Shares of gaming company, Melco-Crown (MPEL), have been in a seemingly never-ending downward spiral as the entire gaming industry has faltered.
Jefferies analyst, Larry Klatzkin, was recently quoted by Bloomberg as seeing "Tremendous upside" for shares of Melco-Crown and has a buy rating on the stock with a recently revised $18 price target for the next 12 months. That is quite a gap from the current share price of near $6 per share.
The entire industry has been hit hard as gaming has slowed down dramatically in Las Vegas, with many strip gaming operators losing more than half their value. MPEL's shares have followed a similar pattern despite being the only U.S. traded gambling company that has no exposure to the weak U.S. market and its current economy. In fact, it operates in a market where revenues grew 45 percent in 2007 and are on pace for a similar growth rate for 2008.
Another possible reason for the decline in share price is the recent rumor of further visa restrictions in Macau. Ironically, Macau is a victim of its own success. Macau is already the most densely populated city in the world (and still growing), and the rapid increase of tourists is putting a strain on the island's infrastructure, causing the government to slowdown visitation to a more normal growth rate until the needed infrastructure is available. In other words, Macau is slowing down its visitation because tourist visitations are increasing too rapidly, causing long wait lines and strains on the islands border gates and ferry terminals. As Macau is taking appropriate actions to slow its rapid growth, Vegas is having trouble attracting any growth at all.
It is quite unusual that too much demand can be a burden for a company. However, Macau is making the appropriate steps in expanding its infrastructure for the anticipated future demand. Millions of tourists crossing the border between Macau and the mainland can expect shorter waiting times following completion of the Border Gate expansion at the end of next year. More than 170 million patacas is being spent to increase the border gate's capacity from 300,000 people per day to more than 500,000. The number of immigration counters will increase from 52 to 98, the number of automatic counters or auto gates from 15 to 80. Work began on the project in June this year and is scheduled for completion in the final quarter of next year.
Macau is also planning a massive bridge project linking Hong Kong with Macau and has recently increased the number of sailings between the two cities quite dramatically. In addition, the government of Macau is still studying the proposals for the implementation of the first phase of the planned Light Rail Transit System, which will link all of Macau's casinos, attractions, border gates, ferry terminals, and the airport.
Many analysts however, believe that the visa restrictions will have a minimal short term impact on MPEL, because of its high-roller focus. "What I find a little bit ridiculous is that of the six players in Macau, MPEL would be the least impacted by a change in visa rules because of its focus at the moment on the VIP market," said Anil Daswani, an analyst at Citigroup in Hong Kong. "We maintain (Melco) is one of the best positioned Macau casino operators over the long term given its complete slate of gaming products," Daswani said. "It still has City of Dreams and Macau Peninsula casinos coming on stream over the next few years, catering to the mass-market and day trippers." Deutsche Bank and BNP Paribas also rate MPEL as a buy.
Now that we know what the analysts think, lets move on to MPEL's largest shareholders. The two largest shareholders of MPEL are Janus Capital Management and Tremblant Capital. Janus, a popular mutual fund company many retail investors are aware of, is the second largest shareholder with holdings in 9 of its mutual funds. Tremblant is a $4.1 billion hedge fund based in New York and is run by Bret Barakett. Tremblant was one of the top performing hedge funds of 2007, and more recently made millions correctly predicting the collapse in the shares of Bear Stearns. As Bear Stearns's shares tumbled, Tremblant's put positions rose in value.
Today, Trembant is not only MPEL's largest shareholder, but a large holder of call options in MPEL's shares. As of the last reported 13-F filing, Tremblant owned nearly 11 million shares of the company, in addition to $27 million in call options (as of the last reported filing). According to public SEC filings, both firms have been adding to their positions.
Jefferies analyst, Lawrence Klatzkin, says investors' worries about visa issues and slower gambling revenue are "way overblown." This author agrees. For those willing to take a contrarian view, Melco's shares could offer tremendous upside, as the company's shares are now trading at near book value. There is even a near term catalyst to boot as the Macau government has recently announced a commission cap on rates paid to junkets. This alone could increase bottom line margins by an astounding 350 basis points overnight.
The market seems to have lost its appetite for shares of Melco-Crown, along with other gaming companies. Has the baby been thrown out with the bathwater? I think so.
Stock position: Long MPEL.