Melco Crown (MPEL) Posts a 567% Gain in Earnings on Macau Growth
Last Friday, Macau-based casino operator Melco Crown Entertainment (MPEL: Charts, News) stunned investors when it posted a sixfold increase in earnings at its City of Dreams casino. The company, a joint venture between Australian billionaire James Packer and a son of gambling tycoon Stanley Ho, posted fourth-quarter earnings of 20 cents per ADR, or $107.5 million USD, on revenue of $1.01 billion.
Melco Crown and its industry peers, Las Vegas Sands (LVS: Charts, News), Wynn (WYNN: Charts, News) and MGM Resorts (MGM: Charts, News), have been in a positive feedback loop fueled by an increasing number of visitors to Macau, the only city with legalized gambling in China. Although concerns have been raised regarding a gradual slowdown, the city still remains a mecca for American and Australian casino operators looking to escape domestic stagnation. The number of total visitors to Macau increased 12% to 28 million in 2011. 53% of those visitors came from the mainland, where an increasingly affluent middle class has fueled the gambling and tourism boom. Casino gambling revenue in Macau rose 42% in 2011, and the city rakes in five times the revenue of Las Vegas.
The Cotai Strip is the newest gambling district in Macau, and is home to the newest and largest casinos - such as Sands' Venetian Macau and Melco Crown's City of Dreams. Melco Crown is currently seeking regulatory approval for a new resort, Studio City, on the Cotai Strip. Studio City, which measures 465,000 square meters, will be squeezed by competitors - Sands China, a subsidiary of Las Vegas Sands, plans to open a new casino, the Sands Cotai Central, in April. Wynn, Galaxy Entertainment Group and Shun Tak are also developing new properties in the area. Melco Crown took a $1.25 billion loan from seven banks in order to fund Studio City's construction, which increases its total debt by 53% to $2.3 billion. Studio City is expected to open for business in 2015.
Melco Crown currently holds 15% of the Macau market with just two properties - City of Dreams and Altira. City of Dreams posted EBITDA growth of 9.4% sequentially, but Altira, its "boutique casino", posted a 32.6% EBITDA decline. City of Dreams' outperformed all of its bigger peers - the Wynn Macau, Sands Macau and the Venetian Macau - in year-over-year EBITDA growth. In quarter-over-quarter EBITDA growth, the casino beat all the properties except for the Venetian Macau. However, Altira was at the bottom of the barrel, falling far behind all of these properties on both comparisons.
However, Lawrence Ho, the CEO of Melco Crown, expressed confidence that Macau's gambling market would remain strong. "When it comes to the discretionary spending and consumer sector," he commented, "we really haven't seen any significant slowdown in Macau." The company also started trading in Hong Kong on December 8 in order to provide more financial flexibility. Melco Crown's U.S.-listed ADRs have risen 23% this year, while its Hong Kong shares have risen 28%. Australia-based Crown, which owns 33% of the joint venture, also operates two Australian casinos in Melbourne and Perth, which are forecast to report earnings growth of 4.7% this quarter.
Melco Crown is considered a cheaper stock than Las Vegas Sands or Wynn. The company's stock trades with a P/E of 21, compared to Las Vegas Sands' 33 and Wynn's 23. Although few analysts believe that Melco Crown stands a chance to outgun its bigger peers in terms of pure profits and revenue, the company can be considered a value play on Macau with more growth potential in the next decade.
Other News About MPEL
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