sands Macao on the Macau peninsula, ushering in a new era of Las Vegas-style casinos in Macau.

Most of the gaming facilities scheduled to open in the next several years will be concentrated in Taipa or Cotai. In particular, Cotai is expected to feature a cluster of new casino resorts that are being designed on a larger scale and in the style of casino resorts located on the Las Vegas Strip. We expect that the new casino and other entertainment offerings will increase visitation to Macau and expand the Macau gaming market to reach an increasing number of mass market and non-gaming patrons. We will seek to benefit from this increased visitation to Macau generally as visitors to Macau and other gaming locations often visit multiple casino resorts on the same trip, in particular if they are in close proximity to each other.

Number of gaming machines

The operating results of the Mocha Club business are affected principally by the number of gaming machines operated by Mocha and volumes of customer traffic at the Mocha Club locations. Traffic volumes are affected by factors such as the popularity of the Mocha Clubs and pedestrian traffic flows at the Mocha Club locations. The average number of gaming machines in the Mocha Clubs has increased from an average of 350 in 2004 to an average of 634 in 2005 and an average of 937 in 2006. We currently have approximately 1,100 gaming machines in the Mocha Clubs, following the addition of approximately 100 gaming machines from the opening of the seventh Mocha Club.

The following table sets forth information on the Mocha Clubs for the six months ended June 30, 2007:

 

Mocha Club

  Opening Date   Location   Gaming Area   Gaming machines  

Average daily
net win

per machine(1)

US$

            (in sq. ft)   (Six months ended June 30, 2007)

Royal

  September 2003   Lobby of Hotel Royal   2,100   82   208

Kingsway

  April 2004   G/F, Kingsway Commercial Centre   6,100   216   251

TP Square

  March 2005   G/F and 1/F, Hotel Taipa Square   4,560   142   228

Sintra

  November 2005   G/F and 1/F, Hotel Sintra   5,110   140   306

Hotel Taipa

  January 2006   G/F of Hotel Taipa   6,100   133   130

Marina Plaza

  December 2006   1/F & 2/F Marina Plaza   12,500   261   201
               

Total(2)

      36,470   974   222
               

(1)   Average daily net win per machine for any period/year represents the average total daily gaming machine win during such period/year divided by the weighted average number of gaming machines in service during such period/year. Gaming machine win is the excess of the amount of money deposited by players into the gaming machine over the amount of money paid out of the gaming machine to players.
(2)   Excludes the seventh Mocha Club opened in October 2007.

Successful completion and operation of our casino resort projects and Mocha Clubs

Crown Macau commenced operation on May 12, 2007 and did not generate any revenue prior to that date. The City of Dreams integrated casino resort complex has not yet commenced commercial operations or generated any revenue. City of Dreams is targeted to begin revenue-generating operations following the

 

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completion of the first phase of the project by the end of the first quarter of 2009. We also expect to monetize the apartment hotel complex located in City of Dreams subject to fluctuations in the real property market in Macau and the availability of financing. The acquisition of the Macau Peninsula site has not yet been completed. We anticipate that the majority of our revenues in the future will be generated from our casino and hotel operations, while we expect revenue from the Mocha Clubs to decrease substantially as a percentage of our overall revenue.

We expect our operating revenues from the casino resorts to be affected primarily by the growth of the Macau gaming and leisure market, the popularity of the casinos, hotels and other entertainment facilities, and the number and net win of the gaming tables and gaming machines. Prior to September 2006, as MPBL Gaming did not have a concession or subconcession to operate casino gaming and had to rely on service agreements with SJM, our past operating revenues from gaming consisted only of the service fees paid to Mocha Slot representing 31% of gaming machine win generated from the Mocha Clubs. After MPBL Gaming obtained its subconcession, our net revenues reflect all the gaming revenues generated from the Mocha Clubs and other gaming operations which are subject to taxes and other government dues on gaming revenue currently totalling 39% of gaming machine win. We expect expenses from gaming operations to consist mainly of labor, commissions paid to junket operators, cost of complimentary allowances provided to high-end patrons and junket operators, property expenses, depreciation of fixed assets and amortization of gaming subconcession, interest expense, marketing and promotion expenses and costs of operating supplies. In future periods, we expect labor, commissions to junket operators, cost of complimentary allowances provided to high-end patrons, depreciation of construction costs, including capitalized fees and finance costs for construction and amortization of gaming subconcession, to be major costs.

We expect that the hotel operating revenues at our development projects will be affected primarily by the number of rooms to be operated, room rates and occupancy rates, as well as the popularity of our food and beverage outlets at our hotels. We expect hotel operating expenses to consist mainly of labor, depreciation, marketing and promotion expenses and costs of operating supplies.

Macau’s Real Estate Market

Our business is affected by the markets for both commercial (including retail) and residential real estate in Macau. Our plan to monetize the apartment hotel complex located in City of Dreams will be subject to fluctuations in the Macau real estate market. In addition, fluctuations in the real estate market will affect the land premium that we pay if we acquire the Macau Peninsula site.

Overview of Financial Results

Revenues

Prior to September 2006, our revenues consisted of fees for services provided to gaming machine lounges, food and beverage and, others. Under Mocha Slot’s previous services agreements with SJM for operation of the Mocha Clubs, Mocha Slot received service fees comprising 31% of gaming machine win. Taxes and other government dues on gaming revenues totaled 38% of gaming machine win, and SJM retained the remaining 31% of gaming machine win. In calculating revenues, we deducted from Mocha Slot’s 31% share of gaming machine win revenue, discounts, costs of points from the Mocha loyalty program and accruals for anticipated payouts of progressive slot jackpots. After the subconcession was granted and these service agreements with SJM were terminated with effect from September 21, 2006, we now reflect as gaming revenue all the gaming machine win at the Mocha Clubs, which we record under the item casino operating revenue, but we are subject to Macau taxes and other government dues currently totaling 39% of gaming machine win.

With Crown Macau opening in May 2007, our revenues in 2007 include table game and gaming machine wins, as well as rooms, food and beverage revenue generated from Crown Macau. Commission paid to high-end gaming patrons and the retail value of accommodation, food and beverage, and other services furnished to patrons without change, are deducted from gross revenues.

 

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Operating Costs and Expenses

Our operating costs and expenses have historically consisted primarily of expenses for operating gaming machine lounges, amortization of land use rights and general and administrative expenses. They also consisted of costs of food and beverage, and others, selling and marketing expenses and pre-opening costs. Subsequent to MPBL Gaming obtaining the subconcession, we record expenses in connection with the amortization of the gaming subconcession and taxes on gaming revenue.

Casino. This cost relates to the operations of our Mocha Clubs and our casino at Crown Macau. Prior to May 2007, this operating cost and expense consisted primarily of salaries and benefits paid to the Mocha Clubs staff, security costs, rent for the Mocha Club locations and operating supplies. Subsequent to Crown Macau opening, this operating cost and expense now includes Crown Macau casino operations which include costs of providing promotional allowances to patrons and gaming taxes.

General and administrative expenses. General and administrative expenses consist primarily of salaries and benefits paid to our administrative and finance personnel, cleaning and overhead costs, and general costs associated with our corporate offices, professional services fees and share based compensation. We expect our total general and administrative expenses to increase as we hire additional personnel for our corporate offices and as we incur costs associated with our obligations as a listed company.

Selling and marketing expenses. Selling and marketing expenses consist primarily of salaries, benefits and sales commissions for sales personnel, advertising, promotional and other sales and marketing expenses. Our sales and marketing expenses increased significantly prior to and in connection with the opening of the Crown Macau. We have also incurred a one-time marketing charge in relation to the Crown Macau opening event. We have increased and anticipate that we will continue to increase significantly our sales and marketing expenses as we seek to grow the Mocha brand, as the mass market segment of Macau grows, and as competitors move aggressively into the gaming machine market in Macau. Our total sales and marketing expenses are also expected to increase significantly following the opening of the Crown Macau in May 2007 and as we approach the respective completion dates of the City of Dreams and Macau Peninsula projects and promote these new facilities to our target patrons.

Pre-opening costs. Pre-opening costs relate primarily to training costs and other administrative costs in connection with the opening of the Crown Macau on May 12, 2007 and the first phase of the City of Dreams project targeted to open before the end of March 2009 and to a lesser extent, the opening of a new Mocha Club. We anticipate that our pre-opening costs will increase as we get closer to the opening dates for our development projects.

Share based compensation. We granted restricted shares to certain personnel in December 2006. The total number of restricted shares that were granted to those persons was approximately 2,540,000, representing approximately US$16.1 million divided by our initial public offering price (as adjusted for the three ordinary shares to one ADS ratio). These restricted shares have a vesting period ranging from six months to five years. We recorded compensation expenses of approximately US$278,000 and US$3.2 million as general and administrative expense for the year ended December 31, 2006 and six months ended June 30, 2007, respectively, with respect to these restricted share grants. Of the restricted shares granted in December 2006, 175,400 of the restricted shares were vested as of October 12, 2007 and the grant date fair value is determined with reference to the initial public offering price as adjusted due to the fact that these restricted shares are not entitled to dividends during the vesting period.

Amortization of gaming subconcession. The cost of the subconcession is amortized on a straight-line basis over the term of the Gaming Subconcession agreement which expires in June 2022. We began to amortize the asset in October 2006 after MPBL Gaming obtained the subconcession. In 2006 and in the first six months ended June 30, 2007, we had amortized US$14.3 million and US$28.6 million, respectively, of the total cost of the subconcession.

 

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Amortization of land use rights. Expenses for amortization of land use rights are incurred in connection with the consideration we paid for our interest in MPBL Crown Macau Developments in three stages from November 2004 to July 2005 and the consideration payable by us to the Macau government for the lease of land for the Crown Macau. The expected expiration date of the government lease for Crown Macau is March 2031, and the amortization of the land use rights for Crown Macau was US$5.4 million for the year ended December 31, 2006 and US$2.8 million for the six months ended June 30, 2007. After commencing site preparation works for the City of Dreams project in April 2006, we began to amortize the consideration payable by us to the Macau government for the anticipated lease of the City of Dreams site. The amortization of land use rights for the City of Dreams project was US$7.0 million as of December 31, 2006 and US$5.7 million for the six months ended June 30, 2007.

Depreciation and amortization. Depreciation and amortization expenses have historically consisted of depreciation of gaming machines and other equipment and amortization of leasehold improvements held by Mocha. In May 2007, we began to depreciate buildings, equipment and leasehold improvement costs associated with Crown Macau as these assets were placed into service.

Impairment loss recognized on slot lounge services agreements. Impairment loss recognized on slot lounge services agreements represents a one-time charge that we recognized in 2006. Prior to obtaining the subconcession, we amortized the Mocha Clubs services agreements with SJM over their estimated useful terms of 10 years. The amortization expense relating to these intangible assets was included in our operating costs and expenses. In March 2006, Mocha Slot agreed with SJM to terminate the services agreements after obtaining the subconcession. As a result of the termination of the services agreements, we incurred an impairment loss of US$7.6 million, which was calculated with reference to a valuation determined by us and the estimated date for obtaining the subconcession.

Interest Income

Interest income consists of interest earned on demand deposits and our highly liquid investments which are unrestricted as to withdrawal and use, and which have maturities of three months or less when purchased.

Interest Expense

Interest expense consists of interest expenses with respect to advances from affiliated companies and shareholders together with interest expenses in connection with the Subconcession Facility prior to repaying the facility in full with the proceeds of our initial public offering in December 2006.

Income Tax Expense

We are incorporated in the Cayman Islands. Under the current laws of the Cayman Islands, we and our current subsidiaries incorporated in the Cayman Islands, Melco PBL International Limited, MPBL (Greater China), Melco PBL Holdings Limited, Melco PBL Investments Limited, Melco PBL Nominee One Limited, Melco PBL Nominee Two Limited, and Melco PBL Nominee Three Limited, are not subject to income or capital gains tax. In addition, dividend payments are not subject to withholding tax in the Cayman Islands.

Our subsidiary, Melco PBL Services Limited which is incorporated in Hong Kong, is subject to Hong Kong profits tax on any profits of MPBL Services arising in or derived from Hong Kong. MPBL Services was set up for the purpose of entering into various administrative contracts, including leases for administrative office space in Hong Kong.

Our subsidiaries, Melco PBL Services (US) Limited and Melco PBL (Delaware) LLC, which are incorporated in the U.S.A., are subject to U.S. tax.

Mocha and MPBL Peninsula are not subject to tax in the British Virgin Islands, where they are incorporated, but are subject to a Macau complementary tax rate of 12% on activities conducted in Macau before the transfer

 

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of all of the Mocha Clubs assets and business to MPBL Gaming. Our remaining subsidiaries are all incorporated in Macau and are subject to a Macau complementary tax of 12% on their activities conducted in Macau. Having obtained a subconcession, MPBL Gaming has obtained a corporate tax holiday on corporate income tax, or complementary tax (but not gaming tax), in Macau for a period similar to that of other concession and subconcession holders. This will exempt us from paying the Macau complementary tax on income from gaming generated by our development projects and Mocha Clubs, but we will remain subject to Macau complementary tax on profits from our non-gaming businesses.

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting and disclosure for uncertainty in tax positions, as defined in that statement. FIN 48 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods in income tax disclosures.

We adopted the provisions of FIN 48 effective January 1, 2007. We made our assessment of the level of tax authority for each tax position (including the potential application of interest and penalties) based on the technical merits, and have measured the unrecognized tax benefits associated with the tax positions. Based on our evaluation, we concluded that there are no significant uncertain tax positions requiring recognition in our financial statements. We have no material unrecognized tax benefit which would favorably affect the effective income tax rate in future periods. As of June 30, 2007, there were no interest and penalties related to uncertain tax positions being recognized in our consolidated financial statements.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of our results of operations and liquidity and capital resources are based on our consolidated financial statements. Our consolidated financial statements were prepared in conformity with U.S. GAAP. Certain of our accounting policies require that management apply significant judgment in defining the appropriate assumptions integral to financial estimates. On an ongoing basis, management evaluates those estimates, including those relating to the estimated lives of depreciable assets, asset impairment, allowances for doubtful accounts, accruals for customer loyalty rewards, business combination and revenue recognition. Judgments are based on historical experience, terms of existing contracts, industry trends and information available from outside sources, as appropriate. However, by their nature, judgments are subject to an inherent degree of uncertainty, and therefore actual results could differ from our estimates.

Valuation of long-lived assets, including goodwill and purchased intangible assets

We review the carrying value of our long-lived assets, including goodwill and purchased intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We assess the recoverability of the carrying value of long-lived assets, other than goodwill and purchased intangible assets with indefinite useful lives, by first grouping our long-lived assets with other assets and liabilities at the lowest level for which identifiable cash flows largely independent of the cash flows of other assets and liabilities (the asset group) and, secondly, estimating the undiscounted future cash flows that are directly associated with and expected to arise from the use of and eventual disposition of such asset group. We estimate the undiscounted cash flows over the remaining useful life of the primary asset within the asset group. If the carrying value of the asset group exceeds the estimated undiscounted cash flows, we record an impairment loss to the extent the carrying value of the long-lived asset exceeds its fair value. We determine fair value through quoted market prices in active markets or, if quoted market prices are unavailable, through the performance of internal analysis of discounted cash flows or external appraisals. The undiscounted and discounted cash flow analyses are based on a number of estimates and assumptions, including the expected period over which the asset will be utilized, projected future operating results of the asset group, appropriate discount rates and long-term growth rates.

 

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To assess potential impairment of goodwill, we perform an assessment of the carrying value of our reporting units at least on an annual basis or when events and changes in circumstances occur that would more likely than not reduce the fair value of our reporting units below their carrying value. If the carrying value of a reporting unit exceeds its fair value, we would perform the second step in our assessment process and record an impairment loss to earnings to the extent the carrying amount of the reporting unit’s goodwill exceeds its implied fair value. We estimate the fair value of our reporting units through internal analysis and external valuations, which utilize income and market valuation approaches through the application of capitalized earnings, discounted cash flow and market comparable methods. These valuation techniques are based on a number of estimates and assumptions, including the projected future operating results of the reporting unit, appropriate discount rates, long-term growth rates and appropriate market comparables.

Our assessments of impairment of long-lived assets, including goodwill and purchased intangible assets, and our periodic review of the remaining useful lives of our long-lived assets are an integral part of our ongoing strategic review of our business and operations. Therefore, future changes in our strategy and other changes in our operations could impact the projected future operating results that are inherent in our estimates of fair value, resulting in impairments in the future. Additionally, other changes in the estimates and assumptions, including the discount rate and expected long-term growth rate, which drive the valuation techniques employed to estimate the fair value of long-lived assets and goodwill, could change and, therefore, impact the assessments of asset impairments in the future.

Impairment of long-lived assets (other than goodwill)

We evaluate the recoverability of long-lived assets with finite lives whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. As of December 31, 2005, based on the results of our assessment, no impairment of long-lived assets, including goodwill and purchased intangible assets was noted. We recognized an impairment loss amounting to US$7.6 million on the Mocha Club services agreement for 2006 in connection with the termination agreement that we entered into in March 2006 to terminate the services agreements with SJM upon obtaining the subconcession. In addition, we recognized an impairment loss of approximately US$1.1 million in connection with the relocation of the Kampek Mocha Club to Marina Plaza in 2006, which is determined as the net book values of the plant and equipment involved.

Business combinations

We have made a number of acquisitions and may make strategically important acquisitions in the future. When recording an acquisition, we allocate the purchase price of the acquired company to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. We have obtained valuation reports from independent appraisers to assist in determining the fair values of identifiable intangible assets, including acquired gaming machine lounge services agreements and trademarks. These valuations require us to make significant estimates and assumptions which include future expected cash flows from gaming machine lounges services agreements and trademarks, discount rates, and assumptions regarding the period of time the acquired gaming machine lounges, services agreements and trademarks will continue. Such assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions and estimates.

Share-based compensation

Prior to January 2006, we did not issue any share options to our employees, directors and consultants. In November 2006, we adopted the 2006 Share Incentive Plan and granted restricted shares in December 2006. Accordingly we record share-based compensation based on the SFAS 123(R) grant date fair value requirements.

 

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With respect to the non-vested restricted shares granted in December 2006, we retained an independent appraiser to produce a valuation report on the fair value of our company. Significant management judgment is involved in determining the underlying variables. Of the restricted shares granted in December 2006, 175,400 restricted shares were vested as of October 12, 2007 and the grant date fair value is determined with reference to the initial public offering price as adjusted due to the fact that these restricted shares are not entitled to dividends during the vesting period.

We will estimate the fair value of share options granted using the Black-Scholes option pricing formula and a single option award approach. The fair value would then be amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods. This option-pricing model requires the input of highly subjective assumptions, including the option’s expected life, estimated forfeitures and the price volatility of the underlying stock. Changes in the subjective input assumptions may materially affect the fair value estimate. In management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the share options.

