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Bill Simpson prepared an analysis for Tradingipos subscribers of Melco PBL Entertainment's (NASDAQ:MPEL) IPO on December 14th. The IPO began trading on December 19, 2006, when 53 million ADSs, representing 159 million ordinary shares, were priced at $19, over the initial price range of $16 to $18 per ADS. The initial public offering was increased to 60 million ADSs, representing 180 million ordinary shares, due to strong demand. The text of Mr. Simpson's original writeup follows:

MPEL, Melco PBL Entertainment, plans on offering 61 million ADSs (assuming over-allotment is exercised) at a range of $16-$18. Credit Suisse, Citigroup and UBS are lead managing the deal, CLSA, JP Morgan, CIBC and Deutsche Bank co-managing. Each ADS represents three ordinary shares. Post-offering, MPEL will have 395 million ADS equivalent shares outstanding, for a market cap of $6.715 billion on a $17 pricing.

MPEL is a 50/50 joint venture between Hong Kong company Melco and Australian company PBL.

Melco is a leisure, gaming and entertainment business whose main focus is Macau gaming. In 2004 Melco acquired the Mocha Slot Group, which through 9/30/06 garnered 30% slot market share by gross gaming machine revenues in Macau. Chairman and CEO Lawrence Ho is credited for initiating all of MPEL's Macau projects and appears to be extremely well connected. His connections were integral in Melco receiving Macau gaming licenses.

Mocha Slots is part of the MPEL joint venture, however Melco's non-gaming assets are not. Those include an investment banking business, a casino IT infrastructure operation and two restaurant chains.

PBL is Australia’s largest listed diversified media and entertainment company. PBL owns and operates the Crown Casino Melbourne and the Burswood Casino, in Perth, Australia. PBL also owns and operates the Australian television network Nine Network and Australia’s largest magazine publisher, ACP Magazines. PBL recently announced plans to sell 50% of their interest in the television and magazine network. None of PBL's Australian assets will be part of the MPEL joint venture.

MPEL then is a venture between Melco's Macau gaming licenses and PBL's casino operating expertise. Both PBL and Melco will be receiving monies from MPEL post-IPO through management and expertise contracts.

From the prospectus:

We are a developer, owner and operator of casino gaming and entertainment resort facilities focused exclusively on the rapidly expanding Macau market. Our subsidiary Melco PBL Gaming (Macau) Limited, or MPBL Gaming, is one of six companies authorized by the Macau government to operate casinos in Macau.

Wynn (NASDAQ:WYNN) and Las Vegas Sands (NYSE:LVS) are two of the other 5 companies that possess Macau gaming licenses. Both stocks IPO'd earlier this decade and each is up significantly in large part due to the potential of their Macau gambling operations.

MPEL currently has two casino projects under development and a third planned. First is the Crown Macau Hotel Casino targeted to open in the second quarter of 2007. Second, The City of Dreams casino complex phase I is expected to open in late 2008. Additional phases of The City of Dreams will open later. Third is a conditional agreement to develop a property located on the shoreline of the Macau peninsula. There is not a defined expected opening date for this last project.

In addition, as mentioned above, MPEL currently operates six Mocha Clubs located in Macau, featuring a total of approximately 1,000 slot machines.

In 2006, revenues generated in Macau will exceed those generated in Las Vegas. Through 9/30/06, revenues generated in Macau were $4.9 billion, compared to $4.8 billion in Las Vegas. In fact, Macau has been a speeding train of gambling growth compared to Las Vegas and Atlantic City. It has been a good decade for gaming, with Las Vegas growing revenues overall by 5% annually, excluding sports and racing books. Macau, however, has been growing 23% annually. If trends/forecasts hold true, Macau five years from now will be bringing in far greater gambling revenues annually then Las Vegas.

Macau is the only place in Greater China to offer legalized gambling. Located about an hour hydrofoil ferry ride from Hong Kong (and Hong Kong's 7 million residents), Macau is within a 2500 mile radius of Taiwan, Japan, Korea, Thailand, Malaysia, Singapore, Indonesia and the Philippines. Until 2002, gaming in Macau was controlled by a single operator.

China has since opened up bidding for gaming licenses, and three gaming concessions have been awarded to SJM, Galaxy, and Wynn. Those three were permitted to each grant (sell) one sub-concession; the three sub-concessions were awarded to Venetian, MGM and MPBL Gaming [MPEL]. No additional gaming concessions will be awarded until April 2009. The bulk of the IPO proceeds from this MPEL IPO will go to repay debt laid on to pay Wynn for the sub-concession.

Competition in Macau is growing as the six licensees are all in the process of opening and/or constructing Las Vegas-style hotels and casinos.

