Now Is the Time to Place a Bet On Melco Crown

As a purely Asian holding, Melco Crown (NASDAQ: MPEL  ) may not be on the radar of many mainstream American investors looking at the big names in the industry such as Las Vegas Sands (NYSE: LVS  ) and Wynn Resorts (NASDAQ: WYNN  ) . It should be. With the company continuing to expand in Macau and probably soon in neighboring countries, this pure-play on Asian gaming continues to grow its revenue. Recent industry-wide price drops may have provided the perfect entry into this well-performing company.

Wynn Resorts and Las Vegas Sands both recently reported first-quarter earnings, and each company posted huge wins driven by their operations in Asia. Wynn Resorts beat the estimates on earnings per share with total revenue growth of 9.7% year-over-year, supported by a 14% revenue increase for its Macau operations. Las Vegas Sands did even better as it led the field with 2014 first-quarter revenue of a record $4.01 billion, up over 21% over the same period of last year. Again, the company attributed this to its huge bet on Macau, which paid off with nearly 50% EBITDA growth for its operations there.

With its earnings release last week, Melco Crown also showed huge wins. Revenue jumped 19% in the first quarter of 2014 over the first quarter of 2013. EBITDA itself jumped 31% for the same period, which was driven mainly by an increased focus on mass-market revenue. These growth rates put Melco Crown second in the industry behind Las Vegas Sands for first-quarter growth over the same period of last year. However, what makes these numbers even more exciting is that this comes at a time when Melco Crown is building and preparing two new megaresorts. Once it completes them, they should drive its revenues much higher.

No need to get bogged down in a declining U.S. market
Las Vegas Sands crushed this quarter thanks to its revenue growth in Asia, not only in Macau but also in Singapore. Las Vegas Sands took in 88% of its first-quarter revenue from Asia. Wynn, by contrast, got 75% of its global revenue from Macau.

However, consider that Las Vegas Sands actually reported a loss this quarter from its U.S. Northeast casino, while Wynn posted a revenue decrease of 1.5% for its U.S. operations. Because Asia is the sole profit driver for each company, doesn't it make sense to be bullish on an Asian pure-play that is competing to be the top gaming company in the region? Melco Crown is that company.


Betting on Melco Crown to bet on mass-market profits
The middle class of China continues to boom. According to research by the McKinsey group, by 2022 more than 75% of China's urban consumers will earn between $9,000 and $34,000 per year while 4% of the total Chinese population fell within that range back in 2000. Macau's gaming population consists mainly of mainland Chinese tourists. Therefore, the mass market has become the focus of the gaming industry, and since companies have begun to focus on this their profits have soared.

Source: Government of Macao Special Administrative Region, Statistics and Census Service

Lawrence Ho, CEO of Melco Crown, said:

Our groupwide profitability continues to be driven by the mass market segment at City of Dreams, a segment which is supported by the property's unique premium positioning and best-in-class gaming, hotel entertainment and other food and beverage amenities. We remain committed to our on-going table and room optimization strategy which has resulted in a shift of more resources to the mass market segment, positioning the property to take advantage of the expected growth in this higher margin segment in the future.

Melco Crown Macau properties, including its flagship City of Dreams resort casino. Photo: Melco Crown

The coming casinos -- which company can drive the most profits from new properties?
Melco Crown's flagship casino resort, City of Dreams, continues to drive profits for the company and is continuing to expand with a new section of hotel rooms coming in 2017. However, opening next year is the company's newest megaresort on the Cotai Strip, Studio City. CitiGroup analysts have said that Studio City will be the best-positioned resort on the strip.

Studio City remains on track to open in mid-2015 and will represent the next stand-alone integrated resort to open in Macau. This exciting cinematically themed integrated resort will bring a new level of entertainment to Macau and will substantially increase our already large exposure to the increasingly important mass market segments in Macau...

Wynn Resorts is also preparing for its new $4 billion Wynn Palace on Cotai, which will have 1,700 rooms, a performance lake which will put the one in Las Vegas to shame, and much more. However, it's set to open at least a year after the opening of Melco Crown's resort.

Las Vegas Sands, however, will be opening a new casino at around the same time. The company's new Cotai resort, the Parasian, will open in mid-2015 across the strip from Studio City. With more hotel rooms, this casino may take some of the mass-market players away from Studio City. However, with visitor counts continuing to rise at unprecedented rates, there will surely be enough gamers for both companies to continue winning.