Revenue Recognition

We recognize revenue at the time persuasive evidence of an arrangement exists, the service is provided or the retail goods are sold, prices are fixed or determinable and collection is reasonably assured.

Prior to termination of the services agreement with SJM, slot lounge gaming revenue was recognized on an accrual basis in accordance with the contractual terms of the respective service agreement. Such revenue was calculated based on a pre-determined rate, as stipulated in the respective service agreement, of the gaming revenue from the gaming machines, which is the difference between gaming wins and losses less the accruals for the anticipated payouts of progressive slot jackpots.

Following termination of the services agreement with SJM, the Company, through its wholly-owned subsidiary MPBL Gaming, generates slot lounge gaming revenue under the gaming subconcession. Slot lounge gaming revenue is measured as the aggregate net difference between gaming wins and losses less the accruals for the anticipated payouts of progressive slot jackpots.

Other casino revenue is measured by the aggregate net difference between gaming wins and losses, with liabilities recognized for funds deposited by customers before gaming play occurs and for chips in the customers’ possession.

Rooms, food and beverage, entertainment, retail and other revenues are recognized when services are provided.

Revenues are recognized net of certain sales incentives in accordance with the Emerging Issues Task Force (“EITF”) consensus on Issue 01-9, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products).” EITF 01-9 requires that sales incentives be recorded as a reduction of revenue; consequently, the Company’s casino revenues are reduced by discounts, commission and points earned in customer loyalty programs, such as the player’s club loyalty program.

The retail value of accommodations, food and beverage, and other services furnished to guests without charge is included in gross revenue and then deducted as promotional allowances. The cost of providing such promotional allowances was included in the casino operating expenses.

Accounts receivable and credit risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of casino accounts receivable. The Company issues credit in the form of “markers” to approved casino customers following investigations of creditworthiness.

Accounts receivable, including casino receivables, is typically non-interest bearing and are initially recorded at cost. Accounts are written off when management deems them to be uncollectible. Recoveries of accounts previously written off are recorded when received. An estimated allowance for doubtful accounts is maintained to reduce the Company’s receivables to their carrying amount, which approximates fair value. The allowance is estimated based on specific review of customer accounts as well as management’s experience with collection trends in the casino industry and current economic and business conditions.

 

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Formation

Under the original agreement between Melco and PBL, it was contemplated that our company would be held 50%/50% by Melco and PBL and would act as a holding company for interests throughout their agreed territory in Asia. MPBL (Greater China), now a dormant company, was to hold and operate our interests in Greater China on the basis that Melco’s effective interest would be 60% and PBL’s effective interest would be 40%. For that reason, MPBL (Greater China) is held 80% by us (initially giving Melco and PBL as our indirect 50/50 shareholders, each an indirect 40% interest in MPBL (Greater China) and 20% directly by Melco and, until October 2006, all of the Mocha operations, the Crown Macau and the City of Dreams projects were held through MPBL (Greater China). In March 2005, Mocha became one of our subsidiaries when Melco contributed the 80% interest it then owned in Mocha to MPBL (Greater China). Dr. Stanley Ho resigned as a director and the chairman of Melco in March 2006, and in May 2006, we acquired the remaining 20% interest in Mocha and repaid in full a shareholders’ loan from Dr. Ho to Mocha of HK$45.7 million (US$5.9 million). Under amendments to their relationship in connection with the obtaining of the subconcession, and the transfer of control of MPBL Gaming to us, Melco and PBL have agreed that their interests throughout their agreed territory, including in Macau through our Company, are held in equal proportions by each of them, which resulted in the corporate reorganization in October 2006 as described at “Prospectus Summary—Corporate Structure”.

As of December 31, 2004, Melco owned 80% of Mocha, 50% of MPBL Crown Macau Developments and 100% of MPBL COD Developments. On March 8, 2005, Melco, in exchange for its 50% interest in us, contributed its interest in Mocha, MPBL Crown Macau Developments and MPBL COD Developments to our subsidiary MPBL (Greater China). Concurrently, PBL contributed US$163 million in cash to MPBL (Greater China) in exchange for its 50% interest in us.

From June 9, 2004 for Mocha, July 20, 2004 for MPBL COD Developments and November 9, 2004 for MPBL Crown Macau Developments through March 7, 2005, the financial statements reflect the consolidated financial statements of Mocha, MPBL COD Developments and MPBL Crown Macau Developments because they were under common control for this period. The contributions by Melco of its 80% interest in Mocha, 70% interest in MPBL Crown Macau Developments and 50.8% interest in the City of Dreams project to MPBL (Greater China), a company 80% indirectly owned by us and 20% owned by Melco, and cash contributions by PBL of US$163 million, which were completed on March 8, 2005, were accounted for as the formation of a joint venture for which a carryover basis of accounting has been adopted.

As of December 31, 2005, we held an 80% interest in MPBL (Greater China), which in turn held an 80% interest in Mocha and its subsidiaries and a 100% interest in each of MPBL Crown Macau Developments and MPBL COD Developments (other than nominal shares owned by other group companies as required under Macau law).

The consolidated financial statements of Mocha for the period from January 1, 2004 to June 8, 2004 have been prepared for the purpose of presenting the financial information of Mocha as our predecessor. Mocha is considered to be our predecessor as we succeeded to substantially all of the business of Mocha and our own operations prior to the succession were insignificant in comparison to the Mocha operations assumed or acquired. As of June 8, 2004, Mocha had two wholly owned subsidiaries, Mocha Slot Management Limited and Mocha Cafe Limited.

Group restructuring upon acquisition of gaming subconcession

On March 4, 2006, PBL entered into an agreement with Wynn Macau to obtain a gaming subconcession for the operation of casino games of chance and other casino games in Macau for US$900 million. PBL Asia Investments Limited, which is owned by PBL, formed MPBL Gaming to hold the subconcession. After MPBL Gaming obtained the subconcession and we obtained Macau governmental approval for our taking control of MPBL Gaming, effective control of MPBL Gaming was transferred to us through a series of steps involving the restructuring of the capital stock and conversion of subordinated debt of MPBL Gaming.

Pursuant to a Memorandum of Agreement dated March 5, 2006 and a Supplemental Agreement dated May 26, 2006, entered into between Melco and PBL, Melco and PBL each agreed to contribute US$160 million for a total of US$320 million to our company to subscribe for all the outstanding Class B shares of MPBL Gaming representing 72% voting control of MPBL Gaming and the rights to virtually all the profits of MPBL

 

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Gaming and virtually all the proceeds of any winding up or liquidation of MPBL Gaming. The existing shares of MPBL Gaming held by PBL Asia Limited were converted into Class A shares representing 18% of the voting power over the outstanding shares of MPBL Gaming. Class A shares representing 10% of the voting power of the outstanding shares of MPBL Gaming were also issued to the Managing Director of MPBL Gaming, who is a Macau resident as required under Macau law, upon the subconcession being issued. The Class A shares are entitled to an aggregate of MOP1 in dividends and MOP1 in proceeds of any winding up or liquidation of MPBL Gaming. In addition, PBL agreed to subscribe or cause its subsidiary to subscribe for US$80 million of equity of MPBL Gaming. Together with the proceeds of US$500 million drawn down from the Subconcession Facility, the above subscription funds to MPBL Gaming’s outstanding capital stock were used to make the required US$900 million payment to Wynn Macau.

Pursuant to the same agreement between Melco and PBL, Melco and PBL also agreed to adjust their existing ownership interests in our company from 60% held by Melco (40% via its interests in our company and 20% via its interest in MPBL (Greater China)) and 40% held by PBL to be 50% owned each by Melco and PBL. Melco also contributed its 20% interest in MPBL (Greater China) to our company. In October 2006, the 20% interest in MPBL (Greater China) held by Melco was re-classified as non-voting shares, which we later acquired through our wholly-owned subsidiary MPBL International. We accounted for this acquisition using the purchase method.

In addition, we acquired all the outstanding Class B shares of MPBL Gaming after the subconcession was granted to MPBL Gaming and the acquisition was approved by the Macau government. We accounted for this acquisition at the fair values of the underlying assets acquired and liabilities assumed including the subconcession, loan drawn down from the Subconcession Facility, working capital loans due to PBL and Melco (subsequently converted into equity), cash and cash equivalents and other net liabilities. The estimated fair value of the subconcession was derived from the purchase consideration paid by MPBL Gaming to obtain the subconcession. On June 12, 2007, PBL Asia Limited transferred its 18% shareholding in MPBL Gaming to two of our subsidiaries, MPBL Investments and MPBL International, for nominal consideration.

Recent changes in accounting standards

In September 2006 the FASB issued FASB Statement No. 157, (“SFAS 157”), “Fair Value Measurement.” SFAS 157 addresses standardizing the measurement of fair value for companies who are required to use a fair value measure of recognition for recognition or disclosure purposes. The FASB defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We are currently evaluating the impact, if any, of SFAS 157 on our financial position, results of operations and cash flows.

In February 2007, the FASB issued SFAS No. 159, “Fair Value Option for Financial Assets and Financial Liabilities”. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Group is currently evaluating the impact of SFAS No. 159.

Results of Operations

The following table sets forth a summary, for the periods indicated, of our consolidated results of operations. Historically, we have relied solely on the operations of the Mocha Clubs for our operating cash flow until May 2007, when our Crown Macau property was officially opened. Our City of Dreams and Macau Peninsula projects have not commenced operations and do not generate any revenue. Our historical results presented below are not necessarily indicative of the results that may be expected for any future period.

 

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Historical result
for the period
from January 1,
2004 to

June 8, 2004
(predecessor)

   

Historical result
for the period
from June 9, 2004
to December 31,
2004

(successor)

   

Historical result
for the year ended
December 31,
2005

(successor)

   

Historical result
for the year ended
December 31,
2006

(successor)

    Historical
result for the
six months
ended
June 30,
2006
(successor)
    Historical
result for the
six months
ended
June 30,
2007
(successor)
 
    (in thousands of US$, except operating data)  

Revenues

    1,896       6,071       17,328       36,101       10,944       65,439  

Total operating costs and expenses

    (1,286 )     (7,001 )     (21,050 )     (93,754 )     (28,209 )     (177,879 )
                                               

Operating income (loss)

    610       (930 )     (3,722 )     (57,653 )     (17,265 )     (112,440 )

Non-operating income (expenses)

    (90 )     (131 )     64       (10,028 )     (376 )     14,271  

Income (loss) before income tax

    520       (1,061 )     (3,658 )     (80,379 )     (17,641 )     (98,169 )

Income tax (expense) credit

    (26 )     (37 )     91       1,885       1,579       1,760  
                                               

Income (loss) before minority interests

    494       (1,098 )     (3,567 )     (78,494 )     (16,062 )     (96,409 )

Minority interests

    —         91       308       5,015       3,273       —    
                                               

Net income (loss)

  $ 494     $ (1,007 )   $ (3,259 )     (73,479 )     (12,789 )     (96,409 )
                                               

Selected operating data:

           

—Weighted average number of gaming machines(1)

    125       513       634       937       972       974  

—Average daily net win per machine(2)

    284.5       171.5       229.1       209.8       193.8       222.0  

Other data:

           

Operating/Adjusted EBITDA(3)

  $ 771     $ 1,119     $ 7,430     $ 13,178     $ 5,305     $ (4,871 )

(1)   Weighted average number of gaming machines for any period represents the sum of the number of gaming machines in service at Mocha Clubs on each day during such period divided by the number of days in such period. Weighted average number of gaming machines does not include the data from Crown Macau as we believe it may not be indicative of a “steady state” average as Crown Macau has only been open since May 12, 2007 and its facilities have only been partially operational through June 30, 2007.
(2)   Average daily net win per machine for any period represents the average total daily gaming machine win during such period divided by the weighted average number of gaming machines in service during such period. Gaming machine win is the excess of the amount of money deposited by players into the gaming machine over the amount of money paid out of the gaming machine to players. Prior to MPBL Gaming obtaining its subconcession in September 2006, Mocha Slot provided management services to the Mocha Clubs under service agreements with SJM. Mocha Slot received 31% of gaming machine win as its net revenue from gaming at the Mocha Clubs, while SJM retained 31% of gaming machine win, and Macau taxes and other government dues accounted for the remaining 38%. Since the subconcession was granted and these service agreements were terminated with effect from September 21, 2006, we now reflect all the gaming machine win as our net revenue from gaming at the Mocha Clubs, but we are subject to Macau taxes and other government dues currently totaling 39% of gaming machine win. Average daily net win per machine does not include the data from Crown Macau as we believe it may not be indicative of a “steady-state” average, as Crown Macau has only been open since May 12, 2007 and its facilities have only been partially operational through June 30, 2007.
(3)   Prior to the opening of Crown Macau in May 2007, our management used Operating EBITDA for Mocha Slot to measure our operating performance, as Mocha Slot was our sole business until May 2007. Subsequent to the opening of Crown Macau in May 2007, our management used Adjusted EBITDA of Mocha Slot and Crown Macau to measure their operating performance as they are our two primary operating businesses.

In 2007, due to the opening of Crown Macau, we classified some of the operating costs and expenses in a different manner as we did at the time we prepared the consolidated financial statements for the period from January 1, 2004 to June 8, 2004 (predecessor), June 9, 2004 to December 31, 2004 (successor) and the two years ended December 31, 2006 (successor). In order to conform to the 2007 presentation, we made reclassifications of expenses for the prior periods that were included in the audited financial statements for the year ended December 31, 2006 appearing in our annual report on Form 20-F dated March 30, 2007. The breakdown of total operating costs and expenses is as follows:

 

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Historical result
for the period
from January 1,
2004 to

June 8, 2004
(predecessor)

   

Historical result
for the period
from June 9, 2004
to December 31,
2004

(successor)

   

Historical result
for the year ended
December 31,
2005

(successor)

   

Historical result
for the year ended
December 31,
2006

(successor)

    Historical
result for the
six months
ended
June 30,
2006
(successor)
    Historical
result for the
six months
ended
June 30,
2007
(successor)
 
    (in thousands of US$, except operating data)  

Operating costs and expenses:

           

—Casino(1)(2)

  (712 )   (2,554 )   (6,351 )   (18,777 )   (5,710 )   (48,811 )

—Rooms

  —       —       —       —       —       (4,018 )

—Food and beverage

  (48 )   (250 )   (596 )   (530 )   (302 )   (952 )

—General and administrative(2)

  (195 )   (1,960 )   (4,336 )   (15,105 )   (2,431 )   (21,361 )

—Selling and marketing

  (81 )   (166 )   (534 )   (3,511 )   (392 )   (18,372 )

—Pre-opening costs

  (96 )   (199 )   (730 )   (11,679 )   (2,403 )   (35,276 )

—Amortization of gaming subconcession

  —       —       —       (14,309 )   —       (28,594 )

—Amortization of land use rights

  —       (130 )   (3,535 )   (12,358 )   (4,703 )   (8,503 )

—Depreciation and amortization(1)(2)

  (154 )   (1,742 )   (4,968 )   (9,845 )   (4,628 )   (11,992 )

—Impairment loss recognized on slot lounges services agreements

  —       —       —       (7,640 )   (7,640 )   —    
                                   

Total operating costs and expenses

  (1,286 )   (7,001 )   (21,050 )   (93,754 )   (28,209 )   (177,879 )
                                   

Notes:  
(1)   For the audited financial statements for the year ended December 31, 2006 appearing in our annual report on Form 20-F dated March 30, 2007, the amortization of intangible assets were included in casino operating costs.
(2)   For the audited financial statements for the year ended December 31, 2006 appearing in our annual report on Form 20-F dated March 30, 2007, the depreciation of property and equipment have been included in casino operating costs and general and administrative expenses.

Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006

The following items had the most significant impact on our operations for the six month-period ended June 30, 2007 as compared to the same period in 2006:

 

   

The opening and commencement of operation of our Crown Macau project on May 12, 2007.

 

   

The weighted average number of machines in operation was 972 and 974 during the six months ended June 30, 2006 and 2007, respectively.

 

   

Average daily net win per machine was US$193.8 and US$222.0 during the six months ended June 30, 2006 and 2007, respectively.

 

   

The increase in the number of machines and lounges resulted in increase in our revenues and costs and expenses.

 

   

MPBL Gaming’s obtaining of the subconcession and the subsequent transfer of MPBL Gaming to us in September 2006 led to a significant impact on amortization expenses attributable to the subconcession going forward.

 

   

We incurred pre-opening, selling and marketing expenses associated with the development of the Crown Macau and the City of Dream projects.

Revenues

Our revenues increased by 497.9% from US$10.9 million for the six months ended June 30, 2006 to US$65.4 million for the six months ended June 30, 2007. The significant increase in revenues was primarily due to the change in reporting of Mocha Clubs revenues from a service fee basis of US$10.9 million for the six months ended June 30, 2006 to a gross gaming revenue basis of US$39.5 million for the six months ended June 30, 2007 subsequent to obtaining the subconcession in September 2006. In addition, the opening of Crown Macau contributed US$25.9 million revenues for the six months ended June 30, 2007.

 

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Operating costs and expenses

Our total operating costs and expenses increased by 530.6% from US$28.2 million for the six months ended June 30, 2006 to US$177.9 million for the six months ended June 30, 2007, primarily due to the increase in operating costs relating to Crown Macau in the amount of US$42.2 million, increase of US$32.9 million in pre-opening costs relating to the Crown Macau and City of Dreams projects, amortization of the gaming subconcession of US$28.6 million, increase of US$3.8 million in amortization of land use rights, and increase in depreciation and amortization of building and equipment of US$7.4 million.

Casino. Our casino expenses increased by 754.8% from US$5.7 million for the six months ended June 30, 2006 to US$48.8 million for the six months ended June 30, 2007, primarily due to the commencement of operations of Crown Macau. In addition, having obtained our subconcession in September 2006, we incurred Macau taxes and other government dues totaling US$29.2 million on gaming revenue generated from Crown Macau and Mocha Clubs. We did not incur any Macau taxes and other government dues prior to the grant of the subconcession.

Food, beverage and others. Our food, beverage and other expenses increased by 215.2% from US$302,000 for the six months ended June 30, 2006 to US$952,000 for the six months ended June 30, 2007, primarily due to the opening of Crown Macau.

Rooms. Our room expenses of US$4.0 million for the six months ended June 30, 2007 represent costs in operating the hotel facility at Crown Macau.

General and administrative. Our general and administrative expenses increased by 778.7% from US$2.4 million for the six months ended June 30, 2006 to US$21.4 million for the six months ended June 30, 2007, primarily due to the incurrence of expenses to establish our corporate administrative offices and an increase in salaries and benefits for our general and administrative personnel as we hired additional personnel in connection with our development projects, and an increase in professional services fees in connection with US regulatory compliance.

Selling and marketing. Our selling and marketing expenses increased by 4,586.7% from US$392,000 for the six months ended June 30, 2006 to US$18.4 million for the six months ended June 30, 2007, primarily due to an increase in marketing and promotion expenses that we incurred for promoting Mocha Clubs and Crown Macau, and in connection with the Crown Macau opening event.

