IAG 2006-06-07 Jun-Jul - page 8-9

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Analysts argue for the continued rise of
Melco’s share price by pointing out that the
company is trading at a substantial discount
to its US peers, Las Vegas Sands Corp (LVS)
andWynn Resorts, which have enjoyed big
run-ups in their share prices on the back of
optimistic forecasts for revenuegrowth from
their Macau operations. Those expectations
arebasedontheviewthattheMacaugaming
market will repeat the Las Vegas experience
of supply-creates-demand–aviewsharedby
DeutscheBank’sKarenTangonpage16.
With Melco’s share price at such lofty
altitudes, however, it’s not surprising that
some analysts are getting cold feet. Dow
Jones Newswires reported the views of an
unnamed analyst who fears Melco’s shares
now looka tadovervaluedwhenconsidering
the potential risks, andoffers a sum-of-parts
valuation of the shares at about HK$16.3.
WhileCitigroupandCreditSuissemaybeex-
cessively bullish because of their likely par-
ticipation in theNasdaq IPO,thebearishview
of the anonymous analyst could also have
ulteriormotives.
Dow Jones quoted the analyst with no
nameas saying theopeningofWynnResorts’
first property inMacau on September 5 (full
storyonpage18) could result in“cannibaliza-
tion”of some of LVS’market share.Most ana-
lysts viewMacau’s gaming industry as supply
driven, although they agree that the coming
hugeexpansion incapacity– from1,648gam-
ing tablesatpresent toclose to10,000by the
end of the decade –will naturally result in a
significantdilutionofwinpertable.Onlythree
of Macau’s six casino licensees – StanleyHo’s
SJM, Las Vegas Sands Corp and Galaxy En-
tertainment Group – are currently operating
tables, so their respective shares of the over-
allmarketwill also likely decline as the other
licensees – Wynn Resorts, the Melco-PBL JV
and the MGM-Pansy Ho JV – open shop. If
supply continues creating demand, however,
although LVS could lose some of its market
share going forward, its revenue growthwill
continue.
Compounding fears that demandwill be
unable tomatch thehuge increase in supply
are concerns about tinyMacau’s straining in-
frastructure, even though casino operators
claim theyareconfident thecitywillhave the
facilities andworkforce in place to host the
projected 35 million visitor arrivals in 2010
Light Background
Melco International Development Limitedwasoriginally incorporatedas“TheMacao
Electric Lighting Company Limited” in 1910, and has been listed on the Hong Kong
StockExchange since1927. Itwasonly in2001 thatMelcoadopted its current form.
In addition to its coregamingbusiness,Melcoowns an investment bankingfirm,
the JumboKingdomfloating restaurant inHongKongandagaming technologyarm
called Elixir,which this year announced a 20-year alliancewith ShuffleMaster Inc to
jointly develop localized gaming technologies in Asia, as well as distribute Shuffle
Master’sexistingproducts in the region.
On June1,Melcowas added toMorganStanleyCapital International’sAsiaPacific
ex-Japan indices and its HongKong index.This should raise holdings of its shares by
international funds,manyofwhichuseMSCI’s indicesasperformancebenchmarksand
maintain thebulkof theirportfolios inanygiven regionwithMSCI constituent stocks.
Melco’s JV partner, Publishing and Broadcasting Ltd (PBL), owns Melbourne’s
CrownCasino andPerth’s Burswood International Resort,WesternAustralia’s only ca-
sino, forwhichPBLpaidA$715million (US$535m) inSeptember 2004.
PBL is one of Australia’s largest diversifiedmedia and entertainment companies.
Itsmarket capitalisationofmore thanA$8billionplaces it among the top25 compa-
nies inAustralia.
PBLwill rely heavily on its gaming operations todrive earnings growth. Profit at
PBL’s gamingunit jumped 60% year-on-year in the sixmonths endedDecember 31,
while its televisionprofit declined 13% as the company’sNineNetwork struggled to
maintain itsfive-year leadasAustralia’smost viewednetwork.
– almost double the 18.7 million visitor ar-
rivals loggedby thecitywithamere488,000
residents in2005.
Bubbly Valuation?
Aswith the technologycompanies thatdom-
inated theNasdaqduring the Internetboom,
the value of Melco’s share price is based
largely on its future earnings prospects. At
thestartof thisyear,Melco’sprice toearnings
ratio was a heady 120, but it declined con-
siderably following a nine-fold year-on-year
jump in thecompany’sprofit in2005.Melco’s
P/E ratiowas40asof June1,but that isbased
onanartificiallyhigh2005profit figure– the
HK$548.7millionprofit for the year included
a one-time gain of HK$514.4 million from
PBL’spurchaseof its JV stake.
ThebulkofMelco’s revenuecurrentlyde-
rives from thecompany’s sixMochaSlotout-
lets,whichaccount for about 30%ofMacau’s
slotmachines.Slot revenue inMacau isgrow-
ing rapidly,albeit fromanegligiblebase.Slots
earnedUS$29million in2003,accounting for
0.8% of total casino gaming revenue, and
US$152million in2005,when theyprovided
2.7%of total revenue.Slot revenue in thefirst
quarter of 2006 stood at US$53 million, or
3.4%of total gaming revenue.
Melco’s slot revenue will likely continue
posting strong growth, but absolute gam-
ing revenuewill only seriously take off after
the Melco-PBL JV starts operating tables at
the two casinos it is currently building, and
a third for which it recently announced it
wouldacquire land.
Melco formed its JVwithPBL in2004,and
inMarch this year purchased the last ofMa-
cau’s six casino licenses fromWynn Resorts
for US$900million.Melco andPBLwill share
profits from all futureprojects inMacau and
Asiaona50:50basis.
Melco is headed by Lawrence Ho, son of
Macau’s legendarykingofcasinos,StanleyHo.
PBL isheadedby JamesPacker,sonof recent-
ly deceased Australian media and gaming
mogul, Kerry Packer. The JV’s projects under
construction are the US$256 million Crown
Macau hotel and casino, slated to open in
April 2007 (delayed from the original Sep-
tember 2006 opening) on Taipa island, and
theUS$1billionCityofDreams resort on the
Cotai Strip,expected toopen inmid-2008.
InMay, theMelco-PBL JVwidened its fu-
turegeographicpresence inMacaubyagree-
ing to purchase a site along the peninsula’s
Friendship Avenue – where SJM’s flagship
CasinoLisboaandLVS’SandsMacaucurrent-
lysit,andWynnMacau,GalaxyStarWorld,and
MGMGrandMacau arebeingbuilt.The land
purchase will cost HK$1.5 billion (US$193
million), andpending government approval,
isexpected tobecompleted in thefirstquar-
terof 2007.
The JV’s third casino project could open
as early as 2009, andwill include ahotel and
ablockof servicedapartments.Construction
costsareexpected tobring theproject’s total
cost to an estimatedHK$3.5 billion (US$449
million). Melco’s June 1 share placement,
which was handled solely by Credit Suisse,
raised HK$1.21 billion (US$157 million), the
bulk of whichwill go towards the land pur-
chase,withtheremainderearmarkedfordebt
repayment andother corporatepurposes.
With Melco’s major gaming operations
yet to commence, its share price is subject
to thevagariesof sentiment towardsMacau,
andmoved by news about the city’s casino
revenues andvisitor arrivals.Analysts regard
project delays as one of the major risks to
the share price.With Crown Macau’s open-
ing date having already been pushed back
six months without groundingMelco’s me-
teoric rise, the bias thus far has clearly been
on theupside.
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