Oct
11

Golden Week Gaming Revenues Up In Macau

Macau Casinos Continue to Outperform During Golden Week: LVS, MGM, MPEL, WYNN

The Golden Week holiday in China is one of the biggest weeks of the year for Macau historically and this year proved no different based on preliminary data from Macau officials. Gaming revenues for the first 6 days of October were up 18- 22% year over year. Analysts were looking for a 16-21% hike in revenues. The average daily table win for the first six days of October in Macau was HKD $1.68 billion, a 30% increase from the same period last year. According to Nomura Securities analysts Harry Curtis, Louise Cheung, and Brian Dobson…

Mass headcount and play levels remain strong, which we think should continue. We estimate mass table revenues could be up 31-34% YoY for the month, which is just above recent trend of 30-32%.

Adding to a very strong September, numbers for Macau continue their trend of coming in stronger than expected. In no surprise to those with an understanding of the Macau market, tourist arrivals during the Golden Week were up 4.7% year over year, despite a ban on ‘zero-fare’ travel packages from mainland China. October is supposed to be a record month in Macau for Las Vegas Sands (LVS), MGM Resorts (MGM), Melco Crown Entertainment (MPEL) and Wynn Resorts (WYNN), and the first weeks result do nothing to indicate otherwise. I remain bullish on the entire sector and MPEL remains our favorite play in Macau out of the group. Numerous other analysts have reiterated or raised their ratings on the group, all echoing bullish sentiment. Citi also named MPEL as their top pick last week.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

Oct
11

Significant Value In Madison Square Garden (MSG)

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Madison Square Garden (MSG): Hidden Assets, Storied Franchises, Deep Value

Spun off by Cablevision in early 2010, Madison Square Garden (MSG) has seen its shares triple since coming public, currently trading just 10% shy of all-time highs. Despite this run-up, I believe there is room for further appreciation. For the purposes of this report, we will view The Madison Square Garden Company as a holding company, and use a sum of the parts analysis to determine what we believe to be MSG’s intrinsic value. Much more than just their world-famous arena, this company is composed of numerous valuable assets and operates in three segments: MSG Media, MSG Entertainment, and MSG Sports. MSG Media is made up of MSG Networks and Fuse Networks, who is currently being shopped around by J.P. Morgan. The entertainment segment hosts and presents various concerts in MSG’s venues, as well as creates and produces various live acts such as the Rockettes. The MSG Sports segment houses the New York Knicks and New York Rangers, two of the most valuable franchises in their respective sports. Also of significant value is the companies namesake, the Madison Square Garden arena, the most iconic sports and concert venue in the world. All pieces accounted for, MSG contains an extremely valuable collection of assets that can be easily distinguished and valued.

MSG Media: MSG Networks and Fuse Networks

MSG Media is the most valuable segment of the company, accounting for nearly half of the total revenue. MSG Networks, broadcaster of the New York Knicks and Rangers games, is one of the most profitable regional sports channels in the country. In recent years the value of regional sports broadcast rights has exploded, the Los Angeles Lakers are in the first year of a 20 year, $3 billion deal with Time Warner. Even more recent, Time Warner secured the rights to broadcast the Los Angeles Dodgers games for the next 25 years for $8.5 billion, the largest such contract in history and one that will set the precedent for regional rights contracts to be negotiated in the future. In the past 12 months, MSG Media produced Adjusted Operating Cash Flow (AOCF- defined as operating income before depreciation, amortization, share-based compensation, and restructuring charges) of $349.5 million and operating income of $328.6 million, increases of 35% and 44% respectively. While Fuse Networks is accounted for in these numbers, it is worth noting that MSG Networks commands $4.91 per subscriber monthly while Fuse charges providers only $0.06 per viewer per month, so we will assume Fuse’s contribution to profitability numbers are next to nothing. Traditional media companies such as CBS (CBS), Viacom (VIA), Disney (DIS) and 21st Century Fox (FOX) generally trade at 10-12x EV/EBITDA. Applying these multiples would yield a valuation range of $3.4 billion- $4.1 billion for MSG Networks. With earning growth rates far outpacing those of CBS, DIS, FOX and VIA, and the exploding values of regional sports TV contracts, I view valuation multiples in the 12-14x EV/EBITDA range as more appropriate for MSG Networks. MSG has recently retained J.P. Morgan to explore a sale or any strategic alternatives after being approached by multiple parties expressing interest in acquiring Fuse. Analysts expect a sale and expect it to net $300-$400 million. Assuming a fair valuation range of $4.1 billion- $4.75 billion for MSG Networks given our suggested 12-14x EV/EBITDA multiple, and an expected $300- $400 million of value unlocked through a sale of Fuse, I believe the MSG Media segment is worth $4.4- $5 billion.

As of today’s close, MSG has an enterprise value of $4.15 billion. Yes, by buying at current prices you are buying MSG Media at a slight discount and getting a bunch of other extremely valuable assets for free at the same time, so lets determine what these other assets are worth.