Pre-opening costs. Our pre-opening costs increased by 1,368.0% from US$2.4 million for the six months ended June 30, 2006 to US$35.3 million for the six months ended June 30, 2007, due to pre-opening costs, such as personnel training costs, equipment costs and other administrative costs, in connection with the development of the Crown Macau leading up to its opening in May 2007.

Amortization of gaming subconcession. Amortization of gaming subconcession for the six months ended June 30, 2007 was US$28.6 million. We began to amortize the subconcession in October 2006.

Amortization of land use rights. Amortization of land use rights expenses increased by 80.8% from US$4.7 million for the six months ended June 30, 2006 to US$8.5 million for the six months ended June 30, 2007.

Depreciation and amortization. Depreciation and amortization expense increased by 159.1% from US$4.6 million for the six months ended June 30, 2006 to US$12.0 million for the six months ended June 30, 2007 as we began to depreciate the building costs associated with Crown Macau in May 2007 upon its commencement of operations.

Non-operating income (expenses)

Non-operating income (expenses) consist of interest income and expenses, foreign exchange gains and losses as well as other non-operating income. Our interest income increased by 3,587.9% from US$315,000 for the six months ended June 30, 2006 to US$11.6 million for the six months ended June 30, 2007, primarily due to interest earned on IPO proceeds. Interest expense of US$940,000 for the six months ended June 30, 2006 was

 

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primarily attributable to cash advances from Melco for our daily operation in 2006. Our foreign exchange gains increased from US$119,000 for the six months ended June 30, 2006 to US$2.5 million for the six months ended June 30, 2007 primarily resulting from foreign exchange transaction gains on H.K. dollar payables. Our other non-operating income increased from US$130,000 for the six months ended June 30, 2006 to US$147,000 for the six months ended June 30, 2007.

Income tax credit

We had an income tax credit of US$1.6 million for the six months ended June 30, 2006, compared with US$1.8 million for the six months ended June 30, 2007 due to a greater deferred tax credit that we benefited from in the six months ended June 30, 2007.

Minority interest

Our share of income to minority shareholders was US$3.3 million for the six months ended June 30, 2006, comprising Melco’s share of our income and loss through the 20% interest in MPBL (Greater China) that it held until October 2006.

Net loss

As a result primarily of the foregoing, we incurred a net loss of US$12.8 million and US$96.4 million for the six months ended June 30, 2006 and 2007, respectively.

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

The following items had the most significant impact on our operations for 2006 as compared against 2005:

 

   

The weighted average number of machines in operation was 634 and 937 during 2005 and 2006, respectively, and we had five and six Mocha Clubs at the end of 2005 and 2006, respectively.

 

   

Average daily net win per machine was US$229.1 and US$209.8 during 2005 and 2006, respectively.

 

   

The increase in the number of machines and lounges resulted in an increase in our net revenues and costs and expenses.

 

   

In 2006, we amortized land use rights in connection with both the Crown Macau and City of Dreams sites, whereas in 2005, we only amortized land use rights in connection with the Crown Macau site.

 

   

We incurred a one-time impairment loss of US$7.6 million in 2006 in connection with the termination agreement that we entered into in March 2006 to terminate the services agreements with SJM upon the obtaining of the subconcession.

 

   

We incurred an impairment loss of US$1.1 million on certain plant and equipment in connection with the relocation of our Kampek Mocha Club to Marina Plaza in 2006.

 

   

There was a substantial increase in general and administrative expenses attributable to the establishment of our corporate administration offices and professional service fees in connection with our group restructuring during the year and initial public offering in December 2006.

 

   

We incurred interest expenses and financing costs in connection with the US$500 million Subconcession Facility prior to its full repayment with the proceeds from our initial public offering.

 

   

MPBL Gaming obtaining the subconcession and the subsequent transfer of MPBL Gaming to us had a significant impact on our revenue recognition, income tax payable and amortization expenses attributable to the subconcession going forward.

 

   

We incurred pre-opening, selling and marketing expenses associated with the development of the Crown Macau and the City of Dreams projects.

Revenues

Our revenues increased by 108.3% from US$17.3 million in 2005 to US$36.1 million in 2006 due partly to obtaining the subconcession, which resulted in a change in reporting of Mocha Clubs revenues from a service fee basis prior to the subconcession to a gross gaming revenue basis during September 2006. The increase was also

 

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due to the opening of the new Mocha Clubs in November 2005 and January 2006 and the increase in the weighted average number of gaming machines at the Mocha Clubs from 634 for 2005 to 937 for 2006. The increase was offset in part by a decrease in the average daily net win per machine from HK$1,787 (US$229.1) for 2005 to HK$1,632 (US$209.8) for 2006. We believe the decrease was primarily attributable to: (1) a ramp-up period for the two Mocha Clubs, which we added in November 2005 and January 2006, during which time the number of customers visiting these facilities was relatively low; (2) a reduction in the number of customers visiting the Kampek Mocha Club, which was the largest Mocha Club, as we were in the process of relocating this facility (as required upon our obtaining the subconcession) and began to reduce advertising promotions for this facility; and (3) an increase in market competition as a result of the openings of a number of new casinos, including Wynn Macau and Galaxy StarWorld. Our average daily net win per machine was HK$1,931 (US$248.2) in the fourth quarter of 2006 and HK$1,646 (US$211.6) in December 2006.

Operating costs and expenses

Our total operating costs and expenses increased by 345.4% from US$21.1 million in 2005 to US$93.8 million in 2006, primarily due to the one-time impairment loss of US$7.6 million that we incurred in connection with the termination of the services agreements with SJM, a US$8.8 million increase in amortization of land use rights, an amortization of US$14.3 million in connection with the subconcession, a US$10.9 million increase in pre-opening costs relating to the Crown Macau and City of Dreams projects, an impairment loss of approximately US$1.1 million on certain plant and equipment in connection with the relocation of the Kampek Mocha Club to Marina Plaza for 2006, which is determined based on the net book value of the plant and equipment involved and the opening of additional Mocha Clubs.

Casino. Our casino expenses increased by 195.7% from US$6.4 million in 2005 to US$18.8 million in 2006, primarily due to the opening of additional Mocha Clubs and an increase in labor costs in connection with new gaming machines. We recorded Macau taxes and other government dues totalling US$7.5 million on gaming revenue from Mocha Clubs.

Food, beverage and others. Our food, beverage and other expenses decreased by 11.1% from US$596,000 in 2005 to US$530,000 in 2006, primarily due to the closure of the Mocha Club at Kampek in September 2006.

General and administrative. Our general and administrative expenses increased by 248.4% from US$4.3 million in 2005 to US$15.1 million in 2006, primarily due to the incurrence of expenses to establish our corporate administrative offices and an increase in salaries and benefits for our general and administrative personnel as we hired additional personnel in connection with our development projects, and an increase in professional services fees and public relations expenses in connection with our initial public offering in December 2006.

Selling and marketing. Our selling and marketing expenses increased by 557.5% from US$534,000 in 2005 to US$3.5 million in 2006, primarily due to an increase in marketing and promotion expenses that we incurred for promoting the Mocha Clubs and in connection with promoting the Crown Macau in anticipation of its opening.

Pre-opening costs. Our pre-opening costs increased by 1,499.9% from US$730,000 in 2005 to US$11.7 million in 2006, due to principally pre-opening costs, such as personnel training costs, equipment costs and other administrative costs, in connection with the development of the Crown Macau and the City of Dreams.

Amortization of gaming subconcession. Amortization of gaming subconcession for the year was US$14.3 million in 2006. We began to amortize the subconcession in October 2006.

Amortization of land use rights. Amortization of land use rights expenses increased by 249.6% from US$3.5 million in 2005 to US$12.4 million in 2006. In 2006, we amortized land use rights in connection with both the Crown Macau and City of Dreams sites, whereas in 2005, we only amortized land use rights in connection with the Crown Macau site.

Depreciation and amortization. Depreciation and amortization expenses increased by 98.2% from US$5.0 million in 2005 to US$9.8 million in 2006 primarily due to costs associated with the roll out of new machines and amortization of leasehold improvements of new lounges.

 

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Impairment loss recognized on slot lounge services agreements. We recognized a one-time impairment loss of US$7.6 million in 2006. See “—Overview of Financial Results—Operating Costs and Expenses—Impairment loss recognized on slot lounge services agreements.”

Non-operating income (expenses)

Non-operating income (expenses) consist of interest income and expenses, foreign exchange gain and loss as well as other non-operating income. Our interest income decreased significantly from US$2.5 million in 2005 to US$816,000 in 2006, primarily due to the significant decrease in cash and cash equivalents on our balance sheet as our cash used in operating activities increased significantly to pay for construction and other costs in connection with our development projects. In addition, interest expenses increased significantly from US$2.0 million in 2005 to US$11.2 million in 2006. The increase in interest expenses was primarily attributable to interest expenses incurred for the US$500 million Subconcession Facility drawn prior to its full repayment with the proceeds from our initial public offering. We had written off deferred financing cost of US$12.7 million primarily in relation to the repayment of US$500 million under the Subconcession Facility as of December 31, 2006. We had a US$570,000 foreign exchange loss in 2005 primarily resulting from foreign exchange transaction losses on H.K. dollar payables, compared to a US$55,000 foreign exchange gain in 2006. Our other non-operating income increased from US$146,000 in 2005 to US$285,000 in 2006.

Income tax credit

We had an income tax credit of US$91,000 in 2005, compared to an income tax credit of US$1.9 million in 2006 due to a greater deferred tax credit that we benefited from in 2006.

Minority interest

Our share of loss by minority shareholders was US$308,000 in 2005, compared to a share of loss by minority shareholders of US$5.0 million in 2006, comprising Melco’s share of our income and loss through the 20% interest in MPBL (Greater China) that it held until October 2006.

Net loss

As a result primarily of the foregoing, we had a net loss of US$3.3 million and US$73.5 million in 2005 and 2006, respectively.

Year Ended December 31, 2005 Compared to The Period from January 1, 2004 to June 8, 2004 (Predecessor Period) And The Period From June 9, 2004 to December 31, 2004 (Successor Period)

Because we acquired Mocha during 2004, the year is broken into an approximately five month predecessor period and an approximately seven month successor period in 2004. As a result, our 2005 results are not directly comparable to 2004. Apart from the difference in the length of the periods, the following items had the most significant impact on our operations.

 

   

The weighted average number of machines in operation was 125, 513 and 634 during the period from January 1, 2004 to June 8, 2004, the period from June 9, 2004 to December 31, 2004, and the year ended December 31, 2005, respectively.

 

   

Average daily net win was US$284.5, US$171.5 and US$229.1 during the period from January 1, 2004 to June 8, 2004, the period from June 9, 2004 to December 31, 2004, and the year ended December 31, 2005, respectively.

 

   

The increase in the number of machines and lounges resulted in increases in our net revenues and cost and expenses.

 

   

Amortization of land use rights in 2005 of US$3.5 million relating to the Crown Macau site.

 

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Amortization of intangible assets was recognized during the 2004 successor period and 2005 as a result of the acquisition of Mocha, principally relating to Mocha’s services agreements with SJM. This resulted in additional charges of US$600,000 and US$1.0 million which are included in depreciation and amortization.

 

   

General and administrative expenses during the successor period in 2004 also included a compensation charge of US$1.4 million related to the acquisition of shareholder loans of US$5.8 million which was advanced by Better Joy Overseas Ltd., or Better Joy, to Mocha through issuance of a convertible note. The compensation charge was recognised based on the difference between the fair value of the convertible note and the shareholder loan acquired.

Revenues

Our revenues were US$1.9 million for the period from January 1, 2004 to June 8, 2004 and US$6.1 million for the period from June 9, 2004 to December 31, 2004, compared to US$17.3 million in 2005 as a result of increases in revenues from both casino and food, beverage and others. The increase was due primarily to the opening of two new Mocha Clubs in 2005 and increasing the number of gaming machines at the Mocha Clubs from an average of 125 for the period from January 1, 2004 to June 8, 2004 and 513 for the period from June 9, 2004 to December 31, 2004, compared to an average of 634 in 2005. The average daily net win per machine was US$284.5 for the period from January 1, 2004 to June 8, 2004 and US$171.5 for the period from June 9, 2004 to December 31, 2004, compared to US$229.1 in 2005, primarily as a result of higher utilization. With increased customer traffic at the Mocha Clubs, revenue from food, beverages and others increased similarly.

Operating costs and expenses

Our total operating costs and expenses were US$1.3 million for the period from January 1, 2004 to June 8, 2004 and US$7.0 million for the period from June 9, 2004 to December 31, 2004, compared to US$21.1 million in 2005, primarily as a result of the increases in expenses incurred as a result of the opening of additional Mocha Clubs and the amortization of land use rights for the Crown Macau site.

Casino. Our casino expenses were US$712,000 for the period from January 1, 2004 to June 8, 2004 and US$2.6 million for the period from June 9, 2004 to December 31, 2004, compared to US$6.4 million in 2005, primarily as a result of the opening of additional Mocha Clubs and an increase in gaming machines and the associated labor costs in connection therewith.

Food, beverage and others. Our food, beverage and others expenses were US$48,000 for the period from January 1, 2004 to June 8, 2004 and US$250,000 for the period from June 9, 2004 to December 31, 2004, compared to US$596,000 in 2005, primarily as a result of the additional expenses in providing food and beverage services to the customers at new Mocha Clubs launched in 2005.

General and administrative. Our general and administrative expenses were US$195,000 for the period from January 1, 2004 to June 8, 2004 and US$2.0 million for the period from June 9, 2004 to December 31, 2004, compared to US$4.3 million in 2005, primarily as a result of an increase in maintenance costs for the Mocha Clubs because of the addition of new locations, an increase in salary expense from the addition of personnel for our general and administrative function as we expanded our business and an increase in professional services fees.

Selling and marketing. Our selling and marketing expenses were US$81,000 for the period from January 1, 2004 to June 8, 2004 and US$166,000 for the period from June 9, 2004 to December 31, 2004, compared to US$534,000 in 2005, primarily due to an increase in marketing and promotion expenses that we incurred in 2005 to grow the Mocha brand and to promote the new and existing Mocha Clubs.

 

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Pre-opening costs. Our pre-opening costs were US$96,000 for the period from January 1, 2004 to June 8, 2004 and US$199,000 for the period from June 9, 2004 to December 31, 2004, compared to US$730,000 in 2005, primarily as a result of pre-opening expenses, such as ground breaking ceremonies, and advertising and marketing, incurred in connection with the development of the Crown Macau and City of Dreams. We did not incur any pre-opening expenses in connection with those projects in 2004 and pre-opening expenses incurred in connection with Mocha remained relatively stable from 2004 to 2005.

Amortization of land use rights. Amortization of land use rights expenses were nil for the period from January 1, 2004 to June 8, 2004 and US$130,000 for the period from June 9, 2004 to December 31, 2004, compared to US$3.5 million in 2005. We amortized land use rights in connection with the land for the Crown Macau project, which we obtained in December 2004. The amortization of land use rights was for a full year in 2005.

Depreciation and amortization. Depreciation and amortization expenses were US$154,000 for the period from January 1, 2004 to June 8, 2004 and US$1.7 million for the period from June 9, 2004 to December 31, 2004, compared to US$5.0 million in 2005 primarily due to costs associated with the roll out of new machines and amortization of leasehold improvements of new lounges.

Non-operating income (expenses)

Non-operating income (expenses) consist of interest income and expenses and net foreign exchange gain and loss as well as other non-operating income. We did not receive any interest income for the period from January 1, 2004 to June 8, 2004 and for the period from June 9, 2004 to December 31, 2004. However, we received interest income of US$2.5 million in 2005, which was offset by the US$2.0 million interest expense we incurred. We also had a US$570,000 net foreign exchange loss in 2005 primarily as result of foreign exchange transaction losses on H.K. dollar payables. We incurred such losses due to differences in the H.K. dollar/U.S. dollar exchange rate on the date such payables were recorded and the date we exchanged U.S. dollars into H.K. dollars to pay such payables.

Income tax (expense) credit

Our income is subject to a Macau complementary tax at 12%. We had income tax expense of US$26,000 for the period from January 1, 2004 to June 8, 2004 and US$37,000 for the period from June 9, 2004 to December 31, 2004, as compared to a US$91,000 tax credit that we received in 2005, due to a greater deferred tax credit that we benefited from in 2005.

Minority interest

Our minority interests were nil for the period from January 1, 2004 to June 8, 2004 and US$91,000 for the period from June 9, 2004 to December 31, 2004, compared to US$308,000 in 2005, primarily as a result of the increase in overall operating loss attributable to minority shareholders.

Net income (loss)

As a result primarily of the foregoing, we had a net income of US$494,000 for the period from January 1, 2004 to June 8, 2004, a net loss of US$1.0 million for the period from June 9, 2004 to December 31, 2004 and a net loss of US$3.3 million in 2005, respectively.

 

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Liquidity and Capital Resources

The following table sets forth a summary of our cash flows for the periods indicated:

 

     Historical
result for the
period from
January 1,
2004 to June 8,
2004
(predecessor)
    Historical
result for the
period from
June 9, 2004 to
December 31,
2004
(successor)
    Historical
result for the
year ended
December 31,
2005
(successor)
    Historical
result for the
year ended
December 31,
2006
(successor)
    Historical
result for the
six months
ended June 30,
2006
(successor)
    Historical
result for the
six months
ended June 30,
2007
(successor)
 
     (in thousands of US$)  

Net cash provided by (used in) operating activities

   $ 557     $ 2,217     $ 4,284     $ (20,237 )   $ (5,243 )   $ 16,040  

Net cash used in investing activities

     (6,445 )     (5,475 )     (181,258 )     (38,645 )     (42,774 )     (381,445 )

Net cash provided by financing activities

     8,267       8,795       191,206       623,109       31,870       58,053  
                                                

Net increase (decrease) in cash and cash equivalents

     2,379       5,537       14,232       564,227       (16,147 )     (307,352 )

Cash and cash equivalents at beginning of period/year

     386       —         5,537       19,769       19,769       583,996  

Effect of foreign exchange on cash and cash equivalents

     —         —         —         —         —         (1,497 )
                                                

Cash and cash equivalents at end of period/year

   $ 2,765     $ 5,537     $ 19,769     $ 583,996     $ 3,622     $ 275,147  
                                                

Operating activities

Our net cash provided by operating activities was US$16.0 million for the six months ended June 30, 2007, compared to the US$5.2 million net cash used in operating activities for the six months ended June 30, 2006. This was primarily attributable to the opening of Crown Macau. Our net cash provided by operating activities totaled US$4.3 million in 2005, compared to US$2.2 million in the period from June 9, 2004 to December 31, 2004, and US$557,000 in the period from January 1, 2004 to June 8, 2004. The primary reason for the increase was the greater revenue generated from additional Mocha Clubs and gaming machines. For the period January 1, 2004 to June 8, 2004, we had an average of 125 gaming machines. For the period from June 9, 2004 to December 31, 2004, and for the years ended December 31, 2005 and 2006, the average number of gaming machines at our Mocha Clubs increased to 513, 634 and 937, respectively. The average number of gaming machines at our Mocha Clubs for the six months ended June 30, 2007 was 974.

