Last week, Melco Crown Entertainment (MPEL) reported gangbuster earnings–and dropped 0.7%. The reason: Fears of a crackdown on so-called junkets with ties to organized crime.
The analyst community came out in support of the Macau gaming stocks last week, calling the reports of a new crackdown overblown. Janney Capital Market’s Brian McGill has another piece of good news for Melco’s investors–the company gets more revenue from mass gaming than high-rollers. He writes:
For the Macau market overall, we think VIP growth will be flat for 2013 while mass market revenue will increase by 20% to 30%. For MPEL, the mass market growth is critical because the company earns approximately 2/3 of its luck-adjusted EBITDA from that segment. Additionally, mass margins approach 40%, which compares to the VIP business which has margins near 10%.
McGill also notes that Melco has an advantage over competitors, including Wynn Resorts (WYNN), Las Vergas Sands (LVS) and MGM Resorts International (MGM). Melco’s City of Dreams project on the Cotai strip should also be finished by mid-2015, ahead of its competitors competing properties.
McGill raised his target on Melco to $28, at which it would be worth 12 times 2013 EBITDA, still at a discount to Las Vegas Sands’ 14 times.