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Published: September 10, 2010
Talk about great timing. Major casino operators decided a
decade ago to build massive new casinos in Macau, just a stone's
throw from Hong Kong and mainland China. Those new gambling
halls are now packed to the gills, thanks to the region's
ever-rising tide of freshly-minted millionaires.
Meanwhile, traffic at casinos in Las Vegas, Atlantic City,
Biloxi and elsewhere in the United States remains in a funk. The
fact that shares of Las Vegas Sands (NYSE: LVS) and
Wynn Resorts (Nasdaq: WYNN) are up +110% and +50%
year-to-date, respectively, is solely due to their exposure to
Macau. U.S.-focused Casino operators like Isle of Capri
(Nasdaq: ISLE) can only look on with envy. That firm
announced very tepid quarterly results August 31st, pushing
shares down -14%.
If you think you missed the Macau surge, fret not. There is a
way to play the region with a stock that is only starting to
find appreciation among investors.
Building boom
After years of construction, new casinos have been opening at a
frenzied pace during the past few years in Macau. Industry
revenue rose more than +50% last year and are rising +50% again
this year. Lest they kill the golden goose, regulators have
installed a moratorium on new development until 2013, so
industry volumes are likely to rise +10% to +15% next year and
in 2012 as a few more casinos still under construction open
their doors.
Casinos generally must be open for a few years before they can
build a loyal following and operate at peak profit levels. Las
Vegas and Wynn were among the first to establish a foothold, and
their Macau casinos have recently produced stellar profit
results, which fully accounts for those heady share price gains
posted this year.
Meanwhile, Melco Crown Entertainment (Nasdaq: MPEL),
which was a few years behind the curve, is still tweaking
operations. Quarterly profits have been erratic, especially this
past winter when an unexpected bout of gamblers' good luck led
to a profit shortfall. Shares took a beating, from above $7 last
September, falling to nearly $3.
Yet shares have started rebounding, rising +15% in the past five
trading sessions to around $4.60. The improving sentiment comes
from industry chatter that the company had a stellar August and
is boosting
market share in Macau.
According to a recent report from analysts at Sterne Agee, Melco
has moved past Wynn Resorts into a tie with Las Vegas Sands in
terms of traffic. That's led the analysts to conclude that Melco
is on track to surpass consensus sales and profit forecasts for
2010. That would be a nice
turnaround, as the company has a history of underperforming
relative to expectations.
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Monthly Market Share of Macau Gaming Revenue
2010 |
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Macau's casino operators have eschewed the Las Vegas model
which has always sought a mix of gambling and entertainment. "Zaia,"
a musical production put on by the Venetian Macau was largely
considered to be a failure. But with scant entertainment
options, Melco still thinks that some tourists will still be
ready to pony up for a glitzy show. So the company has produced
"House of Dancing Water," which is thought to be better geared
toward Chinese tastes. Early reviews have been positive, which
may explain some of the recent market share shift.
Action to Take --> Despite
the recent rebound, shares of Melco still trade at a discount to
peers. While Las Vegas Sands and Wynn Resorts trade for about 12
times projected 2011 EBITDA on an
enterprise value basis, Melco trades for just nine times
projected 2011 EBITDA. Closing that gap yields a +30% upside for
the shares.
More importantly, unless you assume that the fast-growing
Chinese middle class will start to shrink in the face of an
economic contraction, Melco could prove to be a solid long-term
holding. The company is controlled by the son of legendary Hong
Kong investor Stanley Ho, and he has stated plans to make sure
that Melco continually seeks out new revenue and profit streams
in the world's newest gambling mecca.
-- David Sterman
Staff Writer
StreetAuthority |