Delays or cost overruns in the completion of any of our casino resort projects would adversely affect our ability to generate operating revenue at the times and in the amounts we anticipate, increase our financing and other costs for such projects and increase the depreciation and amortization charges we incur due to increased construction costs and capitalized fees and finance costs. See “Risk Factors—Risks Relating to Our Early Stage of Development—We may be required to incur significant additional indebtedness or sell convertible bonds, ADSs or other equity or equity-linked securities. Our ability to obtain additional financing may be limited, which could delay or prevent the opening of one or more of our projects.”

Investing activities

City of Dreams. The estimated cost of City of Dreams, comprising a 420,000 sq.ft. casino, the Hard Rock hotel, the Crown Towers hotel, the Grand Hyatt twin-tower hotel, a purpose-built wet stage performance theatre, approximately 145,000 sq.ft. of retail space together with food and beverage outlets is approximately US$2.1 billion, consisting primarily of construction costs, design and consultation fees, but excluding the cost of land. The additional cost of the apartment hotel complex planned for development at the City of Dreams integrated

 

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casino resort complex is approximately US$330 million, excluding the cost of land. As of June 30, 2007, we had spent approximately US$200.6 million of the total budget (excluding land), primarily for construction, and design and consultation fees. We plan to fund the remaining budgeted costs of construction and development from a combination of the following sources:

 

   

borrowings under the US$1.75 billion City of Dreams Project Facility; and

 

   

a portion of the net proceeds from this offering.

See “—Liquidity and Capital Resources—Financing Activities.”

Macau Peninsula Site. In May 2006, we entered into a conditional agreement to acquire a third development site, which is located on the shoreline of Macau peninsula near the current Macau Ferry Terminal, or Macau Peninsula site. The Macau Peninsula site is approximately 6,480 square meters (approximately 1.6 acres) and the acquisition price is HK$1.5 billion (US$192.8 million), of which we have paid a deposit of HK$100 million (US$12.9 million). We expect to pay a land premium of approximately HK$205 million (US$26.3 million) to the Macau government for this site. The agreement completion deadline was first extended in January 2007 and again in July 2007 when we negotiated an extension of the completion deadline for the conditional agreement to the end of July 2008 in order to benefit from additional flexibility in the timing of the purchase, which is subject to various closing conditions. Other than the extension of the purchase completion deadline, all other provisions of the agreement remain in force, and there were no fees associated with the extension. Completion of the purchase remains subject to (i) significant conditions in the control of third parties unrelated to us and the seller of the property, and (ii) the approval of the Macau government. We are currently considering plans to develop the Macau Peninsula site into a mixed-use hotel, serviced apartment and casino facility aimed primarily at day-trip gaming patrons. If we acquire the site, we are targeting the middle of 2010 as our opening date. Based on preliminary estimates and conceptual designs, we have currently budgeted approximately US$750 million for the total project costs of the Macau Peninsula project consisting primarily of land and construction costs, land premium costs, design and consultation fees.

Macau Gaming Subconcession. In September 2006, MPBL Gaming obtained a gaming subconcession from the Macau government under the concession granted to Wynn Macau. PBL signed an agreement with Wynn Macau under which US$900 million was payable to Wynn Macau upon the issuance by the Macau government of the subconcession to MPBL Gaming. The US$500 million loan incurred by MPBL Gaming under the Subconcession Facility became part of our consolidated indebtedness when control of MPBL Gaming was transferred to us in October 2006. We repaid the entire US$500 million drawn under the Subconcession Facility and any fees and interest incurred in connection with this facility in December 2006 with a portion of the net proceeds of the initial public offering of our ADSs. See “—Liquidity and Capital Resources—Financing Activities.”

Mocha Clubs. We will seek opportunities to expand the Mocha Clubs business by adding new Mocha Club locations and additional gaming machines to our existing locations during the next few years. Funding of this expansion is expected to be provided by operating cash flow to the extent available.

Financing activities

Proceeds from Our Initial Public Offering. Net cash provided by financing activities amounted to US$58.1 million for the first six months of 2007, primarily due to proceeds from the sale of additional ADSs pursuant to the exercise of the underwriters’ over-allotment option in January 2007, which amounted to US$160.6 million after underwriting discounts and commissions, following our initial public offering in December 2006. Net cash provided by financing activities amounted to US$623.1 million in 2006, primarily due to the proceeds from our initial public offering, which amounted to US$1.1 billion after underwriting discounts and commissions, of which US$500 million was immediately used for the repayment of the Subconcession Facility.

Shareholder Loans and Contributions. In March 2007, we fully repaid the amounts outstanding due to Melco and PBL as at end of 2006 totaling US$ 96.9 million. As of June 30, 2007, we have approximately US$115.9 million of outstanding shareholder loans from Melco and PBL in the form of a fixed term loan at an interest rate of 3-month HIBOR per annum repayable in May 2009.

 

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No fees or proceeds are payable to PBL and Melco in return for their contributions to us or our subsidiaries and their future economic interest in us is solely based on their share ownership in forming our company.

Great Wonders Project Facility. On February 13, 2006, our subsidiary, MPBL Crown Macau Developments (formerly Great Wonders) entered into a two tranche HK$1.28 billion (US$164.5 million) term loan facility with lenders led by Bank of China Limited, Macau Branch, and Banco Nacional Ultramarino, S.A. to finance the construction of the Crown Macau. This facility was never drawn down and was cancelled in June 2007.

Subconcession Facility. On September 4, 2006, MPBL Gaming entered into the US$500 million Subconcession Facility with lenders led by Australia and New Zealand Banking Group Limited, Banc of America Securities Asia Limited, Barclays Capital and Deutsche Bank AG, Hong Kong Branch, to pay a portion of the purchase price due to Wynn Macau upon the Macau government’s approval of the issuance of a gaming subconcession to MPBL Gaming. The Subconcession Facility was drawn and used to pay US$500 million of the US$900 million due to Wynn Macau in September 2006 upon the issuance of the subconcession to MPBL Gaming. The US$500 million indebtedness from the Subconcession Facility became part of our consolidated debt upon the transfer of control of MPBL Gaming to us in October 2006 and was repaid with part of the net proceeds from our initial public offering in December 2006.

City of Dreams Project Facility. On September 5, 2007, MPBL Gaming entered into the US$1.75 billion City of Dreams Project Facility to finance a portion of the total project costs of the City of Dreams. On September 24, 2007, the first drawdown equating to the Hong Kong dollar equivalent of US$500 million was made under the City of Dreams Project Facility.

We may obtain financing in the form of, among other things, equity or debt, including additional bank loans or high yield, mezzanine or other debt, or rely on our operating cash flow to fund the development of our projects.

Description of Our Indebtedness

Subconcession Facility

On September 4, 2006, MPBL Gaming entered into a US$500 million term loan facility with certain lenders to pay the remaining part of the US$900 million purchase price due to Wynn Macau upon the Macau government’s approval of the issuance of a gaming subconcession to MPBL Gaming. The US$500 million indebtedness from the Subconcession Facility became part of our consolidated debt upon the transfer of control of MPBL Gaming to us in October 2006 and was fully repaid with the proceeds of our initial public offering in December 2006.

City of Dreams Project Facility

MPBL Gaming has entered into a senior facilities agreement, dated September 5, 2007 (as supplemented), with Australia and New Zealand Banking Group Limited, Banc of America Securities Asia Limited, Barclays Capital, Citigroup Global Markets Asia Limited, Deutsche Bank AG, Hong Kong branch, and UBS AG, Hong Kong Branch to finance primarily the development and construction costs of the City of Dreams.

The City of Dreams Project Facility consists of:

 

   

a US$1.5 billion term loan facility; and

 

   

a US$250 million revolving credit facility.

 

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Drawdown

The final maturity date of the term loan facility is September 5, 2014 and the final maturity date of the revolving credit facility is September 5, 2012 or, if earlier, the date of repayment, prepayment or cancellation in full of the term loan facility.

Drawdowns on the term loan facility are, subject to satisfaction of conditions precedent, available in minimum amounts of US$5 million (approximately HK$39 million) until January 5, 2010. The revolving credit facility will be made available on a fully revolving basis from, in the case of any drawing for general working capital purposes or purposes of meeting cost overruns associated with the City of Dreams project, the date upon which the term loan facility has been fully drawn, to the date that is one month prior to the revolving credit facility’s final maturity date.

All drawings under the City of Dreams Project Facility are to be paid into a disbursement account that will be subject to security. The first drawdown under the City of Dreams Project Facility took place on September 24, 2007 in an amount equal to the Hong Kong dollar equivalent of US$500 million. Subsequent drawdowns under the City of Dreams Project Facility are subject to, among others, satisfaction of conditions precedent specified in the City of Dreams Project Facility, including registration of the land concession and execution of construction contracts, compliance with affirmative, negative and financial covenants and the provision of certificates from technical consultants certifying the amount paid or payable for the construction cost. MPBL Gaming is also required to undertake a program to hedge exposures to interest rate fluctuations under the City of Dreams Project Facility and in certain circumstances, currency fluctuations. These hedging agreements will be secured on a pari passu basis with the lenders.

Repayment

The term loan facility will be repaid in quarterly installments according to an amortization schedule commencing September 5, 2010. Each revolving credit facility loan will be repaid in full on the last day of an agreed upon interest period ranging from one to six months, or rolled-over.

MPBL Gaming may make voluntary prepayments in respect of the term loan facility and the revolving credit facility, subject to certain conditions without premium or penalty other than break costs, in minimum amounts of US$20 million following completion of the project and in full prior to completion. Voluntary prepayments will be applied to the principal outstanding on the City of Dreams Project Facility and to maturities on a pro-rata basis and amounts prepaid will not be available for redrawing.

We must make mandatory prepayments in respect of the amounts within the borrowing group (which does not include MPBL Entertainment) under the City of Dreams Project Facility, or the Borrowing Group, with, among other sources, all of (1) 50% of the net proceeds of any permitted equity issuance of any member of the Borrowing Group and all of the net proceeds of any permitted debt issuance of any member of the Borrowing Group; (2) the net proceeds of any asset sale, subject to reinvestment rights and certain exceptions; (3) net termination proceeds paid under MPBL Gaming’s subconcession, any lease agreement, the hotel management agreements, or any other material contracts or agreements (subject to certain exceptions); (4) the net proceeds or liquidated damages paid pursuant to obligation, default or breach under the certain documents relating to the City of Dreams project; (5) the insurance proceeds net of expenses to obtain such proceeds, subject to reinvestment rights and certain exceptions; and (6) excess cashflow (as defined under various financial ratio tests).

Accounts

The terms of the City of Dreams Project Facility require that all of the revenues of the gaming business operated by MPBL Gaming, including the Crown Macau and the City of Dreams, be paid into a bank account established by MPBL Gaming, which will be divided further into sub-accounts, secured in favor of the security agent for the benefit of the lenders. In addition, subject to certain exceptions, all of the accounts of all of the members of the Borrowing Group are security for the indebtedness. Subject to such security, such revenues will be paid out in order of priority, in accordance with specified cash waterfall arrangements.

 

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Interest and Fees

The U.S. dollar and H.K. dollar denominated drawdowns will bear an initial interest rate of LIBOR and HIBOR, respectively, plus a margin, and the interest rate margin will be adjusted in accordance with the total debt to EBITDA ratio on a consolidated basis in respect of the Borrowing Group after the completion of the construction of the City of Dreams project. We are obligated to pay a commitment fee quarterly in arrears from September 5, 2007 throughout the availability period. The commitment fee is payable on the daily undrawn amount under the relevant term loan facility and revolving credit facility.

PBL and Melco Support

In connection with the signing of the City of Dreams Project Facility in September 2007, Melco and PBL each provided an undertaking to Deutsche Bank AG, Hong Kong Branch, as agent under the City of Dreams Project Facility, to contribute additional equity up to an aggregate of US$250 million (divided equally between Melco and PBL) to MPBL Gaming to pay any costs (i) associated with construction of the City of Dreams project and (ii) for which Deutsche Bank AG, Hong Kong Branch as agent has determined there is no other available funding. In support of such contingent equity commitment, each of Melco and PBL has agreed to maintain a direct or standby letter of credit in favor of the security agent for the City of Dreams Project Facility in an amount equal to the amount of contingent equity it is obliged to ensure is provided to MPBL Gaming. These letters of credit are required to be maintained until the final completion date of the City of Dreams project has occurred and certain debt service reserve accounts have been funded. Subject to the approval of the lenders, MPBL Gaming may in the future elect to replace the contingent equity commitments provided by Melco and PBL with its own contingent equity commitment in favor of MPBL Gaming, along with a similar letter of credit in favor of the security agent in an amount equal to US$250 million, or another form of security (which could include cash) satisfactory to the lenders, although there is no plan to do so as of the date of this prospectus.

Security

Security for the City of Dreams Project Facility and hedging agreements include, amongst others:

 

   

a first priority mortgage over all land and all present and future buildings on and fixtures to such land, and an assignment of land use rights under land concession agreements or equivalent held by the borrower and specified guarantors (the “Relevant Obligors”);

 

   

the letters of credit described above in “—Description of Our Indebtedness—City of Dreams Project Facility—PBL and Melco Support”;

 

   

charges over the bank accounts in respect of the Borrowing Group, subject to certain exceptions including the capital contribution account for the holding or payment of equity for Crown Macau and cash deposits of MPBL COD Developments set aside as guarantee money in favor of the Macau government;

 

   

assignment of the Relevant Obligors’ rights under certain insurance policies;

 

   

first priority security over the Relevant Obligors’ chattels, receivables and other assets which are not subject to any security under any other security documentation;

 

   

pledge over equipment and tools used in the gaming business by MPBL Gaming; and

 

   

first priority charges over the issued share capital of the Relevant Obligors.

Covenants

The Relevant Obligors must comply with certain negative and affirmative covenants. These covenants include amongst others, that, without obtaining consent from the Majority Lenders (as defined in the facility agreement), they may not:

 

   

create or permit to subsist further charge or any form of encumbrance over its assets, property or revenues except as permitted under the facility agreement;

 

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sell, transfer or dispose of any of its assets unless such sale is conducted on an arm’s length basis at a fair market value permitted in accordance with the terms of the City of Dreams Project Facility and the proceeds from the sale shall be credited to the relevant accounts over which the lenders have a first priority charge on;

 

   

make any payment of fees under any agreement with Melco or PBL (or their affiliates) other than fees approved by the Majority Lenders or, after a certain date, in accordance with the waterfall, or enter into agreements with Melco or PBL or their affiliates except in certain limited circumstances;

 

   

make any loan or guarantee indebtedness except for certain identified indebtedness and guarantees permitted;

 

   

create any subsidiaries except as permitted under the City of Dreams Project Facility, such as those necessary for completion and operation of City of Dreams; or

 

   

make investments other than within agreed upon limitations.

In addition, the Relevant Obligors will be required to comply with certain financial ratios and financial covenants such as a maximum total debt to earnings before interest, taxes, depreciation and amortization ratio, a minimum debt service coverage ratio, a minimum interest coverage ratio and a maximum capital expenditure test.

Events of Default

The City of Dreams Project Facility contains customary events of default including: (1) failure to make any payment when due; (2) breach of financial covenants; (3) cross default triggered by any other event of default in the facility agreements or other documents forming the indebtedness of the borrowers and/or guarantors; (4) failure by PBL and Melco to maintain the letters of credit according to the terms of the City of Dreams Project Facility; (5) breach of the credit facility documents, land agreements, lease agreements for the provision of gaming services or hotel management agreements; (6) insolvency or bankruptcy events; (7) misrepresentations on the part of the borrowers and guarantors in statements made in the loan documents delivered to the lenders; (8) failure to commence or complete the construction by certain specified dates; and (9) various change of control events involving us.

We may obtain financing in the form of, among other things, equity or debt, including additional bank loans or high yield, mezzanine or other debt, or rely on our operating cash flow to fund the development of our projects.

Sources and Uses

Our current funding sources and uses are set forth in the table below:

 

Funding Sources

  (US$m)    

Funding Uses

   (US$m)  

Equity

  $ 2,116     Subconcession    $ 900  

Senior Secured Credit Facilities(1)

    1,743     Crown Macau project      483  

Expected proceeds from this offering(2)

    [· ]   City of Dreams Project (excl. apt-hotel units)(4)      2,331  

Shareholder Loans

    116     Apt-hotel units (City of Dreams Project)(5)      353  

Others(3)

    419     Other capital expenditure and pre-opening expenses(6)      330  
    Others(7)      [· ]
                  

TOTAL FUNDING SOURCES

  $ [· ]   TOTAL FUNDING USES    $ [· ]
                  

Notes

(1)   All operating cashflow from Crown Macau, City of Dreams (excluding apartment-hotel) and Mocha Clubs serves or will serve as security for the benefit of the lenders to the City of Dreams Project Facility.
(2)   Expected proceeds of US$[·] less related fees and expenses.
(3)   Others include funding from potential future issuance of debt or equity or future operating cash flows.
(4)   Includes the cost of land.
(5)   Includes the cost of land.

 

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(6)   Includes maintenance capex for Crown Macau and Mocha Clubs, expansion capex for Mocha Clubs and pre-opening expenses.
(7)   Includes partial financing for other projects which may include Macau Peninsula financing costs and expenses, working capital (including cage cash) and other general corporate expenses.

We have been able to meet our working capital needs, and we believe that we will be able to meet our working capital needs in the foreseeable future, with our operating cash flow, existing cash balances, proceeds from this offering and additional financings.

Indebtedness and Contractual Obligations

Our total long-term indebtedness and other known contractual obligations are summarized below as of December 31, 2006.

