MPEL: HOLD WILL DRIVE GOOD Q3

MPEL should report a consensus beating Q3 on Thursday.  However, the properties played lucky and October market share came back to Earth. Is that reason enough for a 37% sell-off since late September?

 

 

We are projecting Q3 EBITDA of $67 million for MPEL versus consensus of $55 million.  It’s no secret that City of Dreams (CoD) held very well in the VIP segment during the quarter.  We estimate a hold percentage 40-50bps higher than normal which boosted EBITDA by approximately $15 million.  As a partial offset, Altira held a little low.  We believe that company EBITDA will be in-line with consensus when adjusted to normalized hold.

 

Unfortunately for shareholders, the recent focus has been on market share in October when MPEL lost approximately 5% from Q3.  Most of the market share loss was concentrated in VIP since Mass share declined only 30bps from Q3.  In the VIP segment, MPEL held poorly in October versus very strongly in Q3 so share loss was magnified.  Indeed, in looking at just VIP turnover (chips), the market share loss was less than 3%.  On a sequential basis, October exceeded each of the Q3 months in terms of Mass revenue and VIP turnover so business is not exactly bad for MPEL.  The charts below show the picture.

 

The takeaway:  Q3 wasn’t as good as it appears but October wasn’t as bad.  Meanwhile, the stock is down 38% since late September.  The carnage seems a bit aggressive, particularly given the huge valuation discount to Wynn Macau (1128.HK) at 16x 2010 EV/EBITDA and the stated range for the LVS Macau IPO which we estimate to be 13x-17x.  In contrast, MPEL is trading at 11x our 2010 EV/EBITDA projection.  While a discount valuation is appropriate but the current spread seems excessive.

 

MPEL: HOLD WILL DRIVE GOOD Q3 - MPEL total rev2

 

MPEL: HOLD WILL DRIVE GOOD Q3 - mpel mass rev1

 

MPEL: HOLD WILL DRIVE GOOD Q3 - mpel vip turnover1


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