GAMING ALERT | Melco Crown drop undercuts analysts’ buy calls

Signage for The Melco Crown Entertainment Ltd.’s City Of Dreams is displayed outside the resort in Macau

Following the consensus view has proven to be a losing strategy for investors in Melco Crown Entertainment Ltd.
Twenty-one of 23 analysts had a buy rating on the Chinese casino operator a year ago. Since then, the company’s American depositary receipts have dropped 23 percent to USD26.15. That’s 32 percent below the analysts’ average price projection set 12 months ago.
Analysts have been caught off guard by the duration of a Chinese government crackdown on corruption that has curbed spending by high rollers in Macau, the world’s biggest gambling hub. Casino revenue has also been squeezed as a faltering property market is pushing the economy toward the slowest expansion since 1990. Analysts have cut their 2014 sales estimates for six Macau casino operators by an average of 6 percent, with Melco’s revenue being reduced the most, data compiled by Bloomberg show.
“The length of China’s anti-corruption campaign caught me by surprise,” Bryan Maher, a senior research analyst at Craig- Hallum Capital Group Ltd. said in a phone interview from Minneapolis. “Melco is very concentrated in Macau compared with peers which have operations in other places, so anything that happens in Macau will affect its performance,” said Maher, who has had a buy rating on the stock since April 2013.
Melco, controlled by Lawrence Ho and Australian billionaire James Packer, has lost 33 percent this year in New York trading, compared with a 3.2 percent gain in a Bloomberg index of the most-actively traded Chinese companies in the U.S.
Maggie Ma, a spokeswoman for the Hong Kong-based company, couldn’t be reached for comment by phone or e-mail outside of normal business hours in Macau yesterday.
Melco may post a 7.1 percent slide in sales and a drop in net income when it reports third-quarter results on Nov. 6, according to the mean estimate of at least six analysts surveyed by Bloomberg. That follows a 26 percent plunge in adjusted earnings per share in the second quarter amid a slump in high- stakes gambling volume, the first decline since the third quarter of 2012. Analysts have on average cut the 2014 sales figure by 11 percent this year.
China’s clampdown on corruption and lavish spending, started in late 2012 after President Xi Jinping took over the Communist Party, has hit the big spenders who contributed more than 60 percent to Macau’s gambling revenue. These high rollers now look to bet outside the city, the only place in China where casino gambling is legal, boosting overseas casinos from Manila to Las Vegas.
“Mainland China and Hong Kong account for almost 90 percent of all visitors to Macau, making the casino market extremely sensitive to changes in China,” Brian C. Miller, an analyst at Bloomberg Intelligence, said by e-mail. The austerity drive “has caused wealthy Chinese gamblers to reduce/avoid trips to Macau leading to a downturn in gross gaming revenue that began in March and has worsened since. October is expected to be the worst month yet.”
Nineteen of 27 analysts covering Melco still have buy recommendations, data compiled by Bloomberg show. Maher at Craig-Hallum Capital, who has a price target of $48, says the company’s stock is poised to rally as it is on track to open new facilities. Ken Chen of Bank of China Ltd., the only analyst to forecast the Melco selloff last year, raised his recommendation to hold in November. Belinda Cao, Bloomberg