Melco PBL Entertainment (MPEL)

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See all Bulls Reasons Bulls: Reasons To Buy "China is a strong gambling market, could fuel growth for Macao's casinos" 0% agree "China is a strong gambling market, could fuel growth for Macao's casinos" China's booming economy, liberalized travel restrictions, improved transportation infrastructure and rising middle class place Macao's casino businesses in a geographically and politically favorable position to achieve strong long-term growth. View or Edit Reason 0 votes 0% agree Melco PBL Holds 20% of VIP market 0% agree Melco PBL Holds 20% of VIP market With the new AMAX/AMA International deal the Crown Macau now controls 20% of the VIP market. View or Edit Reason 0 votes 0% agree China is a strong gambling market, could fuel growth for Macao's casinos 0% agree China is a strong gambling market, could fuel growth for Macao's casinos China's booming economy, liberalized travel restrictions, improved transportation infrastructure and rising middle class place Macao's casino businesses in a geographically and politically favorable position to achieve strong long-term growth. View or Edit Reason 0 votes 0% agree See all Bears Reasons Bears: Reasons To Sell Elastic Demand in Gambling 0% agree Elastic Demand in Gambling The gambling industry suffers is subjected to particularly elastic demand. MPEL, which is completely dependent on the industry, will be adversely affected by any form of economic downturn. View or Edit Reason 0 votes 0% agree Macau boom may lead to supply outpacing demand and market saturation 0% agree Macau boom may lead to supply outpacing demand and market saturation With numerous casino developments along the way, supply may out-pace demand and saturate Macau's gambling market, exacerbating the already intense competition in the area. This fact is worsened by the entrance of foreign competitors rich in capital, and the possibility that the local government may allow even more companies into the market. View or Edit Reason 0 votes 0% agree Financial statements still in a flux 0% agree Financial statements still in a flux MPEL's financial statements remain in flux since Crown Macau began operations in the beginning of 2007. The company has historically failed to generate a positive operating income, and still faces many financial uncertainties today. With the onset of new developments and financial liabilities, MPEL is especially vulnerable to these risks. View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

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Melco-PBL Entertainment (NASDAQ: MPEL) develops, owns and operates casinos in Macau, China. It is the only pure-play Macau casino traded on U.S. exchanges, and one of only six companies authorized to run casinos on the island (others include MGM, Wynn and Las Vegas Sands). MPEL owns and operates the Crown Macau Hotel Casino, which accounted for 4.9% of total gaming revenue in Macau in 2006. MPEL draws day-trippers and tourists of all economic background with its various gambling establishments due to its strategic proximity to China and other fast-growing Asian economies. Gaming generated over 90% of all revenue for the company in 2006.

MPEL is in process of developing two massive casino gaming resorts in Macau. First is the “City of Dreams”, a $2.1 billion (USD) project scheduled to open in March of 2009.^[1] The second, in more preliminary stages of development, is known as the “Peninsula Project” and is planned to open in mid 2010 near the geographically favorable Macau Ferry Terminal.^[2]

[edit] Business Financials

As of the end of its fiscal 2006, Melco-PBL Entertainment was in the process of developing large projects, and as such, had been subjected to large swings in revenue and operating loss. The company opened Crown Macau in May of 2007, which helped accelerate its quarterly performance as seen below.

The great majority of MPEL’s revenue is generated from its casinos. Income from other sources, including rooms, food and entertainment remains insignificant.^[3] It is also important to note that MPEL’s only source of income is from Macau.^[4]

[edit] Key Trends/Forces

• Macau's Rapid Growth : Macau is the fastest growing gaming market in the world, overtaking Las Vegas in 2006(US)^[5] with gaming revenue compounding at 23% annually since 2001. The burgeoning Chinese economy, which is close in proximity, is sending large contingents of increasingly wealthy tourists to the gambling region. On the downside, MPEL, which is solely based in Macau, is extremely vulnerable to changes in the economic, political, and social conditions of Macau and China.

Macau is strategically located close to the burgeoning economies of Asia, namely, coastal China, Hong Kong, Taiwan, India, Japan and Korea.

• Chinese Tourism: The Chinese government has eased its regulations on travel permits to Macau in recent years. This phenomenon, along with a rapid increase of wealth and disposable income of Chinese citizens , will significantly fuel Macau’s gaming industry. This trend will also be affected by the ease of currency exchange between the Chinese Yuan and the Hong Kong dollar used in Macau.^[6]

Statistics based on macau statistics and census services. ^[7] Estimates based on “Visitors Arrivals for October 2007” ^[8]

• Land Concessions: MPEL has accepted a 28-acre land concession from the government of Macau for its "City of Dreams" project, but the company has not yet finalized an official agreement with the local government in acceptable terms to both parties as of the end of 2006. Without such a concession, MPEL may lose most or all of the $190 million that the company had invested.^[9]

• Access to Financing: Like most hotel and casino developers, MPEL has been forced to rely on significant debt and equity financing. The success of these ventures is largely contingent on external factors, especially interest rates, which make financing more expensive as it rises.^[10] In MPEL's case, the company has structured much of its debt with loans tied to the Hong Kong Interbank Offered Rate (or HIBOR). Significant debt carried by the company includes (as of the end of 2006):

1. $165 million (USD) for the Great Wonders project construction
2. $1.6 billion (USD) for the City of Dreams project construction
3. A significant portion of the $193 million used to acquire a site that has not yet been named

[edit] Competition

MPEL holds one of only 6 authorizations to operate casinos in Macau, a privilege that serves as a significant competitive barrier against other potential market participants. Nevertheless, MPEL’s operations compete with 25 other casinos in the city. In addition, the government of Macau may allow other companies to enter the market in the future, further intensifying competition. ^[11]

• Las Vegas Sands (LVS): This company owns and operates The Sands Macao. It is also developing The Venetian Macau.
• Wynn Resorts (WYNN): Since the opening of Wynn Macau in 2006, this company has actively pursued additional opportunities, and is currently building another large resort casino.
• MGM MIRAGE (MGM): This company is developing the MGM Grand Macau, which is scheduled to open in late 2007. However, like most of American companies operating in Macau, MGM operates primarily in Las Vegas, Nevada.
• Sociedade de Turismo e Diversoes de Macau (STDM): One of the most prominent companies in Macau, This company controls 18 casinos in the city, most prominent of which is the Grand Lisboa.
• Galaxy Casinos S.A (HKSE:0027): Similar to MPEL, this company currently operates five casinos and is in the process of developing three more on the Cotai Strip.

^Estimate based on third quarter performance of MPEL

^^Based on LVS's plan for development in the Cotai Region. Note that these projects are only in their preliminary stages of maturity.^[12]

[edit] Footnotes

1. ↑ 2007 MPEL 6-k, Pg. 8
2. ↑ 2006 MPEL 20-f, Pg. 8
3. ↑ 2007 MPEL 6-k, Pg. 13
4. ↑ 2006 MPEL 20-f, Pg. 25
5. ↑ "Tiny Macau Overtakes Vegas Strip", BBC News
6. ↑ 2006 MPEL 20-f, Pg. 26
7. ↑ Tourism Statistics 2006, "Tourism Statistics", Macau Census
8. ↑ "Visitors Arrivals for October 2007", Macau Census
9. ↑ 2006 MPEL 20-f, Pg. 16
10. ↑ 2006 MPEL 20-f, Pg. 11
11. ↑ 2006 MPEL 20-f, Pg. 20
12. ↑ LVS 2006 10k, Item I, Pg. 3