Melco PBL Entertainment
Analysis and Due Diligence

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By 4evergolfing
October 2, 2008

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MPEL, Oct 2, 2008

Here's a little summary from me regarding MPEL. All of the information has come from online sources which I've tried to reference. Thanks to the Motley Fool and Yahoo boards for bringing these links to my attention. I'd like to warn you that I'm long MPEL and a lot of this is just my rambling opinion in point form. Sorry, but you get what you pay for ;)

Just to get you started here is the yahoo finance link that provides a profile for Melco.


MPEL's current stock price is below it's book value of. $5.612/share. If you consider the $900M purchase price for Melco's gaming license from Wynn Resorts, you're left with $770M for the rest of Melco's assets! This includes The Crown Macau (which was on May 16th, the largest casino in the world in terms of betting volume!!), it's 7 Mocha Clubs, it's yet to be named Macau Peninsula casino project (I don't know if this should be included, since they haven't broken ground yet) and most importantly, it's City of Dreams development which is broken into 3 phases.

(From Melco PBL's 2007 annual report)

City of Dreams is currently targeted to open during the first half of 2009, with an initial phase
that will include substantially all of the 420,000 square foot casino, approximately 175,000
square feet of retail space, a 330-room Hard Rock Hotel and the Crown Towers Hotel, Cotai,
with approximately 300 rooms, suites and villas.

The 800-room Grand Hyatt Macau and the 2,000-seat wet stage performance venue form the second phase.

The third phase of development at City of Dreams comprises an apartment hotel complex consisting of approximately 800 units.

(The apartment hotel which has 800 units will go on pre-sale late 2009 for ~$1.5-$2.5 B!) Of course you can throw in it's obligatory high end shopping, dining and Cirque de Soeil-knock-off aka Dragone Entertainment to perform at the 2,000 seat wet stage.)

Melco also has a service contract to manage Playboy (mansion) themed casino in 2010. I can't imagine this adding too much to the bottom line, but it is Playboy. And who doesn't want to check out the Playboy mansion? I wonder if they'll have a swimming pool/grotto area. Mmmmm...Playboy grotto.

Cash vs. Debt

Total cash exceeds total debt (773M vs. 616M). For a casino company, this is simply off the charts good. Check these other competitors cash vs debt positions:

WYNN (1.33B vs 3.9B)
LVS (801M vs. 8.92B) and
MGM (280M vs 13B). What's the interest payments on a 13B debt?

Please correct me if I'm wrong, but I believe MPEL has funded it's projects with it's IPO (which raised ~$1.14B) and a secondary stock offering (which raised ~$600M) stock offerings. It's had these sales when the "Macau gambling" story was white hot. MPEL took advantage of the situation and is in great cash position.

"There is no definitive need for additional capital over the next 12 to 24 months and City of Dreams is fully funded, subject to satisfying various conditions in our bank facility."

Melco Crown Entertainment CEO, Lawrence Ho.

Look what 69% owner of LVS, Sheldon Aldelson has done in so that LVS doesn't breach leverage requirements on it's loans.

LVS has around $8.9B in debt. At 5% interest, we're talking $445M in interest alone to service it's current debt. How eager are banks willing to loan another $2B in this lending environment?

Growth Potential

Macau, clearly is Asia's answer to Las Vegas. Surprisingly (or not), Macau's gambling revenue now exceeds the gambling revenue of Las Vegas.

The downside of all this super growth, is that Macau's infrastructure cannot handle all the demands of the people working there (Construction, hospitality, casino and entertainment workers need transportation, a place to live and places to eat). So the Chinese government, in their wisdom, is intentionally curbing growth in Macau by restricting the number of times someone for China may visit Macau. Chinese government intervention has panicked investors (rightly so). When might these restrictions be lifted, if at all? What other intentions/ideas does the Chinese government have? I would hope that once the infrastructure is built, China will lift the restrictions.

Frank Waddell does an excellent job explaining the situation.

So remember, Melco's potential won't be realized until it's casinos are built an after proper government infrastructure has been built.

Macau is an island, so is this a moat?

Macau government has put a temporary freeze on any new gaming licences and casino developments. So that leaves Melco Crown as 1 of 6 companies that have a gambling licence in Macau (and when I say Macau in this sentence, what I really mean is China!). Now that is a nice competitive moat. It's not a perfect moat since Melco Crown shares the moat with 5 other castles, but it's the next best thing. *Note: I think the reasoning behind this licence freeze is also related to Macau's infrastructure trying to catch up to it's current casino projects.

Now even if (and that' big if) a new gambling entity is granted a licence, how long would it take for this entity to build their casino? What would it cost? How prime would their location be? I'm just wondering, but are there any good plots left? (Do you think the Stratosphere wants to be out there?)

US recession

China is less affected by recession in the US' subprime mortgage crisis (although not immune). Profits in the Chinese yaun provides a hedge against a weakening US dollar.

