Plain fact about MPEL and their Crown Macau

On May 12th Crown Macau finally opened, 15 days after the initial estimation (April 27th) made on the IPO day, and 4 days after the second estimation (May 8th), missed the Golden May Weekend. That's it, it was eventually there, a not very timely execution, you may wonder why it plummeted so much to make lower lows everyday. Today it actually touched $13.61, which was a 28.5% retreat from its IPO price $19. And it was considered sizzling hot IPO then.

Here is why, it is really not about the 15 days or 4 days delay, it is about the confidence of the investors on management ability to run the first 6-star casino ever built on that island.

So what is missing from the openning?

Let's get the fact straight, from the recent conference call

Crown opened with

26 VIP table vs. 80 planned 32.5%
142 premium mass tables, vs 142 planned 100%
479 gaming machines vs 550 planned 87.1%

"the additional 54 VIP gaming tables and 71 gaming machines will be operational within approximately four weeks."

let's do a quick estimation, if every time unit each gaming machine makes $1, premium mass table makes $10, VIP table makes $100, which is just a rough estimation, every time unit, under full occupancy they are planning to make $9970, for the first 4 weeks, they are only going to make 26*100+142*10+479= $4499, which is roughly 45% of the planned profitbility.

So their first month report will be a huge disappointment, since they simply don't have the capacity ready.

This is not the only problem, their real problem is the hotel room.

"Crown Towers hotel will be operational with approximately 60 rooms available within three weeks. Approximately 216 hotel rooms, including all villas and suites, will be operational by the end of July 2007."

in plain language, in the first 3 weeks, no rooms at all, after that 60 rooms until end of July, after July (hope there will be no further delay) 276 total rooms.

This hotel room condition will impact its casino revenue much much more than the table/machine capacity issue due to their geographical location. Basically they assume most VIP table players want to stay with them in the original plan, now they don't even have this facility ready for the first Q.

So even after all the 80 vip table are operational, in the first Q the revenue and net earning will be way off the original plan, let's break down the number

first month, roughtly no room, 26 VIP table, best estimation is it will only make 35% of those 26 tables full earning potential if VIP guests have no room to stay with in CROWN.
so our previous number of $4499 per time unit is really about $2809 vs full potential $9970

second-third month, 60 rooms, 80 VIP table, this looks better, however it can only make the efficiency ratio stay the same of 35% if not reducing at the best since much increased # of table and barely 60 rooms, the number we are looking at will be

80*100*0.35+142*10+550=$4770

so the first quarter looks like $4470*2+$2809=$11749, and the planned full potential is $9970*3=$29910, so my view is 40%-50% at the best.

Here we made a lot of numerical estimation, however looking from any aspects, I have reason to believe the first quarter revenue data will be a huge disappointment by a large margin if you think in the sense of their planned configuration.

When market gets this data, it will further hammer this stock, so I would say, the future of MPEL might be great (actually they did mention together with the second stage hotel rooms, there will be 54% more VIP tables available, which is another 44 more VIP table if we calc from the initial number of 80). The results from second quarter after every facility is in place is really going to make it move. However 4-5 month from now, MPEL stock price will underperform.

For now I will watch it from the sideline, MPEL has long way to go to really reach its bottom. In the meanwhile, there will be a small scale pre-ER run between the announcement of ER date for reporting Crown's first ever Q results and the actual ER, largely driven by naive retail longs hoping for some good numbers and thinking they get the bottom price. However such hope will turn out to be bloody, being a trader, you know what to do to make the best out of it.

After that bad ER in mid-late August (my best guess), MPEL will be trading lower due to the huge disappointment (I have shown you my estimation above), once it stops dropping about 15-20 days after that bad ER, I will be a buyer waiting to jump for a nice and surprising second Q ER number.