Gaming | Bulls return to Melco Crown as revenue mix offsets Macau slump

Melco Crown opened the Hollywood-themed Studio City on Oct. 27

After a nearly two-year slump, some analysts are saying the worst is over for Melco Crown Entertainment Ltd. Macau’s fourth-largest casino operator has been accumulating buy ratings after the total number of them slumped to a four-year low in September, according to data compiled by Bloomberg. Since then, banks including Daiwa Securities and HSBC Holdings Plc. upgraded the stock, while Gabelli & Co. initiated coverage, advising clients to buy. That made 13 analysts with bullish calls.
Melco Crown, which has dropped 62 percent in New York from a peak in March 2014, is seen rebounding as it focuses on mass-market players instead of the high rollers who have been avoiding the gambling enclave amid a government crackdown on corruption and illegal money transfers. The opening of the USD3.2 billion Studio City casino resort in Macau and expansion in the Philippines and other neighboring nations provide more diversified revenue, according to the analysts who recently turned bullish on the stock.
“Melco is a little different from some of the other Macau operators,” Brian Egger, a Bloomberg Intelligence analyst, said by phone from New York. “It’s certainly more exposed to the segment of the market that is more stable,” and with the opening of new projects, “there’s at least some underpinning of hoping,” said Egger, who doesn’t make recommendations on stocks.
The stock has risen 24 percent to $16.87 from a three-year low on Sept. 29, reducing its decline in 2015 to 33 percent. Short interest slipped to 10 percent of outstanding shares on Dec. 24, near the three-year high of 11 percent it touched a week earlier, according to data compiled by Bloomberg and Markit.
Macau is going through its worst downturn on record as China’s slowing economy and a crackdown on corruption deterred high-stakes gamblers from visiting the city. Gross gaming revenue fell for the 18th straight month in November.
While Melco’s earnings have slumped, the downturn is showing signs of abating. Third-quarter profit fell 22 percent to $237 million, beating the median forecast of five analysts surveyed by Bloomberg. Mass-market gaming revenue overtook the VIP segment for the first time during the period.
Billionaire chairman Lawrence Ho said at a briefing after the November earnings announcement that the worst is over for Melco Crown. While the VIP segment will be challenging in 2016, the mass market has stabilized “and should see some reasonable growth hopefully,” he said.
Melco Crown opened the Hollywood-themed Studio City on Oct. 27 featuring a Batman ride, a Ferris Wheel in the shape of a figure-8 and other attractions as part of a strategy to reduce its reliance on gambling. Its City of Dreams Manila, which opened in February and contributed 10 percent of revenue in the third quarter, will become a “meaningful contributor of value” by 2017, Adam Trivison, an analyst at Gabelli & Co., wrote in a Dec. 9 research report initiating coverage of the company.
HSBC analyst Charlene Liu raised the stock to buy from hold in October, less than one month after Jamie Soo at Daiwa upgraded it to outperform from underperform. In all, 13 analysts now advise clients to buy Melco Crown, compared with 10 who rate it hold and three who say sell. The average 12-month price target is $20.11, implying a potential 19 percent return from Monday’s closing price. Ye Xie and Bonnie Cao, Bloomberg