Melco Crown Entertainment (MPEL)

Our Top Macau Pick

 Growth catalysts — The opening of Galaxy Macau in early 2011 and SCL’s Sites 5 & 6 in early 2012E should increase CoD/Cotai visitation. Further, the new light rail system (to be completed in 2014) and extended hours at the Lotus bridge entry point will also drive Cotai traffic down the road.

 Mass market growth — Mass market growth is a key objective as mgmt believes it can further increase drop at CoD. Accordingly, it is aggressively working to improve relationships with local/regional tourism/transportation providers to promote MPEL’s product and increase footfall.

 New Options Create Additional Long-Term Upside to CoD — According to local press, MPEL reached a deal with the Macau government for unused land adjacent to CoD. Under the announced terms, MPEL will spend some US$30m for rights to alter design for the towers planned at the northern end of CoD. As a result, MPEL can potentially now add up to 42% more space into its planned five-star hotel and about 32% into its apartment-hotel.

 Over the CapEx Hump; Now Focused on Operations — While the design option may eventually lead to yet another increase in CapEx down the road, with the opening of House of Dancing Water (which premiered last evening), MPEL is now over its current CapEx hump. Meanwhile, the other major Cotai players, Sands China and Galaxy, still have additional CapEx as well as ‘launch’ risk associated with their new untested properties. For now, we expect MPEL’s new management team to focus on improving the existing operation (following teething pains at the outset).

 3Q Preview; Raising Forward Estimates — To reflect our latest channel checks, we have raised our continuing 3Q EBITDA estimate to US$113m (from US$99m previously), 15% above Consensus of $98.5m. We note some modest pre-opening expense associated with the new House of Dancing Water in the period. We also increased our FY11-12 EBITDA estimates by 10% and 13% each to US$489m and US$537m.

 Raising TP to US$7.50 — We value MPEL at +1 std above its average EV/EBITDA multiple (equating to 14.4x) blended with our DCF NPV. As a result, we have raised our TP by 32% to US$7.50 from US$5.70, implying 29% upside.


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