 

     Payments due by period
    

Less than

1 year

   1 –3 years    3 – 5 years    More than
5 years
   Total
     (in millions of US$)

Contractual obligations

              

Long-term debt obligations:(1)

   $ —      $ 115.6    $ —      $ —      $ 115.6

Capital (finance) lease obligations:(2)

     —        —        —        —        —  

Operating lease obligations:

              

Rent payable for Crown Macau land:(3)

     0.1      0.3      0.3      3.4      4.1

Land premium, guarantee deposit and rent payable for city of Dreams Land:(4)

     21.5      12.3      12.5      39.0      85.3

Leases for office space as recruitment and training center and Macau and Mocha Clubs locations

     4.3      7.7      5.2      8.3      25.5

Other contractual commitments:(5)

     156.4      11.2      —        —        167.6
                                  

Total

   $ 182.3    $ 147.1    $ 18.0    $ 50.7    $ 398.1
                                  

(1)   Excludes the working capital loans provided by Melco and PBL, which had outstanding balances of US$70 million and US$27 million, respectively, as of December 31,2006. As of December 31, 2006 and June 30, 2007, the balance of the outstanding term loan, from Melco and PBL amounts to approximately US$115.6 million and US$115.9 million, respectively, were repayable in May 2008 carrying interest at a floating rate equal to 3 months HIBOR. Subsequently in September 2007, the final maturity date was extended to May 2009.
(2)   Capital lease obligations due within one year and after one year are US$6,000 and US$10,000 respectively, as of December 31, 2006, and US$5,000 and US$8,000, respectively, as of June 30, 2007.
(3)   Rent payable during the construction period was US$20,000 per year. Since completion of construction the annual rent has been US$171,000. The rent payable is adjusted every five years as agreed between the Macau government and MPBL Crown Macau Developments in accordance with the applicable market rates from time to time.
(4)   MPBL COD Developments was offered a grant of a medium-term lease of 25 years for the City of Dreams site for approximately MOP 509 million (US$63.4 million) by the Macau government in April 2005. MPBL COD Developments accepted the offer of grant in May 2005. The total payment obligation under this lease was US$63.4 million as of December 31, 2006 with US$21.2 million payable at signing of the government lease and the remaining balance of approximately US$42.2 million payable in nine equal half-year installments bearing interest at 5% per annum. Rent payable during the construction period is US$285,000 per year. The annual rent increased to US$508,000 after the completion of construction. The rent payable is adjusted every five years as agreed between the Macau government and MPBL COD Developments in accordance with the applicable market rates from time to time.
(5)   On November 24, 2004, MPBL Crown Macau Developments entered into a construction contract with Paul Y. Construction for the design and construction of the Crown Macau project. The total remaining commitment under this contract was US$107.5 million as of December 31, 2006. Upon completion of the Crown Macau project, there were no outstanding contractual commitments as of June 30, 2007.

 

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Off-Balance Sheet Arrangements

We have entered into interest rate swaps in connection with our first drawdown under the City of Dreams Project Facility. We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity, or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

Restrictions on Distributions

We are a holding company with no material operations of our own. Our assets consist, and will continue to consist, of our shareholdings in our subsidiaries. Our subsidiaries’ current and future financing facilities will restrict our subsidiaries’ ability to pay dividends to us and any financings we may enter into will likely restrict our ability to pay dividends to our shareholders. For example, under the City of Dreams Project Facility, our subsidiaries within the Borrowing Group will be subject to certain restrictions on paying dividends outside of the Borrowing Group. There is a blanket prohibition on paying dividends outside of the Borrowing Group until after the first repayment under the term loan facility is made and only then we will be able to pay dividends if certain financial tests and conditions are satisfied.

Distribution of Profits

All of our subsidiaries incorporated in Macau are required to set aside a minimum of 10% to 25% of the entity’s profit after taxation to the legal reserve until the balance of the legal reserve reaches a level equivalent to 25% to 50% of the entity’s share capital in accordance with the provisions of the Macau Commercial Code. The legal reserve sets aside an amount from the statement of operations and is not available for distribution to the shareholders of the subsidiaries. The appropriation of legal reserve is recorded in the financial statements in the year in which it is approved by the board of directors of the subsidiaries. As of June 30, 2007, the balance of the reserve amounted to US$2,000.

Inflation

We believe that inflation and changing prices have not had a material impact on our revenues or income from operations during the past year. Increased costs of labor, materials and energy in Macau may adversely affect the future costs of construction of our projects. We may not be able to protect ourselves from the risks of these increases through fixed or maximum price terms in our construction contracts or otherwise.

Quantitative and Qualitative Disclosure about Market Risk

Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. We believe our and our subsidiaries’ primary exposure to market risk will be interest rate risk associated with our substantial future indebtedness.

Interest Rate Risk

We have entered into interest rate swaps in connection with our first drawdown under the City of Dreams Project Facility. Under the City of Dreams Project Facility to finance the development of our projects, we have incurred substantial indebtedness, and we expect to incur substantially more indebtedness, which will bear interest at floating rates based on LIBOR and HIBOR. Accordingly, we are subject to fluctuations in LIBOR and HIBOR. The lenders under the City of Dreams Project Facility require us to partly hedge our floating rate debt through interest rate swaps, caps and other derivatives transactions. We may also hedge our exposure to floating interest rates in a manner we deem prudent. Interests in security we provide to the lenders under the City of

 

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Dreams Project Facility, or other security or guarantees, may be required by the counterparties to our hedging transactions, which could increase our aggregate secured indebtedness. We do not intend to engage in transactions in derivatives or other financial instruments for trading or speculative purposes and we expect the provisions of our credit facilities to restrict or prohibit the use of derivatives and financial instruments for purposes other than hedging.

Foreign Exchange Risk

The Hong Kong dollar is the predominant currency used in gaming transactions in Macau and is often used interchangeably with the Pataca in Macau. The Hong Kong dollar is pegged to the U.S. dollar within a narrow range and the Pataca is in turn pegged to the Hong Kong dollar. Although we will have certain expenses and revenues denominated in Patacas in Macau, our revenues and expenses will be denominated predominantly in Hong Kong dollars and in connection with most of our indebtedness and certain expenses, U.S. dollars. We cannot assure you that the current peg or linkages between the U.S. dollar, Hong Kong dollar and Pataca will not be broken or modified. See “Risk Factors—Risks Relating to Our Business and to Operating in Macau—Any fluctuation in the value of the H.K. dollar, U.S. dollar or the Pataca may adversely affect our expenses and profitability.” In addition, Crown Macau and Mocha Clubs accept foreign exchange for their cage cash. We and our subsidiaries do not engage in hedging transactions with respect to foreign exchange risk.

Construction Materials Risk

The development of our projects involves substantial capital expenditure and requires long periods of time to generate the necessary returns. Our business will continue to be subject to significant expenses before and after the commencement of commercial operation of our projects. Prior to the completion of our development projects, our cost will be primarily driven by expenses attributable to the construction contracts we have entered into and intend to enter into for the City of Dreams project. Although we have implemented measures to maintain the agreed development costs within budget, for example, by controlling all the sub-contractor costs and similar cost control arrangements in the construction contracts for the City of Dreams project, the actual expenses attributable to the construction contracts may increase. In addition, the cost of construction materials or equipment could increase prior to our entering into the construction contracts.

Credit Risk

We have conducted, and expect to continue to conduct, our table gaming activities at our casinos on a limited credit basis as well as a cash basis. It is a common practice in Macau for junket operators or promoters to bear the responsibility for issuing and subsequently collecting credit. While most of our gaming credit play has been, and we expect it will continue to be, via junket operators and promoters, who will therefore bear this credit risk, we also grant gaming credit directly to certain customers. We may not be able to collect all of our gaming receivables from our credit customers. We expect that we will be able to enforce our gaming receivables only in a limited number of jurisdictions, including Macau. As most of our gaming customers are expected to be visitors from other jurisdictions, principally Hong Kong and the PRC, we may not have access to a forum in which we will be able to collect all of our gaming receivables. The collectibility of receivables from international customers could be negatively affected by future business or economic trends or by significant events in the countries in which these customers reside. We currently conduct and plan to continue to conduct credit evaluations of customers and generally do not require collateral or other security from our customers. We have established an allowance for doubtful receivables primarily based upon the age of the receivables and factors surrounding the credit risk of specific customers. In the event a customer has been extended credit and has lost back to us the amount borrowed and the receivable from that customer is still deemed uncollectible, Macau gaming tax will still be payable.

 

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OUR INDUSTRY

Macau Gaming Market Overview

In 2006 and the six months ended June 30, 2007, Macau generated approximately US$7.0 billion and US$4.7 billion of gaming revenue, respectively, compared to the US$6.5 billion and US$3.3 billion of gaming revenue (excluding sports book and race book), respectively generated on the Las Vegas Strip, and the US$5.2 billion and US$2.4 billion (excluding sports book and race book), respectively, generated in Atlantic City. Gaming revenue in Macau has increased at a five-year CAGR from 2001 to 2006 of 24.9% compared to CAGRs of 7.3% and 3.9% for the Las Vegas Strip and Atlantic City (excluding sports book and race book), based on information published by the DICJ, the Nevada Gaming Control Board and the New Jersey Casino Control Commission. Macau benefits from its proximity to one of the world’s largest pools of existing and potential gaming patrons and is currently the only market in Greater China, and one of only several in Asia, to offer legalized casino gaming. Macau is located in the Pearl River Delta region of China, and is approximately an hour away from approximately 6.9 million people in Hong Kong via a 24-hour hydrofoil ferry system. All of the main population centers of China, as well as Taiwan, Japan, Korea, Thailand, Malaysia, Singapore, Indonesia and the Philippines lie within an approximately 2,500 mile radius of Macau. According to the Economic Intelligence Unit, these countries had a total population of almost two billion people in 2006, with China alone representing approximately 1.3 billion people.

Visitation to Macau increased at a CAGR between 2001 and 2006 of 16.4% to 22.0 million visitors and at a growth rate of 21.3% from 10.4 million visitors for the six months ended June 30, 2006 to 12.6 million for the six months ended June 30, 2007, according to the Macau Statistics and Census Services. We believe that visitation and gaming revenue growth, for the Macau market have been driven by and will continue to be driven by a combination of factors, including:

 

   

proximity to major Asian population centers;

 

   

liberalization of travel restrictions in China under China’s “Facilitated Individual Travel Scheme,” enabling greater numbers of Chinese citizens from more provinces to visit Macau individually without being in a tour group (as was required previously), and liberalization of currency restrictions to permit Chinese citizens to take significantly larger sums of foreign currency out of China when they travel;

 

   

increasing regional wealth, leading to a large and growing middle class with more disposable income;

 

   

planned infrastructure improvements such as an expanded and upgraded airport, new roads, tunnels and bridges and additional ferry access, which are expected to facilitate more convenient travel to and within Macau; and

 

   

an increasing supply of better quality casino, hotel and entertainment offerings as evidenced by the strong reception to the opening of new casinos such as the Sands Macao, Venetian and Wynn Macau.

In conjunction with these factors, we believe that Macau is undergoing a transition from a gaming-focused market into a leisure destination offering a greater breadth of gaming and non-gaming entertainment options and amenities. We believe that this development should help to drive further growth in consumer demand and visitation to Macau, particularly from the emerging mass market segment. Historically, Macau has catered primarily to high-end patrons who generally play at baccarat tables requiring large minimum bets. The development of Las Vegas style casinos, which offer a broader gaming and entertainment experience to mass market players, should enable additional revenue opportunities from a larger demographic base. We believe that the build-out of world-class facilities in Macau should help to make Macau a more attractive destination for longer multi-day stays for various customer segments, including families. At the same time, we believe that Macau will continue to support an active market for day-trip visitors from locations such as Hong Kong and Guangdong Province.

 

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Market Growth

Proximity to Major Asian Population Centers. Macau is located in the Pearl River Delta region of China, close to Hong Kong and some of the most populous and prosperous areas in southern China, as well as Taiwan and other Asian markets. Gaming customers can reach Macau in a relatively short period of time using various means of transportation, for example, by car or bus from Guangdong province, by hydrofoil ferry and helicopter from Hong Kong and by air from elsewhere in China and other Asian countries. The relatively easy access from major population centers facilitates Macau’s development as a popular gaming destination in Asia. Macau completed construction of an international airport in 1995 that provides regularly scheduled direct air service to many major cities in Asia, such as Shanghai, Beijing, Taipei, Singapore, Bangkok and Manila, and through those cities, links to numerous other Asian destinations.

LOGO

 

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Until 2002, the dominant feeder market to Macau was Hong Kong. Although the number of visitors from Hong Kong continued to exhibit steady growth between 2001 and 2006, the number of visitors from China increased at a CAGR of 31.9 %, rising from 3.0 million in 2001 to 12.0 million in 2006. The number of visitors from China comprised approximately 54.5% of the 22.0 million visitors to Macau in 2006 according to the Macau Statistics and Census Service. The number of visitors from Hong Kong and Japan realized steady growth rates between 2001 and 2006, while visitation from South Korea and other parts of East Asia increased significantly at CAGRs of 27.5% and 15.8% respectively during the same period. The following table sets forth statistics on visitations from major Asian population centers to Macau for the periods indicated.

 

    2001     2002     2003     2004     2005     2006     5-Year
CAGR
 
    Visitation   %
Total
    Visitation   %
Total
    Visitation   %
Total
    Visitation   %
Total
    Visitation   %
Total
    Visitation   %
Total
   

Visitation

                         

China

  3,005,722   29.2 %   4,240,446   36.8 %   5,742,036   48.3 %   9,529,739   57.2 %   10,462,966   55.9 %   11,985,617   54.5 %   31.9 %

Hong Kong

  5,196,136   50.6     5,101,437   44.2     4,623,162   38.9     5,051,059   30.3     5,614,892   30.0     6,940,656   31.6     6.0  

Taiwan

  1,451,826   14.1     1,532,929   13.3     1,022,830   8.6     1,286,949   7.7     1,482,483   7.9     1,437,824   6.5     0.2  

Japan

  140,937   1.4     142,588   1.2     85,613   0.7     122,184   0.7     169,115   0.9     220,190   1.0     9.3  

South Korea

  48,274   0.5     50,447   0.4     38,281   0.3     65,631   0.4     120,739   0.6     162,709   0.7     27.5  

East Asia—Others

  1,891   0.0     2,705   0.0     2,667   0.0     3,555   0.0     5,301   0.0     3,934   0.0     15.8  
                                                                 

East Asia Subtotal

  9,844,786   95.8     11,070,552   96.0     11,514,589   96.9     16,059,117   96.3     17,855,496   95.4     20,750,930   94.3     16.1  

Other

  434,187   4.2     460,289   4.0     373,287   3.1     613,439   3.7     855,691   4.6     1,247,192   5.7     23.5  
                                                                 

Total

  10,278,973   100.0 %   11,530,841   100.0 %   11,887,876   100.0 %   16,672,556   100.0 %   18,711,187   100.0 %   21,998,122   100.0 %   16.4 %
                                                                 

Source: Macau Statistics and Census Services

 

     Six Months Ended
June 30, 2006
    Six Months Ended
June 30, 2007
    Growth Rate
between
June 2006 and
June 2007
 
   Visitation   

%

Total

    Visitation   

%

Total

   

Visitation

            

China

   5,825,455    55.9 %   6,905,636    54.6 %   18.5 %

Hong Kong

   3,191,467    30.6     3,952,761    31.3     23.9  

Taiwan

   684,273    6.6     705,706    5.6     3.1  

Japan

   97,451    0.9     130,096    1.0     33.5  

South Korea

   80,626    0.8     101,940    0.8     26.4  

East Asia—Others

   2,120    0.0     2,314    0.0     9.2  
                            

East Asia Subtotal

   9,881,392    94.8     11,798,453    93.3     19.4  

Other

   541,088    5.2     841,551    6.7     55.5  
                            

Total

   10,422,480    100.0 %   12,640,004    100.0 %   21.3 %
                            

Source: Macau Statistics and Census Services

Liberalization of Travel and Currency Restrictions in China. In the past, many mainland Chinese were prohibited from traveling to Macau unless they traveled in tour groups. Under China’s “Facilitated Individual Travel Scheme”, which took effect in 2003, mainland Chinese from 44 large urban centers and economically developed regions may obtain permits to travel to Macau individually without being in a tour group. Previously, Chinese citizens could travel only to select countries and only if they were part of tour groups. In addition, with effect from July 2005, Chinese traveling abroad for 6 months or less are allowed to take up to US$5,000 out of China, an increase from the previous limit of US$3,000. These travel policies have contributed significantly to Macau’s development into a major entertainment and tourist destination for visitors from China. In 2006, Chinese tourists comprised 54.5% of total visitors to Macau, compared with 36.8% in 2002, the year prior to the introduction of the new travel scheme, according to Macau Statistics and Census Services. As China extends the relaxation of travel restrictions to more cities, Macau will be open to even greater numbers of Chinese visitors. With the continued liberalization of travel and currency restrictions, we believe that there is significant potential for further growth in visitor numbers from China to Macau.

 

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Economic Growth. We believe that a wealthier Chinese middle class population will also lead to an increase in travel to Macau and will generate higher demand for gaming and other entertainment offerings. According to the Economist Intelligence Unit, between 1993 and 2006, China’s gross domestic product (at current market prices) increased at a CAGR of 11.0% to US$2.8 trillion.

Gaming Revenue

Gaming revenue generated by the Macau market increased from US$2.3 billion in 2001 to US$7.0 billion in 2006, representing a five-year CAGR of approximately 24.9% and from US$3.2 billion for the six months ended June 30, 2006 to US$4.7 billion for the six months ended June 30, 2007, representing a growth of approximately 47.5% over the same period of last year, according to the DICJ. In 2006 and the six months ended June 30, 2007, the Las Vegas Strip generated gaming revenue of US$6.5 billion and US$3.3 billion (excluding sports book and race book), respectively, according to the Nevada Gaming Control Board, and the Atlantic City market generated gaming revenue of US$5.2 billion and US$2.4 billion (excluding sports book and race book), respectively, according to the New Jersey Casino Control Commission. Consequently, as of 2006, Macau is the largest gaming market in the world, surpassing both the Las Vegas and the Atlantic City gaming markets. The following table sets forth information regarding gaming revenues generated in Macau, the Las Vegas Strip and Atlantic City for the periods indicated.