Maybe the concern should be for the Chinese stock market instead (which is nearly down 2/3rds in 11 months!):

The 31 year old CEO

CEO, Lawrence Ho is the "Prince of Macau". He's the son of Stanley Ho, the man who ran the government issued gambling monopoly in Macau from 1962 up until 2002, when the Macanese government issued gaming licences to foreign companies.,9171,1838587,00.html

I can tell you that entrusting this company with a 31 year old CEO, going up against the likes of Steve Wynn, kind of freaks me out. Can I trust such a young CEO to manage my investment? My answer to this question is - yes. While it's not a resounding "yes", Ho's age isn't something that will keep me up at night. I mean, Facebook's CEO, Mark Zuckerberg is 24. (OK, maybe he's CEO because he invented Facebook, but there's nothing wrong with a young CEO.)

It's reassuring to know, Australian partner Crown has prior experience in developing and running casinos in Australia, and should be a good source of advisors and consultants from which Ho can draw upon.

While Lawrence Ho may be young, I wouldn't consider him inexperienced. I would guess having the ear of Stanley Ho everyday for 31 years will have some major advantages. We're talking about 1-degree of separation (or less) from Macau's gambling patriarch. I would imagine meeting a few Chinese officials; local politicians and high level bankers would be ordinary occurrences at the Ho household. (Mind you, Stanley Ho has 17(!) kids, so I don't know how much face time one child might get. "Ummm, Lawrence? I can meet you between 2:25 pm - 3:15 pm on the 10th of next month...")

The connections and political clout of the Ho family isn't lost on MGM either. MGM has teamed up with Lawrence Ho's sister Pansy Ho to develop MGM Macau.

Crown Macau

Melco's Crown Macau is poorly located and out of the way for Macau's average gamblers. The Crown Macau initial opening was a disaster. This caused the quick and drastic makeover of the Melco Crown from a casino that was to appeal to middle class customers, into a primarily highroller/VIP casino. Kudos to Lawrence Ho his partnership with AMAX Entertainment Holdings to funnel high-rollers to the Crown. This strategy change resulted in making the Crown Macau the highest revenue-generating casino in the world.

Additionally, the Macau government has recently announced a commission cap on rates paid to junkets. This should help Melco's bottom line tremendously.

Lawrence Ho from Melco's Aug 14, 2008 press release:

"The sequential decrease in quarterly 2008 financial performance at Crown Macau is mostly attributable to the (rolling chip) hold rate of 2.7% which was much lower than the 3.1% recorded in the first quarter 2008. We are optimistic that our profitability and competitive advantage in the market will be enhanced with the junket operator commission cap currently being proposed by the Macau government and targeted for implementation in the near future.

Some personal thoughts on catering to high rollers.

By appealing to the VIP customer base, you're dealing with a more educated customer base. Thus, the VIP customers are more likely to understand statistics and the odds of winning. Which means the VIP's will stay away from the slots (up to 8% rake), and lean towards the games with a very slight house edge i.e. baccarat (< 1.24% house advantage). By being very rich, you can bet big. And when you can bet big, you can hurt the casinos and affect the bottom line.

To quote Lawrence Ho, from Leslie P Norton's Barron's article:
"Slots have the highest Ebitda [earnings before interest, taxes, depreciation, and amortization] margins -- about 40%. For mass [market], it's 30%. But for VIP, it's in the high single-digits."

So having lots of VIP's will yield lower casino margins (bad) but higher casino revenue (good). Essentially, they cancel each other out.

Stock Price

I find it surprising, that the stock continues to dive. I think, if you have an outlook of 12 to 36 months (or perhaps even 60 months), I think you can get some impressive returns. So if you're looking for a quick kill in Melco, you're probably looking in the wrong place. The current low stock price and market conditions leaves the stock vulnerable and volatile.

Now realistically, I'd consider a good rate of return about 8-9%/year (a great rate of return 15-20%/year). So from here, new investors should be happy if MPEL was to hit $4.80 within a year and just under $6 in two years.

Somehow, I seriously doubt most people reading this would be happy with only a 20% return, and I don't blame them. Many investors who bought MPEL, are mentally anchored to their initial purchase price that is two, three or four times higher than the current stock price; to them, MPEL is a dog. But to people considering investing in MPEL now, MPEL should look like an impressive value play with fantastic growth potential. It's a value stock and a growth stock rolled into one.

If things turn out just right, Melco Crown will smash these "conservative" 20% returns two or threefold. I'm going to keep my eyes on Melco (perhaps average down if the price is right), but right now, my hands are off the sell button. I won't sell my stock until Melco's hotels are completed and operating. I won't sell my stock until Macau has developed it's planned infrastructure. And I won't sell my stock until there are several quarterly reports from which to measure Melco's profitability.

The extreme volatility, may cause me to toss my cookies a few times but I am confident Melco (and the people of China) will deliver.

Good luck

Other sources and random links:

This is a review of Melco's Crown Macau 6(!) star hotel, with pictures:

and of course the company website:

and it's 2007 annual report

What the heck is Rolling Chip Count?