First entrance out of Macau: The Philippines
Melco Crown, in partnership with the richest Filipino national, Henry Sy, is set to open its City of Dreams Manila resort later this year. This initial $1.3 billion investment indicates confidence that Manila will become one of the future gambling and resort hubs of Asia and the world. While Singapore represents a premier developed market, the Philippines will be another bet on a developing region within Asia supported by huge populations of mass-market gamers. 

"City of Dreams Manila is due to open later this year, marking our first entrance outside of Macau... We believe this property will significantly enhance Manila's appeal to regional tourists who are seeking a unique and World-class entertainment and gaming experience," said Ho. The pre-opening costs of this new resort accounted for $8.8 million worth of costs this quarter. However, when the resort opens next quarter, these costs should pay off.

A rendering of the City of Dreams Manila, Melco Crown's first venture outside of Macau. Photo: Melco Crown

Your best bet yet: Japan
While Japan currently bans casinos, legislators will vote on regulation to allow them, which analysts expect to pass easily, in the coming few months. The legalization of casinos in Japan will be the next biggest growth story in the gaming industry. Analysts expect that Japan will beat out Singapore to become the second-highest profit-generating gaming center in Asia behind Macau.

Melco Crown has been aggressive in meeting with Japanese officials early, as it hopes to claim a spot in Japan with what is likely to be one of four accepted bids. On the recent earnings call, speaking on the company's future prospects, Ho said, "While we remain fully committed to optimizing our current operating assets in Macau and progressing our exciting development pipeline both in Manila and Macau, we also continue to further our goal of becoming a leading gaming and entertainment company in the region, with particular focus on new major markets, most notably Japan." Las Vegas Sands, Wynn Resorts, and other companies are looking to get in on this market, and Foolish investors should stay tuned this summer to the coming vote by the Japanese government.

Foolish takeaway: Melco Crown may be the best bet you'll make for the next few years
Melco Crown reported a great quarter of rising revenues and EBITDA. With the company's resort in Manila opening in the next few months and Studio City opening in Macau next year, profits are likely to continue rolling in for the gaming company despite what happens with Las Vegas Sands' new casino next year and Wynn's new resort in 2016. Additionally, its hopeful investment in Japan should keep analysts excited about betting on this company more long term.

Analysts have set an average price target for Melco Crown near $50, and they will probably guide this up as the company continues to post strong earnings. Many of the Macau gaming stocks have been beaten up on concerns about industry regulation, although they should rebound soon. For those Foolish investors who are bullish on great Asian gaming plays like Melco Crown, this could be a great buying opportunity.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 20, 2014, at 12:01 PM, spokanimal wrote:

    One big error in your article, Bradley, one small error, and one necessary clarification:

    The big error was your contention that Las Vegas Sands reported "a loss at it's U.S. Northeast Casino".

    Sands Bethlehem is LVS's only, N.E. U.S. casino, and Bethworks reported operating income of $17.3 million, with an EBITDA margin of 2.6%. That is hardly a "loss", Bradley.

    Secondly, you characterize Sand's "Parisian" resort as being "across the strip" from Studio City when, in fact, it's next door to Studio City on the SAME side of the strip.

    Finally, only a small number of analogies of Studio City remember to mention that the resort does not presently have a "gaming license", and yours is not one of those analogies.

    The partnership that owned Studio City prior to MPEL's arrival on that scene never applied for a gaming license as the resort was not originally conceived as a gaming venue. Although Lawrence Ho has since begun the process of applying for a gaming license, none has been forthcoming thus far.

    Although Mr. Ho expresses public confidence that he will receive one, his chances are far short of certain, because the winds of change in the Chui government are blowing in the direction of diversification AWAY from gaming, not TOWARD it.

    Recall that Sands had a verbal grant on Cotai Sites 7 and 8 during the Edmund Ho regime in Macau, only to have it taken away from them after spending some $110 million in site prep there.

    If Sands actually had a prior verbal commitment rescinded in such a way, I can assure you that it will be an uphill battle to acquire a New commitment for gaming at Studio City, when such a commitment was never promised before.


  • Report this Comment On May 20, 2014, at 12:02 PM, spokanimal wrote:

    Correction: LVS's Bethworks resort had an EBITDA margin of 22.6%, not the aforementioned figure of 2.6% cited in my above comment posting.


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Bradley Seth

Small town Colorado native, always content with just fresh air, blue skies, coffee, and... a stack of 10Ks.

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