MELCO CROWN ENTMT LTD -ADR MPEL
March 05, 2010 - 5:14pm EST by
duff234
2010 2011
Price: 4.40 EPS -$0.63 -0.08E
Shares Out. (in M): 526 P/E n/a n/a
Market Cap (in $M): 2,321 P/FCF -108.0x 212.0x
Net Debt (in $M): 1,800 EBIT 14 25
TEV ($): 4,121 TEV/EBIT 295.0x 165.0x

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Description

 

Melco Crown Entertainment Limited (MPEL), owns, develops and operates casinos in Macao. The company came public in Dec, 2006 at the lofty price of $19/share, traded briefly above $20, and has been under water ever since. MPEL seriously stumbled and fell out of favor in 2H of 2008, after a drop in revenues, and again in 2H of 2009 as investors started to worry about the risks associated with the company's huge new centrally-located and expensive development, the City of Dreams ("CoD"), which includes Hard Rock and Hyatt resorts, in addition to the marquis Crown Towers.   I see short term catalysts that will lead to a reappraisal and re-rating of MPEL, and in the medium to long-term, sustainable high growth rates in gaming revenue for Macao. In short, MPEL is attractive both from a top-down and bottom-up perspective, and I expect the stock to more than double by 2012.

Macau has been and continues to be a phenomenal success.  Macau was a sleepy island just a decade ago, but gaming laws were liberalized in 2002, travel restrictions from mainland China eased, and licenses extended to 6 operators, including MPEL (formed in 2004).  Gaming revenues grew 8x from $2.2 billion in 2002 to U.S. $16.5 billion in 2009 - making Macau twice as big as Las Vegas. Macau is truly big, located next to a prosperous and densely populated China. During the recent Chinese New Year, an estimated 1m Chinese visited Macua each day. 90% of Macau's revenues are from gambling, which is no less popular in China than it is elsewhere, to say the very least.  I believe Macau will at least double in size over the next 5 years as its infrastructure is built out and it evolves into a broader entertainment destination. MPEL is positioned to benefit from this growth.

MPEL's future seemed at risk late in 2009.  Its first property in Macau, Altira, had underperformed expectations for a variety of reasons (It was awkardly located off the central Cotai strip, targeted a niche premium segment, etc.), giving the company a mixed reputation in its ability to execute successfully. Also, in 2009, MPEL was just finishing the huge "City of Dreams" funded with a $1.8bn construction loan.  Growth was below expectations and 'hold' rates (the % of wagered funds kept by the house) were worse than usual - the casino had bad luck (Picture a high-stakes gambler having a hot night at the tables and promptly departing).  The company issued equity at $4/share in April, 2009, and broker's cut their forecasts, igniting fears of re-financing risk as it seemed MPEL would fail some Dec 2010 debt covenants.  The reversal of these fears is the catalysts that underpin the investment thesis:

1)       Macau's January and February 65% yoy growth bodes well. If MPEL keeps monthly profits at these levels it could beat 'street' estimates substantially (For example, JPM currently pegs 2010 Ebitda at $329m, whereas MPEL's January Ebitda performance was $40m, or $440m annualized).

2)       MPEL said it is working to refinance its construction loan debt (due starting 2012) into longer term debt, which may be cheaper, by Q2 2010. I think it is highly probable that the debt will be successfully refinanced on acceptable terms.

3)      City of Dreams occupancy rates at the Hyatt are already over 70%, and the low 'hold' rates or 'bad luck' of late 2009, is statistically likely to be reversed: The House always wins.

My 2010 forecast is 20-30% above "street" anaylst estimates but I beleive these numbers are attainable as demonstrated by MPEL's recent Januare run-rate performance and February numbers for Macau, up +70% y-o-y. At 10x EV/Ebitda, which is a discount to MPEL's peers, the stock could reach $7/share in 2011 and $9.60/share in 2012, or +59% and +118%, respectively. 

   

Year 2008 2009 2010F 2011F 2012F
Revenue 1,416 1,333 2,300 2,530 3,036
Ebitda 157 56 400 443 546
Net Debt   1100 900 660 360
EV   3420 3220 2980 2680
EV/Ebitda multipl     8 6.7 4.9

 

 

Current Mkt Price: $4.40/share

Target Valuation @ 10x Ebitda:  2011 = $7.08/share

Target Valuation @ 10x Ebitda:  2012 = $9.60/share 

Some comps:

Wynn Macau currently trades at an EV/Ebitda (2010) multiple of 13.7x

Sands China currently trades at an EV/Ebitda (2010) multiple of 14.2x

Finally, Melco Int'l (0200 HK) and Crown Ltd (CWN AU) each own 31% of MPEL, providing a high level of inside ownership.

Risks to the thesis are: China either implodes or drastically restricts growth, or both, reducing travel to and gambling activity in Macau; A government imposed travel restriction to Macau/backlash against destructive gambling behavior; MPEL's City of Dreams is a flop. 

