At $17.65 A Share Could Melco Crown Be A Bargain Hiding In Plain Sight?

| About: Melco Resorts (MLCO)


The James Packer exit blurred the good news about this Macau gaming operator.

Strong management commitment to mass market segment with VIP as well on tap.

Betting on Lawrence Ho, among the youngest gaming CEOs, presages long runway to expansion.

"Life is a DNA software system…"

Craig Venter

Any analysis of the prospects of Melco Crown Entertainment Ltd. (MELCO) must be anchored in of all things, a belief in the DNA carried by its young, current chairman, Lawrence Ho.

A bit of history for perspective is warranted here. (His sister Pansy Ho, 54, is a billionaire, 29% owner of MGM (NYSE:MGM) Grand Macau. She had been approved by Nevada gaming authorities but not New Jersey regulators. In 2010, they asserted she has ties with Chinese organized crime and ordered MGM to sever any ties with her regarding New Jersey.)

Lawrence is the 41-year-old son by the second of four wives of the fabled King of Macau gambling, Mr. Stanley Ho, now 95. It was after World War II that Ho, with his partner, gambling baron Yip Hon, won the public tender to develop Macau as a tourist destination using legal gambling as one of its major attractions. In the process, he outmaneuvered the powerful Fu family. Macau in those years was a place where members of the notorious Triads regularly gambled and arranged junkets.

Despite diverse interests in dozens of businesses, and smoky pasts, Ho and Yip Hon thrived, eventually controlling much of the high-end gambling and very profitable lending to gamblers in Macau. Rumors about their associates in the triads abounded but that never stopped numerous business groups and governments both in Asia and Britain from conferring high honorifics on him. Stanley Ho emerged over time as the poster boy gold-plated citizen business tycoon of Macau.

My point here is that Stanley Ho conferred the gaming genes onto both his son and daughter and imparted a priceless one-on-one education and customer knowledge about Macau as they grew into adulthood. It's not the classic MBA so many gaming executives bring to the table today but probably on many levels, far more valuable. It's probably why just after the departure of his partner James Packer late last Spring, Ho announced that the Melco Macau properties would ramp up their pursuit of VIP by opening a junket room at Studio City. My sources say it's doing well.

During the 2015 downdraft, Melco revenues and earnings were blitzed along with all their competitors. In October of that year, they opened their long-awaited Studio City property putting 1,600 rooms into the mix. More critically, the property with its movie pop culture theme was directly aimed at the mass market segment, which then as now, augers as the strongest propellant of Macau growth going forward.

The crackdown plus the sudden decision of Packer to give up his interests there sent alarm flags flying all over the investment community. Earnings were down, early results from Studio City evoked more yawns than applause. But Lawrence Ho soldiered on and as the market passed July and monthly GGR began its recovery.

MPEL share prices remained with industry peers mired in skepticism by a market that didn't then, and I believe still does not, fully understand the clockworks of Macau gaming beyond the basic numbers used to value the shares.

Since then, MPEL has had earnings bounce back. In the most recent published quarter, revenues were up 22% YoY and the company posted a $0.04 a share earnings result. Besides the improving health of the Macau portfolio, MPEL's Philippines property, City of Dreams in Manila, grew as well. Although only representing 11% of total company revenue estimated to be over $4 billion at the next earnings call scheduled at or near February 16th.

Competition is heating up in that market with the debut last month of Okada Manila's property and others in the pipeline. What this tells us is that developers are seeing upside potential here based on the proven MPEL business model of centering its marketing thrust at the mass market both in Macau and Manila. However, the Ho family's established know-how and contact network in the VIP field has not gone inactive. We are hearing that Lawrence Ho has every expectation of being competitive in VIP as well, as that segment continues to show improvement as well.

The key here: We think with Las Vegas Sands (NYSE:LVS), MPEL shares are a dual market diversity in Asia. LVS with its Singapore property and MPEL in the Philippines. James Packer's sale of 198 million of his shares to Ho now places the company with 51.3% control, which we believe will produce greater flexibility, going forward, for MPEL to expand. We now see MPEL as a viable bidder for a Japanese license among industry leaders as they too have proven their understanding of the Asian tourist segment, which will loom so crucial to Japanese officials who will be considering the mix of awardees.

With an improving earnings profile, growing mass sectors, aggressive VIP marketing, recovering Macau market and a vital Philippines entry for MPEL and a majority position by the savvy Ho family, we see its current entry point as an opportunity.

Here's the basics and our call:

Melco Crown Entertainment (MPEL)

Price at writing: $17.65

52-week trading range: $12.86 to $20.00. Our view is that most of the downdraft of 2014/15 and half of 2016 had been baked into the low indicated above. Add uncertainties about the sudden departure of Packer and you had a bearish to hold case. That no longer applies.

It's a different world.

Market cap: $8.69b

P/E: 76.78. This clearly is high compared to its peers. But it is a number without repeat, without the bullish cast to the Macau and Manila markets yet baked in as I believe we will see at the next earnings call. I have worked the phones to friends both in Macau and Manila attempting to get an eyeball sense of the texture of the mass market business there. The reports I have gotten back are positive, largely agreeing with my premise that we could see much better earnings news come February. If that is the case, the P/E might well come down considerably, triggering more institutional interest.

EPS (TTM) $0.23

Dividend and Yield $0.10 (0.56). We don't see MPEL at this time as a dividend up play but more likely, depending on the work out of the sale of the Packer interest, a possible buyback sometime before the end of this year.

One year target: $19.98. The current trade stands roughly $2 under this target, which we believe, given the sharply improved outlook for MPEL and the markets it serves, will be reached by Q2. Our one-year target is more ambitious based on our own call of up to a 15% upside in Macau for 2017, the mass sector strengthening and despite increasing competition, more ebullient growth coming in Manila.

With its ownership profile now clarified, its management in the sure hands of a young, ambitious Lawrence Ho, our one-year target for MPEL is $26 to $28.

For perspective, we have held our calls on these competitors as follows:

WYNN: $135 by the end of Q2 this year.

LVS: $70 by the end of Q2 this year.

MGM: $43 by the end of Q3 this year. Note: Our MGM call is obviously not Asia specific or Asia dependent. It is a blend of that company's strong Las Vegas strip profile, its new record-breaking property at National Harbor, Maryland and its acquisition of market-leading Borgata in Atlantic City, which last month reported the first YoY increase in gaming win in ten years. This does not negate what we believe will be MGM Cotai's opening during the Macau recovery during Q2 this year.

So if you appraise relative values, you have MPEL as a major competitor in the Asia space reaching a trade that still places it attractively below all its peers with similar bullish market outlooks.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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