Melco PBL Entertainment: The Crown of Macau

Macau, now known as the "Las Vegas of China", is already set to pass the entire Las Vegas Metropolitan area (Clark County), not just the Las Vegas Strip, in terms of gaming revenue in 2008. This is fueled by the fact that Macau is the only area in China where gambling is legal, where enormous wealth is being created, and where the average Chinese gambler has an expectation of beating the house.

This has begun to grab the attention of investors looking to take part in the upside in the future of Macau that may soon leave Las Vegas looking like Reno (no offense, Reno). Currently, there are only 6 companies that hold concessions and sub concessions to manage casinos. These include: Las Vegas Sands (LVS), Wynn Resorts (WYNN), Galaxy Entertainment [0027.HK], Melco-PBL (MPEL) [soon to be called Melco-Crown], MGM Mirage (MGM), and Sociedade de Jogos de Macau.

Of the companies mentioned, the one yet to prove itself and, coincidently, the one that intrigues me the most is the “pure play” on Macau, is Melco-PBL (MPEL). The company recently signed an exclusive deal with the most lucrative junket group in Macau to only gamble at its casino, the Crown Macau, where the average gambler who plays there wagers an average of US$125,000 per visit.

The Crown has already begun to make a big impact on the market, thanks to its new junket deal, which has allowed the company to capture by far the largest slice of VIP market share in Macau. The Crown Macau is now the largest casino in the world in terms of betting volume. The company’s flagship casino, the City of Dreams, will soon come on board as well and will be in operation in the first quarter of 2009.

As more attention is focused on the massive City of Dreams, conveniently located on the Cotai strip, investor optimism should begin to build. They also have a third casino they will build on the Macau Peninsula in 2010 and have a service contract to manage the Macau Studio City project (a Playboy themed casino, Playboy mansion replica and all), which should also open in 2010.

In addition, there is a wild card in the mix that many investors fail to appreciate the significance of. Located within the City of Dreams complex will be an 800 unit serviced apartment complex (approx. 1.6 million sq. ft. of apartment space), which Melco-PBL will begin to pre-sale in late 2009. This aspect of the company is not mentioned very often, though it will be a significant value driver for the company late next year, as the sales are expected to bring in revenues between an estimated US$1.5 billion to US$2.5 billion, allowing the company to eliminate the debt on it balance sheet once the City of Dreams is completed.

Las Vegas Sands is following a similar model selling apartment units at its Four Seasons casino directly across the street at sales prices around $2,000/sq. ft. Put this price per sq. ft. on Melco-PBL’s apartment units and you will see revenues of over US$3 billion (the company is trading at a market cap of only $6 billion). The company has yet to attach a brand to the apartments, but there is speculation among the investment community that those apartments will carry the Trump Int. (TRMP) brand name, possibly allowing Melco-PBL to achieve similar prices/sq. ft. as the Four Seasons.

Another factor that is grabbing headlines recently is the Macau government’s recent restriction to limit competition in Macau via no new gaming licenses or land allocated to casinos. That is about as good of a competitive moat as one could ask for in the fastest growing gaming market in the world.

MPEL is also immune to any slow down in the U.S. economy, including the currently weak Las Vegas gaming market. MPEL should also be an interesting currency play and a prime beneficiary of the weak dollar as the Chinese Yuan continues to appreciate against the U.S. dollar. There is also quite a bit of speculation in the Chinese press that Hong Kong will soon de-peg itself from the dollar, which should be a boon to all U.S. investors in gaming companies operating in Macau.

The tide seems to be turning for MPEL and I plan to ride this wave for a long time.

Disclosure: Author holds a long position in MPEL

Comments

[rose royce]

i agree with you was shocked after positive earnings and other good news to see stock fall like a rocket, from the big blocks being sold it must have been the big boys somebody, very strange, all looks a bit fishy to me.

[Chris Katje]

Great earnings report yesterday. The stock will double from the new casino. Check out my review at stockworldpicks.blogsp... .

[FrankWaddell]

Earnings announcements are a funny thing in the current invesment climate. Seems the market is currently rewarding write-downs and other mishaps and discounting companies with improving fundamentals and positive earnings surprises relative to street estimates.

I think many retail investors have the feeling that the Macau story has been "played out", and has led to overvaluations in their multiples. This may be the case with a few of the gaming operators that may have taken on a bit more leverage than they can handle.

Over time the "good" money should come into this company's ownership structure as they begin to see the whole picture and future pipeline. Seems there are currently a lot of speculators trying to catch a huge earnings surprise and providing a lot of short-term volitility.

I plan to do a follow-up on Melco-PBL, specifically refrencing its valuation and a comparables valuation.

[RichardDwyer]

Excellent analysis. Macau will be bullish for a very long time. And MPEL should be too.

[User 103383]

MPEL has great earnings and no dout about it and trades at 50% from the IPO price at 19. It is ridiculous to say, although MPEbL improved fundamentals and trades at 50% of IPO price. For sure it is giving tough compettion to others in Macau and gaining market share. People will recognise the potential here in MPEL,hold on

[buyforeclosures]

This stock is getting killed..10 bucks a share and could go to 9's or even back to 8's but I may buy some as in a couple years it should be doing well...but so far that ride of yours has been a ride down wipe out

[MIKE W]

Have there been any responces,from tth MPEL management, as to why the stock value keep falling? How long do we wait for good news concerning stock values, dividends, ect....


Mike for Michigan

[j_remington]

STRONG BUY @$6

mid teens by 2009 target

[j_remington]

STRONG BUY @$6

mid teens by 2009 target

[GM -Sydney,Australia]

The stock has this week broken through its 13 day moving average. I bought some on the downward slope around $10 not expecting them to go much further to around 6 bucks last week. Was an exceptional buying opportunity last week at around 6 so as a value investor I took advantage of the opportunity last week when people were dumping the stock for lack of understanding of the impact on MPEL of the new visa restrictions. The reports are that the Macau casinos can't cope with the numbers going through the places (MPEL recently converted slot areas to tables to try to cater for the extra punters coming through its doors) and the visa restrictions are more likely to get the gamblers punting full on whilst they are there in Macau on their limited visas. The new visa restrictions are not going to solve the problem with an appreciating Yuan and prosperity in China. Furthermore the junket operators such as A-Max will most likely "facilitate" visas for the high roller players that the Macau Crown has as a portion of its clientelle. I am veryu much looking forward to the June quarter results next month (probably mid August if the timing of release of the March quarter is anything to go by) to see if there is any upward movement on the rolling chip turnover of around US19.5 billion (that's an amazing turnover!!!!)...and further upside when the second phase of the project opens in the first half of 2009....
This stock in my view has huge upside potential.... Chinese and gambling.... the company has the right ingredients to make money!

I am now set for the long term in MPEL (having exited my US casino stocks mid 2007) and am really looking forward to the ride up on this one.

Sooner or later investors will finally understand that this is a diamond worth taking a position on.