Thu Oct 30 2014
Live Index (1358 articles)
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Discounted Chinese Casino Titan Could Surge Nearly 40%

Make no mistake, Macau’s long-term future remains bright. China continues to mint new millionaires every year, and Macau — as a lure for both gambling and entertainment — is a heck of a lot closer for them than Las Vegas.

The casino titan is also expanding its empire across Asia. Melco is ready to launch its first casino in Manila, Philippines, which is known as “City of Dreams Manila.” Analysts at Citigroup (NYSE: C) predict it will “be a game changer to the Philippines gaming market.” They estimate the casino will contribute $ 190 million in EBITDA to the $ 1.58 billion they estimate for 2015.

Management is also keeping close watch on a gaming bill that is expected to be passed next month for a casino in Osaka, Japan, the country’s third largest city. The issue of gambling in Japan has been contentious, but Kunio Kano, the executive director of the Osaka Government Tourism Bureau, noted in September that casino and entertainment complexes would have a “very significant impact” on tourism and provide “the opportunity to build appropriate venues and convention forums that we currently don’t possess.”

Approval of a gaming license in Osaka would be a clear catalyst for this stock. Citigroup’s analysts think a win would add up to $ 10 a share in value. They currently have a $ 43 price target on the stock — 68% above current prices.

Thanks to the near-term headwinds among Chinese gamblers , MPEL’s revenues are likely to be flat this year. Yet that’s a mere blip on the long-term growth trajectory. Citigroup anticipates sales rising to $ 9.5 billion in 2016 from $ 5.1 billion in 2013.

If MPEL wins the Osaka gaming license, then sales are poised to move even higher in subsequent years. A resumption of its growth, coupled with the near-term catalysts noted above, should reverse this flagging stock.

Look for a rebound into the mid-$ 30s if the Japanese bill is passed and MPEL wins a contract. Longer term, shares could move back up into the $ 40s, if not higher, as investors start to appreciate the long-term potential of this business model.

The company is scheduled to release quarterly results on Nov. 6, at which time investors will get a preview of management’s long-term growth plans.

Recommended Trade Setup:

— Buy MPEL at the market price
— Set stop-loss at $ 22
— Set initial price target at $ 35 for a potential 37% gain in four months

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