MPEL's future operations:

  • Crown Macau - Construction kicked off in 12/04, with a target opening in 2nd quarter of 2007. While all current Macau casinos and hotels target the day trip and weekend traveler, the Crown Macau will target the high roller and those seeking luxury accommodations. Think of the Bellagio of Macau.
  • City of Dreams - Construction kicked off in the 2nd quarter of 2006, with opening target for first phase in late 2008. The first phase will include all casino operations, retail space and two of the four planned hotels. The 2nd phase, consisting of the other two hotels, is targeted for completion in the 2nd quarter of 2009. Unlike the Crown Macau, the target market is the mass market patron. From the prospectus:

    The City of Dreams is planned to feature an underwater-themed casino with approximately 450 gaming tables and 2,500 gaming machines, and four luxurious 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 hotel in Macau to be operated under the Crown Towers brand by us with approximately 260 rooms, suites and villas; (2) two hotels to be operated under the Grand Hyatt and Hyatt Regency brands with a total of approximately 970 rooms and suites; and (3) a themed hotel to be operated under the Hard Rock brand with approximately 380 rooms and suites. The complex will also feature a performance hall that will be designed and built to the specifications of Dragone Entertainment GmbH, or Dragone, and which is expected to offer world-class performance shows. The complex will also feature an upscale shopping mall and a wide variety of mid- and high-end food and beverage outlets.

  • Mocha Clubs - Six slot-only clubs in an upscale atmosphere.The Mocha Clubs will be MPEL's sole source of revenue until the Crown Macau opens in the spring of 2007.
  • Macau Peninsula site - If purchase is completed, MPEL would begin construction on a project for a mixed-use casino and hotel facility targeted primarily at day-trip gaming patrons, and target its opening in the middle of 2009.
  • The combined costs of all projects are expected to be approximately $3.3 billion.

    Financials

    MPEL will not begin to bring in substantial revenues until the opening of the Crown Macau in spring of '07.

    $1.6 billion in debt post-offering are being brought on to finance construction costs.

    Revenues to date have been derived from the Mocha Slot Clubs operation. Total revenues for 2006 should be approximately $25 million. MPEL is not coming public with a near $7 billion market cap on current operations, however. They're coming public on the hope that the Crown Macau and City of Dreams will be raking in billions total by 2008/2009. In the meantime, MPEL will lose $25-$30 million in 2006, mostly due to construction expenses on Crown Macau and City of Dreams.

    The large risk here is that MPEL currently is not much more than a large construction project. Yet with the successful 'Crown' brand name, there is every indication the Crown Macau should do quite well. However, keep in mind any delays in the Crown Macau and/or City of Dreams' opening dates will undoubtedly put a dent in the market cap. MPEL is not a cheap stock and there are extensive future revenues built into the initial market cap. Should something (anything) go awry to slow or push out those revenues, MPEL's stock will fall.

    In addition, anything economical or political in Greater China that could negatively impact the extent of gaming would hurt MPEL's properties and stock price.

    Conclusion

    How to value a $6.7 billion operation that has not yet opened its revenue generating properties? Good question. A look at WYNN may help a little. WYNN currently owns and operates two destination resort hotels, one in Las Vegas and one in Macau. WYNN's current market cap is $9.6 billion. MPEL is planning to have two destination resorts in Macau by the end of 2008. Initial market cap for MPEL is $6.7 billion. I would submit that WYNN should currently trade at a nice premium to MPEL, as both WYNN's properties are in operation and generating significant revenues and earnings. It doesn't appear, though, that MPEL's initial valuation is too much out of sync though. If both properties in Macau are in operation and are as successful as anticipated, it would not be out of the realm of possibility for MPEL's market cap to approach WYNN a few years from now. I honestly don't know if $6.7 billion is too much to pay here. Too much depends on revenues that won't be seen for 6 months in one case and 2 years in another. If the Crown Macau and City of Dreams are both successful, I would expect MPEL's stock price to be higher than $17 two years from now. I suppose that is the best way to look at this IPO. This looks to me like a deal that you accept on allocations and put away for a couple of years to see these projects to completion. LVS/WYNN have been on a roll the past year or so, predominantly because of their operations and pending operating in Macau. MPEL is going to be a big player in Macau. I also think that if MPEL prices and opens aggressively, the market cap might be valuing in an awful lot of success.

    Even at the size of the offering, I think this deal works initially. Recommend in range and a bit above as a spec play on the strength of Macau gaming stocks. Over time, everything will depend on MPEL putting the two casinos in operation on time and then having them generate the expected significant revenues. Macau is soon to be the world's largest gaming destination. MPEL has one of six concessions and sub-concessions. At even a $6.7 billion market, that combination is worth the risks. Keep in mind that this is a very large offering and a $6.7 billion market cap mid-range on what is essentially a construction project at this point. This IPO is not a cheap one by any basis and if conditions alter in Macau or Macau related stocks, MPEL could lose a significant chunk of market cap. This is a rather high risk type recommend for me, and if pricing and open gets carried away to the upside, I'll be neutral on the deal. In range though a speculative recommend.

    MPEL chart since IPO:

    mpel chart

    Source: An In-Depth Look at Melco PBL Entertainment's IPO