Gaming Revenue by Jurisdiction

 

    Gaming Revenue(1)  
    2001   2002   2003   2004   2005   2006   5-Year
CAGR
   

2005-

2006
Year
growth

 
    HK$   US$   HK$   US$   HK$   US$   HK$   US$   HK$   US$   HK$   US$    
    ($ in billions)  

Macau

                           

Gaming Machines

  $ 0.2   $ 0.0   $ 0.2   $ 0.0   $ 0.2   $ 0.0   $ 0.60   $ 0.1   $ 1.2   $ 0.2   $ 2.0   $ 0.3   58.4 %   64.2 %

Table Games

                           

VIP Table Games(2)

  $ 12.8   $ 1.6   $ 15.9   $ 2.0   $ 21.5   $ 2.8   $ 28.9   $ 3.7   $ 28.0   $ 3.6   $ 35.7   $ 4.6   22.8 %   27.4 %

Mass Market Table Games

  $ 5.1   $ 0.7   $ 5.4   $ 0.7   $ 6.1   $ 0.8   $ 10.6   $ 1.4   $ 15.5   $ 2.0   $ 17.3   $ 2.2   27.6 %   11.6 %

Total Revenue

  $ 18.1   $ 2.3   $ 21.5   $ 2.8   $ 27.8   $ 3.6   $ 40.2   $ 5.2   $ 44.7   $ 5.7   $ 55.0   $ 7.0   24.9 %   23.0 %

Las Vegas Strip(3)

  $ 34.8   $ 4.6   $ 34.5   $ 4.6   $ 35.2   $ 4.7   $ 39.6   $ 5.2   $ 44.9   $ 5.9   $ 49.5   $ 6.5   7.3 %   10.4 %

Atlantic City

  $ 32.6   $ 4.3   $ 33.2   $ 4.4   $ 34.0   $ 4.5   $ 36.4   $ 4.8   $ 38.0   $ 5.0   $ 39.5   $ 5.2   3.9 %   4.0 %

Sources: DICJ, Nevada Gaming Control Board, New Jersey Casino Control Commission

Note: US$/HK$ = 7.8; MOP/HK$ = 1.03

(1)   Gaming revenue comprises revenue from traditional table games and gaming machines but excludes revenue from sports book and race book
(2)   Represents baccarat played in rooms operated by VIP operators
(3)   Excludes gaming revenue generated from other parts of Las Vegas and Clark County

 

    Gaming Revenue(1)  
    Six Months
Ended
June 30,
2006
  Six Months
Ended
June 30,
2007
  Growth Rate
between
June 2006 and
June 2007
 
    HK$   US$   HK$   US$  
    ($ in billions)  

Macau

         

Gaming Machines

  $ 0.9   $ 0.1   $ 1.5   $ 0.2   76.7 %

Table Games

         

VIP Table Games(2)

  $ 15.9   $ 2.0   $ 24.5   $ 3.1   54.2 %

Mass Market Table Games

  $ 8.3   $ 1.1   $ 10.9   $ 1.4   31.5 %

Total Revenue

  $ 25.0   $ 3.2   $ 36.9   $ 4.7   47.5 %

Las Vegas Strip(3)

  $ 24.5   $ 3.2   $ 25.1   $ 3.3   2.5 %

Atlantic City

  $ 18.5   $ 2.4   $ 18.5   $ 2.4   -0.5 %

 

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Sources: DICJ, Nevada Gaming Control Board, New Jersey Casino Control Commission

Note: US$/HK$ = 7.8; MOP/HK$ = 1.03

(1)   Gaming revenue comprises revenue from traditional table games and gaming machines but excludes revenue from sports book and race book
(2)   Represents baccarat played in rooms operated by VIP operators
(3)   Excludes gaming revenue generated from other parts of Las Vegas and Clark County

Table games are currently the most popular form of casino gaming in Macau and the rest of Asia. Baccarat is typically the most popular game, followed by blackjack, “big and small”, a traditional Chinese dice game, roulette and other games. Currently, a much larger percentage of revenue in Macau is from high stakes patrons, particularly VIP patrons who play baccarat at restricted tables in private VIP rooms, compared to Las Vegas and other markets. This has led to a significantly higher average daily net win per table in Macau for both VIP and mass market tables compared to in Las Vegas and Atlantic City. For example, in the six months ended June 30, 2007, the average daily net win per table in Macau was US$8,069.0 as compared to US$3,201.0 on the Las Vegas Strip, according to the DICJ and the Nevada Gaming Control Board, respectively. Mass market table game revenue growth in Macau has increased at a CAGR of 27.6% since 2001, outpacing VIP table game revenue growth in Macau, which rose at a 22.8% CAGR over the same period. In 2006, mass market table game revenue growth accelerated by 11.6%, increasing from approximately US$2.0 billion in 2005 to US$2.2 billion. We believe mass market table game revenue will continue to grow in Macau as new casinos such as the City of Dreams that cater to the mass market open in coming years.

The gaming machine market in Macau has historically been relatively small, comprising approximately 8,200 gaming machines as of June 2007. Many of these gaming machines are older machines that do not offer the latest technologies, games and themes and are located in “fill-in” and out-of-the-way locations. By contrast, in many other gaming venues, gaming machines represent a significantly more prominent part of the mix of gaming offerings and are in high demand and profitable. According to the Nevada Gaming Control Board and the DICJ, in 2006 Las Vegas generated more than 50.0% of its gaming revenues from gaming machines, as compared to less than 4.0% in Macau. While the total number of gaming machines in Macau has increased significantly since 2003, the number is relatively small when compared to the approximately 55,000 gaming machines located on the Las Vegas Strip in June of 2007. Between 2001 and 2006, revenue generated by gaming machines in Macau increased at a CAGR of approximately 58.4% based on information published by the DICJ. We believe this was due in large part to improved product offerings provided by facilities such as our Mocha Clubs and the Las Vegas-style Sands Macao casino. As visitation from mass market patrons from China and other areas in Asia increases, and as new Las Vegas-style casino operators place a greater emphasis on gaming machines, we believe gaming machines will become increasingly popular in Macau and contribute a larger portion of total gaming revenue.

Increasing Accessibility and Modernizing Infrastructure

We believe that improved accessibility to and within Macau will facilitate continued growth in visitation and revenue in Macau. In addition to existing methods of transportation, several major infrastructure developments are being planned in Macau that should further facilitate travel to and within Macau:

 

   

Second ferry terminal. A second ferry terminal located on Taipa nearer to Cotai to provide expanded hydrofoil ferry service access between Hong Kong and Macau is expected to be fully operational by 2009 and to support traffic of up to 12,000 travelers per day.

 

   

Hong Kong—Macau—Zhuhai Bridge. A bridge connecting Hong Kong, Macau and Zhuhai in China is expected to be completed by 2015, which would provide direct ground access between Hong Kong and Macau, and reduce the travel time to Macau to approximately 30 minutes from approximately one hour by hydrofoil ferry.

 

   

Airport expansion. The Macau Airport Authority is planning further expansion of the Macau International Airport, which is expected to increase capacity to 10 million passengers per year up from its current capacity of 6 million passengers per year.

 

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Light rail service. The 20km line is expected to run along the eastern and southern fringe of Macau Peninsula and onto Taipa Island through a bridge, linking various casinos with the Border Gate checkpoint, the Hong Kong-Macau Ferry Terminal and the airport. It has been announced that the first phase will be operational in 2011.

Enhanced Product Offerings and Potential Growth of Non-Gaming Leisure and Entertainment Options

From 2003 to 2004, gaming revenue and visitation increased by 44.3% and 40.2%, respectively, driven largely by the opening of The Sands Macao casino. We believe that the addition of enhanced, international standard product offerings in Macau will make Macau an increasingly attractive destination and will continue to be a principal driver of visitation and revenue growth in Macau.

Gaming operators in Macau have not historically placed significant emphasis on offering non-gaming leisure activities and facilities to their patrons, particularly in comparison with current Las Vegas style casino resorts. We believe this has resulted in a focus on day-trip and short-stay patrons who are interested predominantly in gaming during short visits to Macau. We believe that the improved experience of visitors at the new properties being developed in Macau is likely to lead to longer average stays and an increased number of return trips from existing feeder markets and the opening of new feeder markets.

There are currently three primary areas under development in Macau:

 

   

the Macau peninsula, where many of the traditional gaming-focused casino operations in Macau are located;

 

   

Cotai, an area of reclaimed land between the islands of Taipa and Coloane, which has been master-planned to feature a series of major new developments in the style of the Las Vegas Strip; and

 

   

Taipa Island, which is the first island off of the Macau peninsula.

 

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LOGO

In Cotai, following the opening of The Venetian Macau in August 2007, several additional “mega” casino resort projects are scheduled for launch between 2007 and 2010, including the City of Dreams, GalaxyWorld, Macau Studio City, Wynn Cotai, and other casino hotels developed by major casino operators, international hotel chains and other sponsors. These casino hotel developments are anticipated to offer patrons higher quality amenities and more upscale ambiance than has been generally available in Macau in the past.

Current Gaming Concessions and Subconcessions

In 1937, six years after Nevada legalized gaming, the Macau government granted the first gaming concession in Macau. In 1962, the Macau government issued an exclusive casino gaming license to Dr. Stanley Ho and his company, Sociedade de Turismo e Diversões de Macau, or STDM, which retained a 40-year monopoly on casino gaming in Macau until 2002. After Macau’s handover to Chinese sovereignty at the end of 1999, the Macau government decided to open the gaming market to other gaming operators and in December 2001, the Macau government undertook a bidding process for three gaming concessions.

One gaming concession was issued to SJM, the successor to the incumbent operator STDM. Wynn Macau was issued the second concession and Galaxy was issued the third concession. SJM’s concession expires in 2020 and the concessions of Wynn Macau and Galaxy expire in 2022. The existing concessions do not place any limit on the number of gaming facilities that may be operated under each concession. However, each additional casino must be approved by the Macau government prior to starting operations. The Macau government has agreed under the existing concession agreements that it will not grant any additional concessions until April 2009.

 

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A subconcession under the Galaxy concession was granted by the Macau government in 2002 to Venetian Macau, setting the first precedent for the granting of a subconcession in Macau. In April 2005, the Macau government approved the granting of a subconcession under the SJM concession to MGM Grand Paradise Limited, a joint venture between MGM-Mirage and Ms. Pansy Ho, the daughter of Dr. Stanley Ho and the sister of Mr. Lawrence Ho. The Macau government has publicly stated that no more than one subconcession will be permitted under each concession. Wynn Macau held the last remaining right to grant a subconcession.

Pursuant to a memorandum of agreement between Melco and PBL, PBL entered into an agreement with Wynn Macau in March 2006. Under this agreement, as amended, subject to the approval of the Macau government, a subconcession would be granted to MPBL Gaming under Wynn Macau’s concession. In September 2006, the Macau government issued the gaming subconcession to MPBL Gaming and in October 2006, with the approval of the Macau government, control of MPBL Gaming was transferred to us as contemplated under the memorandum of agreement. See “Prospectus Summary—Corporate Structure.” MPBL Gaming’s subconcession is effective until June 2022.

 

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OUR BUSINESS

Overview

We are a developer, owner and, through MPBL Gaming, operator of casino gaming and entertainment resort facilities focused exclusively on the Macau market. MPBL Gaming is one of six companies licensed, through concessions or subconcessions, to operate casinos in Macau. We were initially formed as a 50/50 joint venture between Melco International Development Limited, or Melco, and Publishing and Broadcasting Limited, or PBL, as their exclusive vehicle to carry on casino, gaming machines and casino hotel operations in Macau. On December 18, 2006, we completed our initial public offering of ADSs, raising approximately US$1.2 billion of net proceeds, which includes the proceeds from the exercise of an over-allotment option by the underwriters in January 2007. Our ADSs are listed on the Nasdaq Global Market under the symbol “MPEL”.

We have chosen to focus on the Macau gaming market because we believe that Macau is well positioned to be one of the largest gaming destinations in the world. In 2006 and the six months ended June 30, 2007, Macau generated approximately US$7.0 billion and US$4.7 billion of revenue from table games and slot machine games, or gaming revenue, respectively, according to the DICJ, compared to the US$6.5 billion and US$3.3 billion of gaming revenue, respectively, generated on the Las Vegas Strip, according to the Nevada Gaming Control Board, and compared to the US$5.2 billion and US$2.4 billion, respectively, generated in Atlantic City, according to the New Jersey Casino Control Commission. Gaming revenue in Macau has increased at a five-year CAGR, from 2001 to 2006 of 24.9% compared to a CAGR of 7.3% and 3.9% for the Las Vegas Strip and Atlantic City, respectively. Macau benefits from its proximity to one of the world’s largest pools of existing and potential gaming patrons and is currently the only market in Greater China, and one of only several in Asia, to offer legalized casino gaming.

Through our existing operations and projects currently under development and construction, we will cater to a broad spectrum of potential gaming patrons, including wealthy high-end patrons, who seek the excitement of high stakes gaming, as well as mass market patrons, who wager lower stakes and are more casual gaming patrons seeking a broader entertainment experience. We will seek to attract these patrons from throughout Asia and in particular from Greater China.

Our existing operations and development projects consist of:

 

   

Crown Macau. The Crown Macau Hotel Casino, or Crown Macau, offers a luxurious premium hotel and casino resort experience by offering premium entertainment, elegant facilities, high quality service and rich décor, and aims to exceed the average five-star hotel in Macau catering primarily to the high-end gaming market. Gaming venues traditionally available to high stakes patrons in Macau have not offered the luxurious accommodation and facilities we offer at Crown Macau, instead focusing primarily on intensive gaming during day trips and short visits to Macau. The property features a 38-story tower including approximately 183,000 sq.ft of gaming space with approximately 220 gaming tables and more than 500 gaming machines and a luxury premium hotel with approximately 216 deluxe hotel rooms, including 24 suites and eight villas. Crown Macau held its grand opening on May 12, 2007 and became fully operational in July 2007.

 

   

City of Dreams. The City of Dreams integrated casino resort complex, or City of Dreams, is being developed to be a “must-see” integrated casino and entertainment resort primarily catering to mass market patrons. City of Dreams will be located in Cotai, an area that has been master-planned to feature a series of major new developments in the style of the Las Vegas Strip. City of Dreams is planned to feature three hotels ranging from four-stars to more luxurious ones designed with the aim of exceeding the average five-star hotel in Macau, a 420,000 sq. ft casino with approximately 450 gaming tables and 2,500 gaming machines, a purpose-built wet stage performance theatre, upscale shopping consisting of approximately 145,000 sq.ft of retail space and a wide variety of mid to high-end food and beverage outlets. The first phase of the complex is currently targeted to open before the end of March 2009. This first phase is

 

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expected to include substantial completion of the casino, retail space, food and beverage outlets and two hotels, which are expected to be operated under the Crown Towers and Hard Rock brands. The purpose-built wet stage performance theatre is scheduled for completion by the end of March 2009 with opening night expected before the year-end 2009, following four to six months of rehearsals. The twin-tower hotel under the Grand Hyatt brand with approximately 1,000 rooms and suites is scheduled to open in September 2009. The approximately 800-unit apartment hotel complex integrated within the City of Dreams footprint is expected to be completed by December 2009 and to be marketed in advance of project completion, subject to compliance with legal and regulatory provisions. We plan to finance the construction of the apartment hotel complex separately from the rest of the City of Dreams project, including with a portion of the proceeds from this offering. The budgeted cost of the City of Dreams project, including the casino, the Hard Rock hotel, the Crown Towers hotel, the Grand Hyatt twin-tower hotel, the purpose-built wet stage performance theatre, retail space together with food and beverage outlets is approximately US$2.1 billion, consisting primarily of construction costs, design and consultation fees, and excluding the cost of land. The additional budgeted cost of the apartment hotel complex planned for development at the City of Dreams is approximately US$330 million, excluding the cost of land.

 

   

Mocha Clubs. Our seven Mocha Clubs feature a total of approximately 1,100 gaming machines, and comprise the largest non-casino-based operations of electronic gaming machines in Macau. By combining machine-based gaming with an upscale décor and cafe ambiance, we aim to improve on Macau’s historically limited service to mass market and casual gaming patrons, including local residents and day-trip customers, outside the conventional casino setting, and to capitalize on the significant growth opportunities for machine-based gaming in Macau.

 

   

Macau Peninsula Site. In May 2006, we entered into a conditional agreement to acquire a third development site, which is located on the shoreline of Macau peninsula near the current Macau Ferry Terminal, or Macau Peninsula site. The Macau Peninsula site is approximately 6,480 square meters (approximately 1.6 acres) and the acquisition price is HK$1.5 billion (US$192.8 million), of which we have paid a deposit of HK$100 million (US$12.9 million). We expect to pay a land premium of approximately HK$205 million (US$26.3 million) to the Macau government for this site. The agreement completion deadline was first extended in January 2007 and again in July 2007 when we negotiated an extension of the completion deadline for the conditional agreement to the end of July 2008 in order to benefit from additional flexibility in the timing of the purchase, which is subject to various closing conditions. Other than the extension of the purchase completion deadline, all other provisions of the agreement remain in force, and there were no fees associated with the extension. Completion of the purchase remains subject to (i) significant conditions in the control of third parties unrelated to us and the seller of the property, and (ii) the approval of the Macau government. We are currently considering plans to develop the Macau Peninsula site into a mixed-use hotel, serviced apartment and casino facility aimed primarily at day-trip gaming patrons. If we acquire the site, we are targeting the middle of 2010 as our opening date. Based on preliminary estimates and conceptual designs, we have currently budgeted approximately US$750 million for the total project costs of the Macau Peninsula project consisting primarily of land and construction costs, land premium costs, design and consultation fees.

 

Our Objective and Strategies

Our objective is to become a leading provider of gaming, leisure and entertainment services that capitalizes on the expected growth opportunities in Macau. To achieve our objective, we have developed the business strategies described below.

Develop a targeted product portfolio of well-recognized gaming brands

We believe that building strong, well-recognized gaming brands is critical to our success, especially in the brand-conscious Asian market. We intend to develop each of the Crown Macau, City of Dreams and Mocha brands by:

 

   

building higher quality properties than those that are generally available in Macau currently, and which rival other high-end resorts located throughout Asia; and

 

   

providing a distinctive experience tailored to meet the cultural preferences and expectations of Asian customers.

 

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Although we strive to have all of our properties consistently adhere to the ideals above, we have incorporated design elements at our properties that cater to specific customer segments. By utilizing a more focused strategy, we believe we can better service specific segments of the Macau gaming market.

Crown MacauA Luxurious Casino and Hotel Offering to Attract High-End Patrons. Crown Macau is primarily focused on the premium segment of the high-end gaming market in Macau. According to the DICJ, revenues generated from baccarat played in private rooms operated by VIP operators was approximately US$4.6 billion in Macau in 2006. We plan to build upon the Crown brand that PBL has fostered in Australia by creating an environment of elegance, sophistication and first-class service in Crown Macau. The casino area of approximately 183,000 sq.ft. with a total of approximately 220 gaming tables and more than 500 gaming machines, are strategically located over multiple levels of the building to help us better service different market segments. The casino floors are arranged such that generally the higher the floor, the higher-end customer we service. These high-end facilities feature private and discrete entrances and house high-limit gaming tables within a mixture of larger private gaming rooms and smaller private salons. Each of these private rooms are designed to create a sense of comfort and exclusivity and are richly decorated with high quality furnishings and fixtures, while a dedicated team of hosts are available to cater to each customer’s needs.

Crown Macau is located in Taipa, away from the older Macau casinos that are typically located in the more congested areas of the Macau peninsula. We believe that high-end customers enjoy this relative privacy away from the general gaming public. We believe that the quality and size of our hotel rooms also help attract high-end customers to Crown Macau. Each of our rooms is elegantly decorated and furnished, while providing guests with sweeping views of the sea and the Macau peninsula. Crown Macau offers 216 deluxe hotel rooms, including 24 suites and eight villas. Guests are also able to enjoy fine dining and a variety of international cuisines without having to leave the comforts of the Crown Macau. Other amenities at the Crown Macau include a luxurious spa, and a sky terrace lounge, including an indoor swimming pool.

City of Dreams—An Integrated “Must-See” Destination Resort to Appeal Primarily to the Mass Market. City of Dreams is designed to cater primarily to the broader entertainment preferences of mass market customers. Mass market table gaming in Macau grew 11.6% to US$2.2 billion in 2006 year-on-year, according to DICJ. We believe that this market will continue to expand rapidly with the development of properties such as City of Dreams.

