Melco Crown: China gaming gamble

High-spenders and day-trippers are placing bets at casinos in Macau.

By TheStockAdvisors Feb 28, 2013 11:05AM
Gambling CorbisBy Paul Goodwin, Cabot China & Emerging Markets Report

An old friend we're recommending again is Melco Crown Entertainment (MPEL), a Hong Kong company that owns one of the scarce gambling concessions in Macau, the only place in China where gambling is legal.

Casinos make more of their money by attracting high spenders, and China has plenty of those. Macau is also within excursion-boat range of Hong Kong and attracts lots of day trippers, who provide a significant amount of revenue.

In Macau, the competition among Las Vegas Sands properties, Wynn (WYNN) casinos and MGM Grand (MGM) developments is fierce, but Melco Crown has played the mega-casino development game shot-for- shot with the big guys and is thriving.

The big driver of revenue for Melco is its City of Dreams resort casino complex, a massive conglomeration of casinos, hotels, theaters, 20 restaurants and bars, 175,000 square feet of high-end shopping venues and water shows powered by 550 gambling tables, and 1,500 gaming machines.

This partially completed development contributes almost two-thirds of Melco's revenue, with the Altira Macau kicking in just under a third. Smaller venues like the company's Mocha Clubs, aimed at casual day trippers, make up the rest.

Gambling revenue from Macau topped that of Las Vegas in 2007, and big gaming companies have been pouring money into this tiny area.

Melco is locked in a building battle with its competitors, but City of Dreams is scheduled for completion in 2015, much earlier than rival developments. And as the Chinese economy revives, money flow will continue to increase.

Melco reported earnings on February 6, and revenue was up 9%. Earnings were flat, but investors were impressed by the 10.1% after-tax profit margin and estimates of 22% earnings growth in 2013.

We owned MPEL from late April 2011 until October of that year, cashing out with a profit as the stock was beginning a year-long correction caused by a slowing Chinese economy. MPEL bottomed at $10 last July and has been in an uptrend since.

The stock took a minor hit just as earnings came out because of a rumor that the Chinese government was going to crack down on gambling junkets from the mainland.

It took only a couple of days for this pullback, which dropped the stock below its 25-day moving average for the first time since December, to be recovered fully. MPEL is back near $21, which was resistance earlier this month. It's buyable on any dip of half a point, or on a breakout over $21.

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