MPEL’s special shareholder meeting tonight could provide some long overdue clarity.
MPEL’s stock has been hammered – absolutely hammered. While all the Macau stocks have been crushed as investors replay 2008 in their heads, MPEL has underperformed even this pitiful collection of stocks. Despite all the rumors and storytelling, the fact is that investors fear that a slowing China economy and tighter credit will pressure junket volumes similar to 2008 and that is the reason these stocks are down.
For Q3, MPEL fell 35% but that was concentrated in September when the stock fell 36%. By comparison, the US operators with casinos in Macau fell an average of 23% and 24% in Q3 and September, respectively, while the Hong Kong listed Macau stocks dropped 30% and 41%. In October, MPEL is down again, -4%, but this pales in comparison to the HK listed stocks which are down 19% already this month.
MPEL now trades at around 5x 2012 EV/EBITDA which seems ridiculous. Investors clearly don’t believe that current Macau run rate revenues are sustainable but that doesn’t explain the relative valuation discount. So why so cheap?
- It’s MPEL, the gang that couldn’t shoot straight – 4 straight quarters of outstanding results apparently cannot overcome dreadful performance following the IPO in 2006.
- Despite the US listing, MPEL is considered an Asian stock and US investors implicitly trust the US operators more. As shown above, the HK stocks have underperformed, sometimes even more so than MPEL. Similar among the HK stocks, public shareholders have little control over the entity given the concentrated ownership – for MPEL, Melco and Crown control almost 70% of the stock.
- Shareholder dilution – as one of my smart clients has asked “do these guys really want to be known as serial diluters?” More on this later.
- Recent performance is not sustainable – What? MPEL has consistently grown market share and margins since the management change in the middle of 2010. And they aren’t necessarily buying the business as EBITDA has grown faster than revenues and the company has beaten bottom line expectations (hold adjusted) for 4 straight quarters.
So what could be a catalyst to turn this thing around? First, a rate cut or some other macro measure by the Chinese government to show it is focused on ensuring a soft landing would help all the Macau stocks. For MPEL in particular, we are pretty sure they will beat the quarter, potentially beating Q3 EBITDA estimates by 40%.
Most immediate, MPEL will hold a special shareholder meeting tonight to discuss and vote on a listing on the Hong Kong exchange and a stock buyback. Investors rightly fear a big dilutive equity raise. This seems to be priced into the stock. We are hard pressed to believe that MPEL would do a straight equity raise at 5x EV/EBITDA. With cash trapped at the parent due to restrictions from the $600 million senior notes, MPEL eventually needs to raise cash or pay off the notes. We opt for the latter, of course.
So the options for MPEL are as follows:
- A big equity raise $250-300 million – probably in the stock already
- Cancelling the HK listing – would be a huge positive for the stock
- Going forward with the listing but buying an equal amount of stock of MPEL to offset dilution but still add the second listing – this would squeeze the shorts
- A substantially smaller IPO – probably a positive
The prospectus is supposed to be offered sometime this month. Hopefully , we will know more details tonight.