City of Dreams will be strategically located at the northern tip of Cotai, which will make it one of the first properties that visitors will encounter when arriving from the Macau International Airport and the anticipated new Hong Kong/Macau Ferry Terminal. Additionally, the City of Dreams will be situated between the proposed sites of the Venetian Macao and a proposed Wynn project in Cotai. We believe that this concentration of properties will help attract mass market customers to this area, and that City of Dreams will benefit from customer flows from its neighboring properties.

City of Dreams is planned to feature three hotels ranging from four-stars to more luxurious ones designed with the aim of exceeding the average five-star hotel in Macau, a 420,000 sq.ft. casino with approximately 450 gaming tables and 2,500 gaming machines, a purpose-built wet stage performance theatre, upscale shopping consisting of 145,000 sq.ft. of retail space and a wide variety of mid to high-end food and beverage outlets. The Company currently targets to open the first phase of the complex before the end of March 2009. This first phase is expected to include substantial completion of the casino, retail space, food and beverage outlets, and two hotels, which are expected to be operated under the Crown Towers and Hard Rock brands. The purpose-built wet stage performance theatre is scheduled for completion by the end of March 2009 with opening night expected before the year-end 2009, following four to six months of rehearsals. The twin-tower hotel under the Grand Hyatt brand with approximately 1,000 rooms and suites is scheduled to open in September 2009. The approximately 800-unit apartment hotel complex integrated within the City of Dreams footprint is expected to be completed by December 2009 and to be marketed in advance of project completion, subject to compliance with legal and regulatory provisions. We plan to finance the construction of the apartment hotel complex separately from the rest of the City of Dreams project, including with a portion of the proceeds from this offering.

Mocha Clubs—A Casual and Convenient Gaming Experience Outside the Conventional Casino Setting. Macau has historically been a table game market. We believe that this is in part due to the lack of quality and

 

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accessibility of alternative gaming products in the market. Having identified a significant opportunity to service a largely untapped niche market, Mocha was created to introduce high-quality gaming machine products similar to those found in more established markets such as Las Vegas. Currently, we have seven Mocha Clubs featuring a total of approximately 1,100 gaming machines and we will seek opportunities to expand the Mocha Clubs business by adding new locations in the future.

Our Mocha Clubs offer on average approximately 157 gaming machines featuring video slot machine games and other electronic table games, such as roulette, sicbo and video baccarat. Our customers have the opportunity to play these games in a comfortable cafe-like environment. We seek to train our staff to high standards of customer service and gaming product knowledge.

The Macau Peninsula Site—We are currently considering plans to develop the Macau Peninsula site into a mixed-use hotel, serviced apartment and casino facility aimed primarily at day-trip gaming patrons. The site is attractively located near the current Macau Ferry Terminal, providing easy access to customers traveling to Macau from Hong Kong and China on a frequent basis.

Leverage the experiences and resources of our founders

We believe one of our greatest strengths is the combined resources of our shareholders, Melco and PBL. We intend to leverage Melco’s and PBL’s experiences and resources in the gaming industry in Asia and particularly with Chinese and other Asian patrons.

Proven Operational Experience. PBL is one of the largest media, entertainment and gaming conglomerates in the Asia-Pacific region and is the largest casino operator in Australia in terms of gaming revenues. Through the successful operation of Crown Casino Melbourne and Burswood Casino in Australia, we believe that PBL has a proven track record in operating both high-end and mass market gaming operations as well as in providing a range of other leisure services and facilities. PBL successfully operates more than 400 high-end and mass market table games and more than 4,000 electronic gaming machines at Crown Casino Melbourne and Burswood Casino. In addition to gaming, these properties feature a total of approximately 1,650 luxury hotel rooms, more than 100,000 sq.ft. of conference and event facilities at Burswood Conventions & Events Center and Crown Conference Center, 50 dining facilities offering a variety of global cuisines, highly acclaimed entertainment venues with seating capacity for more than 26,000 and a host of resort and recreational facilities, including an exclusive championship 18-hole golf course. We leverage PBL’s operating skills, its international experience and its high standards and reputation to strengthen our operations in Macau. For example, PBL assists us in:

 

   

implementing customer relationship management systems to facilitate our loyalty programs;

 

   

adapting our gaming product analytics systems to maximize revenue potential;

 

   

implementing management reporting practices and operating procedures to ensure accuracy and consistency in our internal control;

 

   

training staff in high quality customer service; and

 

   

adopting a community and government relations framework to promote efficient working relationships with government authorities and compliance with rules and regulations.

PBL assists us by recommending candidates for employment by and seconding employees to us or our subsidiaries from time to time, providing management information systems and policy and procedure guidelines, facilitating of training and by appointing directors to our board of directors. PBL’s expertise in the international gaming markets is complemented by Melco’s local gaming market experience in Macau. Through the operation of the Mocha Clubs and the initial months of operation of Crown Macau, Melco has developed a strong understanding of Macau gaming machine players’ betting habits and preferences as to types of games and game titles and is well-positioned to assist us in meeting the expected demand from gaming machine players in Macau.

On May 8, 2007, PBL announced its intention to separate into two listed entities being Crown Limited, an entity that will hold all of PBL’s existing gaming assets, and Consolidated Media Holdings Limited, which will hold all of its media assets. On completion of the PBL separation, PBL Asia Investments Limited, which holds PBL’s interest in MPEL, will become a wholly-owned subsidiary of Crown Limited. The PBL separation is subject to shareholder and court approvals.

 

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Network of Local Relationships. Among the listed companies in Hong Kong, Melco is one of the first to tap the rapidly growing leisure and entertainment market in Macau. In June 2004, Melco established Macau gaming as a principal activity with the acquisition of interests in Mocha and in September of the same year, Melco announced its participation in a hotel development project in Taipa, Macau which subsequently evolved to become our existing Crown Macau project. Through the leadership and reputation of Mr. Lawrence Ho, Melco has a broad network of business relationships in Macau, Hong Kong and elsewhere in Greater China. We believe these relationships have been and will be important to the successful development and operation of our gaming business in Macau. For example, Melco’s local relationships helped it to initially secure an interest in the Mocha Clubs, the Crown Macau and the City of Dreams projects, and those interests were subsequently contributed or sold by Melco to us. In addition, Melco’s relationships have helped us to identify and secure sites for the Mocha Club venues on attractive economic terms and helped expand the Mocha Clubs into the largest non-casino based operations of gaming machines in Macau with an approximately 20% market share by gross gaming machine revenue for the six months ended June 30, 2007, based in part on DICJ figures.

Recognized Staff Training and Development Capabilities. Given the number of new properties anticipated to open in Macau in the coming years, we believe that training our staff to deliver attentive, personal and high-quality customer service will become increasingly important. PBL has developed substantial experience in identifying, training and developing staff to reach international standards in customer service and in meeting strict regulatory requirements. PBL provides on and off the job training for its employees, with a strong focus on operational, compliance, regulatory and supervisory development. PBL’s achievements have earned Crown the Victorian State Training Awards for Employer of the Year in 2004, and, on a national level, the Australian National Training Authority Award for leading Employer of the Year for the Tourism and Hospitality Industry for 2002, 2003 and 2004. We intend to utilize PBL’s experience and expertise to develop our own in-house training facilities in order to provide high-quality personalized customer service that will build customer loyalty and encourage repeat visits. In addition, we expect that some of our future management-level employees may come from PBL’s current operations.

Develop a Comprehensive Marketing Program

We will continue to seek to attract customers to our properties by leveraging the Crown and Mocha brands and utilizing the marketing resources of our founders. PBL has combined its brand recognition with sophisticated customer management techniques and programs to build a significant database of repeat customers and loyalty club members. With a large number of high-end patrons originating from Asia, PBL’s existing customer network provides a natural and readily available customer base that we can leverage. In addition, PBL has nine sales offices in seven countries, including Hong Kong, Indonesia, Malaysia, Singapore, Thailand, Taiwan and in various locations in Australia, as well as a sales network of independent representatives across Asia, including China. Through the Mocha Clubs’ significant share of the Macau electronic gaming market, we have also developed a significant customer database and have developed a customer loyalty program, which we believe has successfully enhanced repeat play and further built the Mocha brand.

We will also seek to continue to grow and maintain our customer bases through the following sales and marketing activities:

 

   

creating a sales and marketing department to promote the Crown Macau, the City of Dreams and the Mocha brands to potential customers throughout Asia;

 

   

utilizing special product offers, special events, tournaments and promotions to build and maintain relationships with our guests, increase repeat visits and help fill capacity during lower-demand periods;

 

   

refining our own customer loyalty programs to build a significant database of repeat customers, which we closely modeled on Crown’s successful “Crown Club” program; and

 

   

implementing complimentary incentive programs and commission based programs with selected junket operators to attract high-end customers.

Focus on Building First-Class Facilities

With the assistance of PBL and Melco, we have assembled a dedicated design and project management team and hired contractors with significant experience in completing similar large scale, high quality projects on time

 

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and within budget. Our senior project management team has significant experience in property development, construction project management, architecture and design. The members of our project management team have worked on some of the largest facilities in Asia, including the Tung Chung Development project (Hong Kong) and Crown Casino Melbourne project.

Paul Y. Construction was the general contractor for the Crown Macau project. Paul Y Construction is a subsidiary of PYE, a leading construction conglomerate with operations in more than nine countries. We have hired Arquitectonica to design the hotel towers for City of Dreams. Arquitectonica’s work experience includes resorts and casinos, hotels, luxury condominium towers, retail centers and office buildings. It is currently designing the Cosmopolitan Resort Casino in Las Vegas. We have engaged Pei Partnership Architects to design the purpose-built wet stage performance theatre for City of Dreams according to the specifications of Dragone.

We have appointed a joint venture between Leighton Contractors (Asia) Limited, or Leighton, China State Construction International Holdings Ltd, or China State Construction, and John Holland Pty Limited, or John Holland, as the construction manager for the City of Dreams project.

Utilize MPBL Gaming’s Subconcession to Maximize Our Business and Revenue Potential

We intend to utilize MPBL Gaming’s subconcession, which, like the other concessions and subconcessions, does not limit the number of casinos we can operate in Macau, to capitalize on the potential growth of the Macau gaming market provided by the greater independence, flexibility and economic benefits afforded by being a subconcessionaire. Possession of a subconcession gives us the ability to negotiate directly with the Macau government to develop and operate new projects without the need to partner with other concessionaires or subconcessionaires, as we did with the Mocha Clubs prior to MPBL Gaming’s obtaining the subconcession in September 2006. Furthermore, concessionaires and subconcessionaires such as SJM and Galaxy have demonstrated that they can leverage their licensed status by entering into arrangements with developers and hotel operators that do not hold concessions or subconcessions to operate the gaming activities at their casinos under leasing or services arrangements and keep a percentage of the revenues. MPBL Gaming has entered into a services agreement with New Cotai Entertainment and New Cotai Entertainment, LLC, under which MPBL Gaming will operate the casino portions of the Macau Studio City project, a large scale integrated gaming, retail and entertainment resort development that is targeted to open in Cotai not prior to 2010. Under the terms of this services agreement, a percentage of the gross gaming revenues from the casino operations of Macau Studio City will be retained by MPBL Gaming. We may consider entering into other, similar arrangements with other such developers and hotel operators, subject to the approval of the Macau government.

Our Properties

Crown Macau

The primary objective of Crown Macau is to serve the high-end market by providing a luxurious casino and hotel experience, while tailoring the experience to meet the cultural preferences and expectations of Asian high-end customers. Recognizing that these discerning customers expect and demand luxury, Crown Macau is designed to provide luxurious hotel suites and dining facilities, high-limit table offerings and private gaming rooms.

The Casino. Crown Macau consists of a spacious casino with approximately 183,000 sq. ft of gaming space, including the first four floors and three dedicated VIP floors higher up the property. The casino comprises general gaming areas as well as limited access high-limit private gaming areas and private gaming rooms catering to high-end patrons. The casino is currently configured with a total of approximately 220 gaming tables and more than 500 gaming machines. High-limit tables located in the limited access private gaming areas provide our high-end patrons with a premium gaming experience in an exclusive private environment. The table limits on our main casino floors accommodate a full range of casino patrons while still focusing on the high-end market and premium end of the mass market. Due to the flexibility of our multi-floor layout, we are able to reconfigure our casino to meet the evolving demands of our patrons and target specific segments we deem attractive on a periodic basis.

The Hotel. The hotel within the 38-story Crown Macau Hotel Casino, which operates under the “Crown Towers” brand, is positioned as one of the leading hotels in Macau catering to high-end patrons. The top floor of

 

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the hotel serves as the hotel lobby and reception area, providing guests with sweeping views of the surrounding area. The hotel comprises approximately 216 deluxe rooms, including 24 high-end suites and eight villas and features a luxurious interior design combining elegance and comfort with some of the latest in-room entertainment and communication facilities. In addition to the Crown Towers hotel, Crown Macau features a range of high-quality non-gaming entertainment venues, including a spa, gymnasium, outdoor garden podium and a sky terrace lounge.

Food and Beverage. A number of restaurants and dining facilities are available at Crown Macau. We have four fine dining restaurants, featuring a variety of international cuisines, that are among the best in Macau including a branch of Tenmasa, a renowned Japanese restaurant in Tokyo. Crown Macau also features several Chinese and international restaurants, dining areas and restaurants focused around the gaming areas and a range of bars across multiple levels of the property. We believe that the restaurants at Crown Macau provide high quality food, service and décor, which we believe will provide additional reasons for gaming patrons to visit and stay at Crown Macau.

Property. In March 2006, the Macau government granted to MPBL Crown Macau Developments, our wholly owned subsidiary through which Crown Macau was developed, a 25-year renewable lease for an approximately 5,230 square meter (56,295 sq. ft) plot of land for Crown Macau. The Macau government approved a gross floor area of approximately 95,000 square meters (1,022,600 sq. ft). Under this lease, we are obligated to pay a land premium of approximately MOP 149.7 million (US$18.7 million), with MOP 50 million (US$6.2 million) due at our acceptance of the terms and conditions of the lease, which was paid on November 25, 2005 and the balance due in four equal semi-annual installments bearing interest at 5% per annum. We paid the outstanding balance in July 2006. A guarantee deposit of approximately MOP 157,000 (US$20,000) was payable upon signing of the lease, subject to adjustments in accordance with the relevant amount of rent payable during the year. Annual rent per square meter is MOP 15 (US$2) for the hotel, MOP 10 (US$1) for the parking lot and MOP 10 (US$1) for the outdoor areas, or an aggregate of approximately MOP 1,372,000 (US$171,000). The rent amounts may be adjusted every five years as agreed between the Macau government and us using applicable market rates in effect at the time of the rent adjustment.

City of Dreams

We have engaged a joint venture among Leighton, China State Construction and John Holland as the construction manager for the City of Dreams project. Each of the parties forming the construction manager joint venture is required to provide to us, to the extent that the relevant party is not the ultimate holding company of its group, a parent company guarantee securing the due performance of the relevant party’s obligations under the definitive contract and, in return, we are required to provide a guarantee to the joint venture partners securing the due performance of MPBL COD Developments’ obligations under the definitive contract.

We began site preparation of the City of Dreams project in the second quarter of 2006. Our objective in building City of Dreams is to offer a “must-see” integrated casino resort, entertainment, retail and food and beverage complex that will be attractive to a wide range of customers, with a particular focus on mass market individual and group customers, including families, while still catering to VIP customers.

City of Dreams will be located in Cotai, a newly reclaimed area of Macau between the islands of Taipa and Coloane, which has been master-planned for the development of a series of major Las Vegas Strip-style hotel casino resorts featuring large-scale casino floors and a range of supporting entertainment and hospitality facilities such as a performance theatre, exhibition and conference facilities, showrooms, shopping malls, spas and other attractions. City of Dreams will be well-positioned at the northern end of Cotai, which will make it one of the closest destination resorts in Cotai to the Macau International Airport and the newly planned Hong Kong/Macau Ferry Pier.

As the City of Dreams project progresses, we continue to improve and vary its overall scope within the original timetable to completion, and by reference to the existing project budget. This is against a background of rising costs of construction, services and materials in Macau. All of the features of City of Dreams described in this prospectus are based on our current plans for the project, and, therefore, the design of individual elements of City of Dreams may be refined from this description. However, project changes will be limited in certain respects by the documents governing our indebtedness.

 

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As of June 30, 2007, we had paid approximately US$200.6 million (excluding the land cost) for the City of Dreams project, primarily for construction costs and design and consultation fees. We expect to fund the City of Dreams project costs from the City of Dreams Project Facility and from a portion of the proceeds of this offering.

The Casino. We plan to offer a casino of approximately 420,000 sq. ft housing approximately 450 gaming tables, including approximately 50 high-limit tables in exclusive VIP salons, and approximately 2,500 gaming machines with potential for future expansion. We target the casino to be substantially completed as part of the first phase before the end of March 2009.

The Hotels. City of Dreams is planned to include three full service luxury hotels with a total of approximately 1,600 rooms, consisting of: (1) a luxury premium hotel designed with the aim of exceeding the average five-star hotels in Macau, to be operated under the Crown Towers brand by us with approximately 300 rooms, suites and villas; (2) a themed hotel to be operated under the Hard Rock brand with approximately 370 rooms and suites; and (3) a twin-tower hotel to be operated under the Grand Hyatt brand with approximately 1,000 rooms and suites.

Performance Theatre. A wet stage performance theatre offering 2,000 seats is included in the plan of the City of Dreams. The performance theatre, which is being designed by the award winning Pei Partnership Architects according to the specifications of Dragone, is a purpose-built theatre catering to the preferences of the Asian mass market. We currently expect to complete the performance theatre by the end of March 2009 and have it ready to host performances before the end of 2009. It is expected to offer a brand new live stage show production created exclusively for us by Dragone, the co-producer and creator of Celine Dion’s “A New Day” show. The artistic director and founder of Dragone was the director and creator of several Cirque du Soleil shows.

Retail Area. Our plan includes a retail area of approximately 145,000 sq.ft. The retail area is designed to feature a wide range of luxury retailers which is designed to cater to the needs of residential guests and to attract other visitors to the complex. We currently expect to complete the majority of the retail space by the end of March 2009.

Apartment Hotel Units. We plan to develop an 800-unit luxury apartment hotel complex. This development may be subject to Macau government’s approval and approval of our lenders under our debt facilities. We expect to market the apartment hotel units in advance of project completion, subject to compliance with legal and regulatory provisions.

Food and Beverage. We plan to position the City of Dreams as one of the leading destinations for food and beverage in Cotai by offering an extensive range of high-quality food and beverage facilities. We intend to secure some of the most well-known international food and beverage brands and celebrity chefs. City of Dreams is planned to include over 20 mid- to high-end restaurants plus a range of other dining outlets offering a variety of cuisines and dining styles to service both our gaming customers as well as to attract other customers from competing Macau properties as well as nearby Hong Kong and Guangzhou, China. We currently expect to complete significant portions of the food and beverage outlets by the end of March 2009.

Entertainment Venues. City of Dreams is planned to feature a variety of recreational facilities designed to attract customers to the complex. The complex is also planned to feature a range of concept bars and night clubs, a karaoke lounge and a nightly live performance venue. For groups and families, the property will also feature a large non-gaming entertainment zone offering a range of entertainment and amusement activities. We currently expect to complete the entertainment venues throughout phases one and two.

