Likely earnings beats, higher estimates, and new junket business drive a favorable thesis. Industry-wide junket liquidity/credit conditions remain our only concern.
The stock has taken one on the chin, not as bad as 0200.HK (Melco), but MPEL is down 11% in the last week. So what’s driving the move down? We think it is related to general Macau concerns - the weak start to February and the fear that Chinese tightening will constrict the Macau junket business. We are not worried at all with the former but the latter should always be a concern.
As we stated when we posted the pre-Chinese New Year (CNY) celebration revenues for February, the numbers are irrelevant. CNY-related gambling really didn’t begin until last Sunday and our guys on the ground are indicating huge volumes and traffic. While we never bought into the hype of a HK$20 billion month, we are sticking with our projection of HK$17-18 billion. Maybe that would disappoint some people but assuming MPEL maintains its share, the company would be on pace to easily beat Q1 estimates.
The second issue is real; although with all our contacts in Macau, we can’t say we’ve seen any indication of a liquidity driven junket slowdown. We’ve statistically tested the relationship between Chinese monetary policy and junket volumes and the causal relationship has been real and significant historically. However, the relationship broke apart during the last 6 months of tightening. Does that mean it won’t be reestablished? Of course not, and we are monitoring that closely.
So what are the positive catalysts? A second blowout quarter in a row from the gang that couldn’t shoot straight for one. See our 1/11/11 note, “MPEL: AN ENCORE PERFORMANCE” for the details. Our EBITDA estimate is 20% above the Street for Q4. The good times should continue as January was strong and Q1 estimates look too low. So far during CNY, we are hearing that MPEL’s volumes and hold is strong.
Looking ahead to Q2, Galaxy could announce that the April opening of Galaxy Macau will be pushed back to June. Cotai cannibalization on MPEL’s City of Dreams (CoD) has been a worry for investors. An additional two months of CoD operating without the additional competition should allow for another beat in Q2. Finally, we think MPEL could pick up some of SJM’s junket business in the coming months as we wrote about in our 01/27/11 note, “MPEL: FAMILY SQUABBLES AND OTHER CATALYSTS".