Description
I am recommending the 31% discount to NAV at Melco Intl. Because Melco Intl's asset value is effectively entirely derived from the publicly-traded equity in Melco Crown, we can structure a trade between Melco Intl (200 HK) and its key underlying asset Melco Crown(MPEL US; 6883 HK). Although this discount is around historical averages, there are some nice features to this trade.
Melco Crown is the only real economic driver of Melco Intl. The primary reason that Melco Intl is mispriced is that for an investor seeking to obtain equity ownership of Melco Crown, better liquidity is offered through direct exposure to Melco Crown rather than indirect exposure through Melco Intl. Another reason for the mispricing is that the relatively overvaued asset (Melco Crown) has a 33% free float; this is still USD 1.6 billion.
Melco Intl is effectively an investment holding company. Other than its equity interest in Melco Crown, Melco Intl has a myriad of small assets, including China and Pan-Asian lottery (through Melco LottVentures), a provision of gaming products tech solutions in Asia (through Elixir Gaming Tech), and China ski resorts (through Melco China Resorts).
Melco Crown is one of the six licensing gaming operators in Macau and was initially a 50/50 joint venture between Melco Intl and Crown Limited, an Australian gaming operator. After a public offering for a piece of Melco Crown, each of Melco Intl and Crown Limited own 33.4% of Melco Crown. Melco Intl is a company controlled by Lawrence Ho, the son of Macau gaming magnate Stanley Ho.
HKD Depeg
You're long an asset in HKD and short an asset in USD. If you're feeling linked to win like Bill Ackman but don't carry a boomstick that gets you access to OTC currency swaptions and calls and would rather avoid simple forex or need to hold listed equities, this is a nice way to potentially win from a HKD de-pegging. The dual listing of Melco Crown (see below) will keep the US listing honest to changes in USD/HKD.
Macau Gaming
To inversely paraphrase Dennis Green, if the Macau gaming industry ultimately isn't what you that it was, then increases in Melco Crown's value will likely close the gap. See Duff's Mar 2010 writeup on MPEL.
Dual Listing of Melco Crown
Melco Crown began trading in Hong Kong (6883 HK) on Dec 7th. I believe the potential for a dual listing has been an overhang on the Melco Intl NAV discount as a Hong Kong listing is expected to draw liquidity from the Melco Crown US listing and the Melco Intl Hong kong listing.
Tax Leakage
I do not believe the discount is due to potential tax leakage. Both Melco Intl and Melco Crown entities are based in Hong Kong. There is no capital gains tax in Hong Knog, and profits remitted to a Hong Kong parent which represent the profitable disposal of its shareholding in a resident subsidiary are not assessed taxes because the gains are capital gains.
Catalyst
Time and money