Melco PBL Entertainment: The Crown of Macau

May.16.08 | About: Melco Crown (MPEL)

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 (NYSE:LVS), Wynn Resorts (NASDAQ:WYNN), Galaxy Entertainment [0027.HK], Melco-PBL (NASDAQ:MPEL) [soon to be called Melco-Crown], MGM Mirage (NYSE: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