Catalyst

1) Re-financing of MPEL's construction loan in the next few months; 2) Raising street estimates for 2010 based on significant out-performance versus current forecasts; 3) Success of City of Dreams.

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    Description

     

    Melco Crown Entertainment Limited (MPEL), owns, develops and operates casinos in Macao. The company came public in Dec, 2006 at the lofty price of $19/share, traded briefly above $20, and has been under water ever since. MPEL seriously stumbled and fell out of favor in 2H of 2008, after a drop in revenues, and again in 2H of 2009 as investors started to worry about the risks associated with the company's huge new centrally-located and expensive development, the City of Dreams ("CoD"), which includes Hard Rock and Hyatt resorts, in addition to the marquis Crown Towers.   I see short term catalysts that will lead to a reappraisal and re-rating of MPEL, and in the medium to long-term, sustainable high growth rates in gaming revenue for Macao. In short, MPEL is attractive both from a top-down and bottom-up perspective, and I expect the stock to more than double by 2012.

    Macau has been and continues to be a phenomenal success.  Macau was a sleepy island just a decade ago, but gaming laws were liberalized in 2002, travel restrictions from mainland China eased, and licenses extended to 6 operators, including MPEL (formed in 2004).  Gaming revenues grew 8x from $2.2 billion in 2002 to U.S. $16.5 billion in 2009 - making Macau twice as big as Las Vegas. Macau is truly big, located next to a prosperous and densely populated China. During the recent Chinese New Year, an estimated 1m Chinese visited Macua each day. 90% of Macau's revenues are from gambling, which is no less popular in China than it is elsewhere, to say the very least.  I believe Macau will at least double in size over the next 5 years as its infrastructure is built out and it evolves into a broader entertainment destination. MPEL is positioned to benefit from this growth.

    MPEL's future seemed at risk late in 2009.  Its first property in Macau, Altira, had underperformed expectations for a variety of reasons (It was awkardly located off the central Cotai strip, targeted a niche premium segment, etc.), giving the company a mixed reputation in its ability to execute successfully. Also, in 2009, MPEL was just finishing the huge "City of Dreams" funded with a $1.8bn construction loan.  Growth was below expectations and 'hold' rates (the % of wagered funds kept by the house) were worse than usual - the casino had bad luck (Picture a high-stakes gambler having a hot night at the tables and promptly departing).  The company issued equity at $4/share in April, 2009, and broker's cut their forecasts, igniting fears of re-financing risk as it seemed MPEL would fail some Dec 2010 debt covenants.  The reversal of these fears is the catalysts that underpin the investment thesis:

    1)       Macau's January and February 65% yoy growth bodes well. If MPEL keeps monthly profits at these levels it could beat 'street' estimates substantially (For example, JPM currently pegs 2010 Ebitda at $329m, whereas MPEL's January Ebitda performance was $40m, or $440m annualized).

    2)       MPEL said it is working to refinance its construction loan debt (due starting 2012) into longer term debt, which may be cheaper, by Q2 2010. I think it is highly probable that the debt will be successfully refinanced on acceptable terms.

    3)      City of Dreams occupancy rates at the Hyatt are already over 70%, and the low 'hold' rates or 'bad luck' of late 2009, is statistically likely to be reversed: The House always wins.

    My 2010 forecast is 20-30% above "street" anaylst estimates but I beleive these numbers are attainable as demonstrated by MPEL's recent Januare run-rate performance and February numbers for Macau, up +70% y-o-y. At 10x EV/Ebitda, which is a discount to MPEL's peers, the stock could reach $7/share in 2011 and $9.60/share in 2012, or +59% and +118%, respectively. 

       

    Year 2008 2009 2010F 2011F 2012F
    Revenue 1,416 1,333 2,300 2,530 3,036
    Ebitda 157 56 400 443 546
    Net Debt   1100 900 660 360
    EV   3420 3220 2980 2680
    EV/Ebitda multipl     8 6.7 4.9

     

     

    Current Mkt Price: $4.40/share

    Target Valuation @ 10x Ebitda:  2011 = $7.08/share

    Target Valuation @ 10x Ebitda:  2012 = $9.60/share 

    Some comps:

    Wynn Macau currently trades at an EV/Ebitda (2010) multiple of 13.7x

    Sands China currently trades at an EV/Ebitda (2010) multiple of 14.2x

    Finally, Melco Int'l (0200 HK) and Crown Ltd (CWN AU) each own 31% of MPEL, providing a high level of inside ownership.

    Risks to the thesis are: China either implodes or drastically restricts growth, or both, reducing travel to and gambling activity in Macau; A government imposed travel restriction to Macau/backlash against destructive gambling behavior; MPEL's City of Dreams is a flop. 

    Catalyst

    1) Re-financing of MPEL's construction loan in the next few months; 2) Raising street estimates for 2010 based on significant out-performance versus current forecasts; 3) Success of City of Dreams.

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