Conference Rooms and Ballrooms. We plan to build approximately 88,000 sq. ft of high quality conference, banqueting and ballroom facilities, featuring some of the latest audio and visual equipment. We will aim to make these facilities the preferred venues of choice in Macau for high-end banqueting and corporate hospitality. These facilities will be located within the Grand Hyatt Hotel and are planned to be completed by December 2009.

Construction Team. We have engaged a joint venture between Leighton, China State Construction and John Holland as the construction manager for the City of Dreams project. In Macau, a joint venture of Leighton and China State Construction recently completed construction of the Wynn Resort Macau and Leighton recently completed construction of the Macau Fisherman’s Wharf.

 

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Leighton. Leighton is one of Asia’s leading project developers and contractors. Established in Hong Kong in 1975, Leighton focuses on a number of specific market segments, including civil engineering and infrastructure, building, rail, mining, marine, oil and gas, water, environmental services, process, and telecommunications.

 

   

China State Construction. China State Construction started its construction business in Hong Kong in 1979. It is a vertically integrated construction company, engaged in building construction and civil engineering operations as well as foundation work, site investigation, mechanical and electrical engineering, highway and bridge construction, concrete and pre-cast production. Since July 2005, China State Construction has been listed on the Main Board of the Hong Kong Stock Exchange.

 

   

John Holland. John Holland is one of Australia’s largest and most diverse specialist contractors. John Holland has significant expertise and experience delivering projects in the fields of building and engineering construction, tunnelling and underground mining, water, including wastewater treatment, telecommunications and rail communication systems, structural mechanical and process engineering, and power, including high voltage transmission projects.

Leighton and John Holland are both part of the Leighton Group, one of Australia’s largest project development and contracting groups.

Design Team. In addition to the construction manager, we have also appointed the following design teams for the City of Dreams project:

 

   

Leigh & Orange Ltd. Leigh & Orange Ltd. has been appointed as the executive architect for implementation of the City of Dreams project. Founded in 1874 and headquartered in Hong Kong with regional offices in Shanghai, Beijing, Fuzhou, Bangkok, Bahrain, Dubai and Riyadh, Leigh & Orange Ltd. is a full service, award-winning architectural and interior designing firm. Its designs encompass buildings and facilities for both private and public sectors. Leigh & Orange Ltd.’s works include the Ocean Park of Hong Kong, New World Centre Phase II in Beijing and the planned Shaqab Education City in Qatar.

 

   

Arquitectonica. Arquitectonica will design the hotel towers for the City of Dreams. Founded in 1977 and headquartered in Miami, Florida with regional offices in many parts of the world including New York, Los Angeles, Hong Kong, Shanghai and Manila, Arquitectonica is a full service award-winning architecture, interior designing and planning firm. Arquitectonica’s work includes projects on several continents, from projects such as resorts and casinos, hotels, luxury condominium towers, retail centers and office buildings. Arquitectonica is currently designing the Cosmopolitan Resort Casino in Las Vegas.

 

   

Pei Partnership Architects. Pei Partnership Architects is designing the performance theatre for the City of Dreams. Founded in 1992 and headquartered in New York with a representative office in Beijing, Pei Partnership is a full service, award-winning architectural firm with international scope, experience and reputation. Principals Chien Chung Pei and Li Chung Pei, sons of I.M. Pei and for many years key members of his firm, have more than forty years of combined architecture experience. Pei Partnership’s architectural designs include the Palm Beach Opera House (West Palm Beach, Florida), the Macau Science Center (Macau), the Centrocultural Poliforum (Mexico) and the Opera of the Future Arts at the Massachusetts Institute of Technology.

 

   

Steelman Partners LLP. (previously Paul Steelman Design Group). Steelman Partners will design the apartment-hotel tower for City of Dreams. Founded in 1977 and headquartered in Las Vegas, Steelman Partners is a full service, architectural and interior design firm specializing in entertainment architecture. Its designs include the Sands Macau (Macau), Grand Casino Helsinki (Finland) which is the world’s first digital casino and Harrahs Rincon Casino Resort (San Diego).

 

   

Hirsch Bedner Associates. Hirsch Bedner Associates (“HBA”) has been appointed to undertake the interior design of the Grand Hyatt twin-tower hotel. Founded in 1964 and headquartered in Atlanta with regional offices in many parts of the world including Hong Kong, Brisbane, Dubai, London, Los Angeles, Shanghai and Tokyo, HBA is a full service interior design firm specializing in the hospitality industry. HBA’s design work includes the MGM Grand Las Vegas Convention Center (Las Vegas), Grand Hyatt Muscat (Oman), Beverly Hills Hotel (Los Angeles) and Mandarin Oriental (New York).

 

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Gettys. Gettys has been appointed to undertake the interior design of the Hard Rock Hotel. Founded in 1988 with offices in Chicago, Miami and Irvine, Gettys is a full-service, award-winning interior design and design architecture firm specializing in the hospitality industry. Its work includes the Four Seasons (Chicago), Conrad Hotel (Miami), Bahia Beach Resort (Puerto Rico) and is currently designing the Radisson Cable Beach Resort (Bahamas).

 

   

Bates Smart. Bates Smart has been appointed to undertake the interior design of the Crown Towers hotel. Founded in 1884 with offices in Melbourne and Sydney, Bates Smart is an award-winning architecture, interior design and planning firm whose work includes the Crown Towers (Melbourne), Crown Entertainment Complex (Melbourne), Crown Promenade Hotel (Melbourne) and Star City (Sydney).

Properties. The Macau government, in a letter dated April 21, 2005, offered to grant to our subsidiary, MPBL COD Developments, a 25-year renewable lease for the development rights in respect of two adjacent land parcels in Cotai in Macau with a combined area of 113,325 square meters (approximately 1.2 million sq. ft) for the City of Dreams, which offer was preliminarily accepted by MPBL COD Developments on May 10, 2005. The Macau government has given approval for a developable gross floor area at the site of 403,692 square meters (approximately 4.3 million sq. ft). MPBL COD Developments intends to seek approval for development of 452,400 square meters (approximately 4.9 million sq. ft), rather than the 403,692 square meters (approximately 4.3 million sq. ft) contemplated by the Macau government.

The proposed lease terms require us to pay a land premium of approximately MOP 509 million (US$63.4 million), with MOP 170 million (US$21.2 million) due at signing of the lease and the balance due in nine equal semi-annual installments bearing interest at 5% per annum. We must also provide a guarantee deposit of MOP 2,290,000 (US$285,000), subject to adjustments in accordance with the relevant amount of rent payable during the year. If the Macau government approves our request to increase the developable gross floor area at the site, we anticipate that the land premium may increase by approximately MOP 69 million (US$8.6 million) to MOP 110 million (US$13.7 million).

During the construction period, we will pay the Macau government rent at an annual rate of MOP 20 (US$3) per square meter of land, or an aggregate annual amount of MOP 2,290,000 (US$285,000). Following completion of construction, annual rent per square meter will vary depending on the use of the areas within the site. The rent amounts may be adjusted every five years.

Mocha Clubs Operations

Mocha Clubs focus on mass market, casual gaming patrons, including local residents and day-trip customers. We intend that Mocha Clubs will grow to form a network of small to medium-sized clubs that feature a friendly atmosphere, with an upscale décor and café ambiance to appeal to customers that historically have been overlooked in Macau by the casinos focused on high-end table game patrons. We believe that there are significant growth opportunities for gaming machines in Macau. The Las Vegas Strip gaming market generates more than 50% of its gaming revenues from gaming machines and electronic gaming, as compared to approximately 3% in Macau. According to DICJ and the Nevada Gaming Control Board, while the total number of gaming machines in Macau has increased to over 6,500 at the end of December 2006 from approximately 3,400 at the end of 2005 from approximately 2,250 at the end of 2004 and approximately 800 at the end of 2003, the number remains small when compared to the approximately 51,000 gaming machines in Las Vegas Strip at the end of December 2006. In addition, many of the existing machines are older machines that do not employ the latest technology.

Our machines are the latest models from suppliers such as IGT, Aristocrat and Stargames. We offer both single player machines with a variety of games, including progressive jackpots and multi-player games where players on linked machines play against each other in electronic roulette, baccarat and sicbo, a traditional Chinese dice game.

We have implemented a Mocha loyalty program, where players earn points for frequent play that can be redeemed for complimentary prizes. We use the IGT Advantage player tracking system. The IGT Advantage system is able to present the player with interactive enhanced bonus, game and promotional events. The IGT Advantage system serves as a marketing and merchandising platform for casino venue amenities. The IGT Advantage system also allows players to track their activity for more than a ten-year period. We intend to

 

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continue to use this system in connection with our marketing and advertising resources to enhance our ability to target repeat players.

Currently, our seven Mocha Clubs feature a total of approximately 1,100 gaming machines. Our Mocha Clubs accounted for approximately 20% of the gross gaming machine revenue in Macau for the six months ended June 30, 2007. Our average daily net win per machine is higher than the industry average in Macau.

The following table sets forth information on our Mocha Clubs for the six months ended June 30, 2007;

 

Mocha Club

   Opening Date   

Location

   Gaming Area    Gaming
machines
   Average
daily net
win per
machine(1)
US$
               (in sq. ft)    (Six months, ended
June 30, 2007)

Royal

   September 2003    Lobby of Hotel Royal    2,100    82    208

Kingsway

   April 2004   

G/F, Kingsway Commercial Centre

   6,100    216    251

TP Square

   March 2005   

G/F and 1/F, Hotel Taipa Square

   4,560    142    228

Sintra

   November 2005   

G/F and 1/F, Hotel Sintra

   5,110    140    306

Hotel Taipa

   January 2006   

G/F of Hotel Taipa

   6,100    133    130

Marina Plaza

   December 2006   

1/F & 2/F Marina Plaza

   12,500    261    201
                    

Total(2)

         36,470    974    222
                    

(1)   Average daily net win per machine for any period/year represents the average total daily gaming machine win during such period divided by the weighted average number of gaming machines in service during such period/year. Gaming machine win is the excess of the amount of money deposited by players into the gaming machine over the amount of money paid out of the gaming machine to players.
(2)   Excludes the seventh Mocha Club opened in October 2007.

We seek to locate Mocha Clubs in convenient locations with strong pedestrian traffic, which are typically located within three-star hotels. Mocha Clubs generally offer diverse machine gaming options with an average of approximately 157 gaming machines in each club, and range from approximately 2,100 sq. ft to 12,000 sq. ft. Each Mocha Club provides café style snacks and beverages to its guests.

Macau Peninsula Project

We are in the process of acquiring a third development site, the Macau Peninsula site, which has a size of approximately 6,480 sq. ft (approximately 1.6 acres), and is located on the shoreline of the Macau Peninsula near the current Macau Ferry Terminal. On May 17, 2006, our subsidiary, Melco PBL (Macau Peninsula) Limited, entered into a conditional agreement to purchase the site by acquiring all the outstanding shares of Sociedade de Fomento Predial Omar, Limitada, or Omar. Omar is the current owner of the site. Dr. Stanley Ho is one of the five directors of Omar but owns no shares of Omar. The acquisition price in the promissory agreement we have entered into is HK$1.5 billion (US$192.8 million), of which we have paid a deposit of HK$100 million (US$12.8 million). Our purchase of the Macau Peninsula site remains subject to important conditions, some of which are not in our control, including approval of the Macau government of an extension of the deadline for completion of development on the site. The agreement completion deadline was first extended in January 2007 and again in July 2007 when we negotiated an extension of the completion deadline for the conditional agreement to the end of July 2008, in order to benefit from additional flexibility in the actual completion timing of the purchase, which is subject to various closing conditions. Other than the extension of the purchase completion deadline, all other provisions of the agreement remain in force, and there were no fees associated with the extension. Completion of the purchase remains subject to (i) significant conditions in the control of third parties unrelated to us and the seller of the property and (ii) the approval of the Macau government. We are currently considering plans to develop the Macau Peninsula site into a mixed-use hotel, serviced apartment and casino facility aimed primarily

 

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at day-trip gaming patrons. If we acquire the site, we are targeting the middle of 2010 as our opening date. Based on preliminary estimates and conceptual designs, we have currently budgeted approximately US$750 million for the total project costs of the Macau Peninsula project consisting primarily of land and construction costs, land premium costs, design and consultation fees.

Macau Studio City Project

MPBL Gaming has entered into a services agreement with New Cotai Entertainment and New Cotai Entertainment, LLC, under which MPBL Gaming will operate the casino portions of the Macau Studio City project, a large scale integrated gaming, retail and entertainment resort development that is targeted to open in Cotai not prior to 2010. The project is being developed by a joint venture between eSun Holdings Limited and New Cotai Holdings, LLC, which is primarily owned by investment funds and David Friedman, a former senior executive of Las Vegas Sands. Under the terms of the services agreement, MPBL Gaming will retain a percentage of the gross gaming revenues from the casino operations of Macau Studio City. We will not be responsible for any of the project’s capital development costs, and the operating expenses of the casino will be substantially borne by New Cotai Entertainment.

Project Management Team

Our senior project management team have significant experience in property development, construction project management and architecture and design. The project management team oversees and manages the City of Dreams project at each stage of the process from design, construction through to completion. Our project management team works closely with our contractors, architects and engineers and consists primarily of the following persons. In addition, we receive support from personnel at PBL and Melco to assist us and our subsidiaries in managing the development of our projects.

Mr. Jaya Jesudason has served as our Project Director since June 2007. He is a Fellow of the Institution of Civil Engineers London and Hong Kong. He has over 30 years of experience in the management of major projects through the planning, design, construction and commissioning phases both in HK and UK, including the HK Airport and KCRC West Rail Projects.

Mr. Roman Bugryn has been working on the City of Dreams project since November 2006, as Design Manager with design responsibility over most of the site. He was recently appointed as Project Design Director to oversee all Client Design/Operations issues across the Site. As Project Design Director, he is responsible for developing design and operations procedures, monitoring all Design Consultants to ensure all designs are within budget requirements and are suitable for the Project objectives. He is a Registered Architect with over 35 years experience as architect, interior designer and manager of design in a wide variety of project types in Australia and overseas ranging from The Crown Casino in Melbourne, hotels, serviced apartments, retail, institutional and sporting facilities in Saudi Arabia, England and Australia.

Mr. Nick Prior has served as our Finance Director—Construction Projects, since January 2007. He is responsible for all finance matters including, forecasting, budgetary control, and settlement. He is a Fellow of the Institute of Chartered Accountants in England and Wales with over 30 years experience. Since 1985 he has served as Regional Finance Director, later Regional Managing Director of investment bank Hoare Govett Asia Ltd. From 1991 he was President and Chief Investment Officer of Search Investment Holdings Ltd., the family office and private investment vehicle of Robert W. Miller, co-founder of Duty Free Shoppers (DFS) whose broadly diversified portfolio included substantial real estate investments. Since 1998, and prior to joining us, he has operated his own private equity advisory company, SeaCap Partners Ltd.

Mr. Greg Wheat has served as our Technical Director—Services since August 2006. He is responsible for all matters relating to the design of services on the Crown Macau and the City of Dreams projects. Prior to joining us, he was the property operations manager at Conrad Jupiters Casino on the Gold Coast in Australia for the period between 1998 to June 2006, responsible for services operation and project management. He was also responsible for services design and operation of major facilities such as Shangri-la Hotel in Sydney during the period between 1990 and 1994, the Sydney Harbour Casino, a temporary facility to the Star City Casino and the Star City Casino complex during the period between 1994 and 1998.

 

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Mr. Stephen Chamberlain has served as our Director, Project Controls and Contracts since June 2007 with responsibility for all commercial and contractual matters relating to the construction of City of Dreams. He is responsible for tendering, negotiation and documentation leading to the placement of construction contracts, their subsequent administration and final account settlement. He is a Fellow of the Institute of Building with 40 years experience within the construction industry having held senior commercial positions on large scale commercial and civil engineering projects that have included the Hong Kong and Shanghai Bank Headquarters, Pacific Place, the Conrad and Shangri La Hotels in Hong Kong, Military Residential Quarters in Saudi Arabia, a Desalination Plant in Dubai, the Central Bank and Ministry of Finance buildings in Trinidad, the BCCI bank in Abu Dhabi and a twin tower hotel and commercial complex in Taiwan. In addition he is experienced in alternative dispute resolution procedures concerning construction contracts. He has been a resident of Hong Kong since 1985, employed by Gammon Construction Limited since 1989 where he spent 10 years as their Commercial Manager for China and more recently with responsibility for the commercial settlement of the HK$2.3 billion Taipo Water Treatment Plant in Hong Kong. He reports to the Project Director, City of Dreams.

Advertising and Marketing

We seek to attract customers to our properties and to grow our customer base over time by implementing and undertaking the following marketing activities and plans:

Press and Public Relations. We believe that utilizing the local and regional media to publicize our projects and operations before our openings, and our continued daily operations is an effective, highly visible and low-cost tool to market our facilities to a large number of people across several market segments. We have built a public relations management team that cultivates media relationships and directly liaise with customers within target Asian countries in order to explore media opportunities in various markets. We also leverage Melco’s existing relationships with local and regional media.

Advertising. We have an internal advertising department responsible for promoting our brands and projects and marketing preferred products to potential customers around Asia. Advertising includes magazine and print pieces, airport duratrans, roadway billboards, radio and television spots (as permitted by Macau laws), collateral and direct mail pieces and handouts.

Promotions. We have created a range of promotions that offer a tangible benefit for the customer as a result of the customer’s interaction with the casinos and hotels. Promotions may include discounts, match play offers, free credits, bonuses, competitions and special draws. Promotions will be targeted at different market segments and may be used to market the casinos and hotels as well as their individual amenities, such as, restaurants and special guests clubs.

Special Events. We will host different types of entertainment and exclusive functions designed to bring customers to the property. We will target various market segments with customer-specific events, which will be designed to cater to our customers’ needs and expectations, with the objective of cultivating repeat customer visitation and developing long-term customer relationships.

Casino Marketing. To the extent permitted by the applicable laws in different jurisdictions, we engage in extensive marketing to casino patrons. We have developed player lists and client databases in order to attract new and repeat high-limit casino patrons as well as develop marketing strategies to attract mass market clientele, including the use of direct mail and telemarketing to draw casino patrons. We seek to utilize the marketing resources of our founders, including Melco’s marketing teams and PBL’s existing gaming office network, to assist in sourcing customers for our properties. Marketing to Asian high-end customers requires specialist skills. The PBL gaming office network is well experienced in this regard, and has developed close and long standing relationships with customers that we intend to leverage.

 

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Loyalty Programs. We have implemented a customer relationship management program to foster and closely monitor our customer base to develop customer loyalty. This program was closely modeled on Crown’s successful “Crown Club” program. Utilizing PBL’s gaming experience with customer analytics, we are building a database of c