Inside Asian Gaming

Sure Bets Melco shares are looking awfully attractive, but remember, share prices can go down as well as up 15 he house advantage dictates that over the long run,for every dollar you bet on baccarat, you will, on average, lose 1.17 cents on each banker bet and 1.36 cents on each player bet. Play long enough and big enough, and you will lose quite a bit. Everyone is aware of the casino caveat,“the house always wins.” Unlike casinos, stockmarkets offer what appear to be tantalisingly sure bets. At the beginning of 2006, financial giant Citigroup said it believed each share of Hong Kong-listed Macau gaming-play Melco is worth HK$15, when the shares were trading at around HK$9. It seemed like investors had a sure way of making 67 cents on each dollar. Soon after Citigroup issued its call, Melco’s share price began a steady ascent, and as of mid-January, was trading at around HK$12.Melco has proved a great buy, with the share having risen steadily from just over HK$2 in September 2004. Still, that’s no guarantee it will continue to rise, and the only sure winner is your broker, who earns a commission on each of your trades. Baccarat players in Macau’s casinos can often be spotted carrying strips of paper charting “patterns” of past outcomes (e.g. two banker wins, followed by a player win, then two more banker wins… the “pattern” dictates the next outcome will be a player win). Statisticians scoff at such behaviour, because future outcomes are independent of what happened before. In stockmarket investing, however, charting past patterns is a legitimate way to predict future outcomes. US funds have been aggressively buying Melco shares since the beginning of the year,using past patterns as their justification. They recall that Nasdaq-listed Wynn Resorts jumped 80% in the run up to the company’s casino resort opening in 2005, and point out Melco will open its Crown Macau complex in September 2006. Melco’s price to earnings ratio of about 120 at a HK$12 share price compares to P/E ratios of 69 for New York-listed Las Vegas Sands and 24 for Harrah’s. But the P/E ratio is based on past earnings, and it is Melco’s future earnings that investors are eyeing as they push its share price ever higher. Melco’s revenue for the time being is largely attributable to Melco’s six Mocha Slot outlets, through which the company controls 30% of Macau’s slot machines. The number of slot machines in Macau has jumped from 814 in 2003 to over 3,000 by the end of 2005. Still, there is much room for growth, with the ratio of slot machines to gaming tables in Macau still just over two times, compared to over 20 times on the Las Vegas Strip. Mocha’s new outlets alone will add 2,500 more machines by the end of 2006, and by 2010, CLSA predicts Macau will have 14,000 slot machines. Meanwhile, PriceWaterhouseCoopers (Macau) gaming practice director David Green predicts there could be as many as 13,000 slot machines by 2008. Though slot revenue could multiply exponentially over the coming years, but recent growth has been subdued, with Melco’s revenue rising 19% in the first half of 2005 to HK$250.7 million (US$32.1 million). Citigroup says investors should focus more on the firm’s net asset value and completion schedules of its two major projects in the works, rather than its immediate earnings. The first of those major projects is the HK$2 billion (US$256 million) Crown Macau being developed in a joint venture with James Packer’s Publishing & Broadcasting Ltd (PBL). The Melco-PBL joint venture is also building the US$1 billion City of Dreams, an integrated entertainment complex featured with underwater casino.Melco plans to recoup the entire City of Dreams investment within “18 months after commencing operation in mid 2008,” according to Lawrence Ho. Lawrence Ho’s plan, like the HK$15 price target, is far from assured. However, when sentiment favours your bet on the stockmarket,you can sometimes score a sure win.When the likes of Citgroup buy aggressively and convince others to follow their lead, the outcome of their bets can become self-fulfilling. Citigroup says investors should focus more on the firm’s net asset value and completion schedules of its two major projects in the works, rather than its immediate earnings. 14