Melco Crown (NASDAQ: MPEL ) has been the hottest stock in gaming over the past few years, and that's in large part because of the company's rapid growth. Not only has Melco Crown ridden a wave of gaming growth in Macau, its City of Dreams has proven the ability to take share from competitors.
The next challenge for the company is keeping that growth rate going. The stock price currently yields a $18.5 billion market cap and at that price the company is worth 17 times the past year's EBITDA. That's a high multiple, even for a company with growth opportunities, so execution needs to be flawless going forward.
Macau is still the growth engine
City of Dreams is the backbone of Melco Crown, but Studio City to the south is where the big upside is. The project is expected to cost $3 billion when it's all said and done, and to have 500 gaming tables and 1,500 slot machines. That's a similar size to other resorts on Cotai, so another $1 billion in EBITDA may not be out of the question.
The risk is that Melco Crown won't be awarded that many tables because Las Vegas Sands (NYSE: LVS ) , Wynn Resorts (NASDAQ: WYNN ) , and MGM Resorts (NYSE: MGM ) will all be opening new resorts on Cotai around the same time. Studio City doesn't have tables approved and the project will be less financially viable if they aren't approved.
Looking beyond Macau
Long before Studio City opens its doors, City of Dreams Manila will open in the Philippines. The project (pictured below) is expected to open mid-2014 and its gaming potential just got a boost. Regulators are now allowing 365 table games and 1,680 electronic games versus a previous plan of 242 tables and 1,450 electronic games, expanding the potential for profit.
The resort has required an investment of $680 million from Melco Crown, up 10% from previous estimates, but management thinks it will be worth it. Estimates have put the Philippines gaming market at more than $3 billion, and with four major resorts splitting the bulk of that revenue, the upside is tremendous. But we won't know exactly what to expect until the doors open.
Eyes on Japan
Everyone in gaming has had eyes on Japan's potential gaming market, which is still a clean slate for the industry. Melco Crown recently said it's ready to spend $5 billion to build resorts in Japan, eyeing a market that could be "in excess of $10 billion to $15 billion or more" according to Lawrence Ho.
But Melco Crown isn't the only one with billions to spend in Japan. Wynn Resorts recently said it is considering $4 billion in investment there, and MGM Resorts said it would put "several billion" into Japan. Both companies have said they plan to build with a local partner, something that could help them win a casino bid.
Las Vegas Sands is "open-minded" about bidding with a partner and is reportedly already scouting sites.
Leaders in Japan are hoping to pass a gaming bill this year, giving developers enough time to build resorts before the 2020 Olympic Games. For each gaming operator, Japan presents upside, but without known winning bids it's hard to expect any one company to be a big winner there.
Foolish bottom line
Melco Crown has its sights set on as many as three new Asian resorts, two of which are already under construction. They'll provide the next phase of growth for the company, which is needed to grow into its valuation. Look for the Philippines to provide the next boost, but the real area to keep an eye on is Studio City in Macau. With table games the resort could be a hit, but without there's risk that it's a cash drain for Melco Crown.
This is still a growth stock in gaming, but at the current valuation I just don't think it's the slam dunk it was a few years ago.
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