MSG Sports: New York Knicks and New York Rangers

For the purposes of valuing the New York Knicks and New York Rangers, we are going to begin with the most recent Forbes valuations of each and make some necessary adjustments to determine their worth. Forbes currently estimates the Knicks value at $1.1 billion and the Rangers at $750 million. Of this combined $1.85 billion, $543 is attributed to the stadium, which we will back out of our valuation. For their valuations Forbes defines “market” as the portion of a franchise’s value attributable to its city and market size. While a subjective figure, Forbes places a value of $838 million on the “market” for the two franchises. With about half of the Knicks media revenue generated locally through their TV stations, and 70% for the Rangers, we will adjust the value of their “market” to reflect that fact that we have already valued MSG Network separately. I don’t feel it is fair to discount a full 50% and 70% respectively of their values as they generate revenue in other avenues and I feel a good deal of their “market” value is derived from the fact that they are two of the most storied franchises in the NBA and NHL and have fans that will show up win or lose, so we will take 15% off the Knicks and 25% off the Rangers Forbes “market” values. After these adjustments and backing out the value attributed to the stadium, we place a value of approximately $1.15 billion on the two franchises, a number that seems extremely cautious given the inflated prices over perceived true valuations that sports franchises have been acquired for in recent years.

Outside of the Garden, MSG has a sizable portfolio of properties consisting of Radio City Music Hall, the Beacon Theatre, the Forum, the Chicago Theatre and the Wang Theatre. They also own the production company for numerous shows hosted at these venues, most notably the Rockettes. We estimate the value of these properties at $350 million.

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Hidden Value in Madison Square Garden Arena and Air Rights

And last but certainly not least, is the Madison Square Garden arena itself, arguably the most famous sports venue in the world. This month will see the completion of a $1 billion renovation project that has been ongoing for years at the Garden, finishing a long needed overhaul that greatly improves the value of the building itself. More valuable however are air rights among other things, assets found nowhere on MSG’s balance sheet, from their Form 10…

We own the Madison Square Garden building, the platform on which it is built and certain development rights (including air rights) associated with the lot. Madison Square Garden sits atop Pennsylvania Station, a major commuter hub in Manhattan, which is owned by the National Railroad Passenger Corporation (Amtrak). While the development rights we own would permit us to expand in the future, any such use of development rights would require various approvals from the City of New York.

The real estate around Madison Square Garden is owned primarily by Steve Roth and Vornado Realty Trust. He has been pushing unsuccessfully for years now to get the Port Authority to fund a purchase of Madison Square Garden arena and its air rights, so that Penn Station can be transformed through a massive renovation. The project has been unable to gain footing because of the highly restrictive costs of buying Madison Square Garden and its air rights, a transaction estimated to require $2 billion to complete. This number may sound high but when you consider that the aforementioned development rights account for 5.4 million sq ft, through simple calculations we can see it is not. At a conservative $250 per square foot, 5.4 million square feet would be worth $1.35 billion. If we place a value of 65% of the completing renovation’s costs, the arena itself would be valued at $650 million, placing a value of $2 billion on Madison Square Garden arena and its development rights.

MSG is a Buy at Current Levels

Having now placed an individual value upon all of Madison Square Garden’s meaningful assets, we can sum up the parts and come up with a fair value of the company as a whole. We have placed a valuation of $4.4- $5 billion on MSG Media, $1.15 billion on the Knicks and Rangers, $350 million on venues outside of the Garden, and $2 billion on Madison Square Garden and its air rights. After summing these figures up, I believe an enterprise value of $7.9- $8.5 billion would represent a fair valuation of the Madison Square Garden Company, a significant premium to today’s closing EV of $4.15 billion.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

Oct
03

Twitter (TWTR) Files for IPO, Seeks to Raise $1 Billion

Twitter (TWTR): Files For $1 Billion IPO

Long anticipated, Twitter has filed their S-1 Statement with the SEC, moving forward with their plans for an IPO this year. Twitter will list under the symbol TWTR. A few key notes from the S-1 Statement…

  • Twitter had 218 million monthly active users as of 6/30/2013, an increase of 44% year over year. Of the 218 million, 169 million are international users.
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  • Twitter’s 218 million active users tweet over 500 million tweets per day.
  • Revenue for the first 6 months of 2013 of $253.6 million, an increase of 107% over the first half of 2012.
  • Twitter generates 65% of their advertising revenue from mobile devices.
  • Net loss for the first half of 2013 was $69.3 million, an increase of 41% year over year.
  • Adjusted EBITDA increased from $0.7 million for the first 6 months of 2012, to $21.4 million in the same period this year.
  • Twitter is using “Timeline Views” rather than pageviews to measure their ability to monetize their platform. Twitter defines timeline views as the total number of timelines requested when registered users visit Twitter, refresh a timeline or view search results while logged in on our website, mobile website or desktop or mobile applications.
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  • Twitter defines advertising revenue per timeline view as advertising revenue per 1,000 timeline views during the applicable period. In the three months ended June 30, 2013, Twitter’s advertising revenue per timeline view was $0.80, a 26% increase YOY. In the three months ended June 30, 2013, TWTR’s advertising revenue per timeline view in the US was $2.17 and $0.30 in the rest of the world, increases of 26% and 111% from the three months ended June 30, 2012, respectively.
  • Twitter has raised $759.2MM in Series A thru G convertible preferred stock rounds

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

Oct
03

Strong September for Macau Casinos

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Gaming Revenues Continue to Grow In Macau: LVS, MGM, MPEL, WYNN

Capping off another strong month for Macau Casinos, the Macau Gaming Inspection and Coordination Bureau reported that gross gaming revenue for the month of September rose 21.4% year over year, versus a 12.3% rise in September 2012. For the year, Macau gaming revenues are up a robust 16.7%, as most month’s revenue figures year to date have exceeded expectations. Both the VIP and mass market segments have been strong. This bodes well for Melco Crown Entertainment (MPEL), Wynn Resorts (WYNN), Las Vegas Sands (LVS), and MGM Resorts (MGM). MPEL remains our favorite of the group, possessing the best growth prospects, cleanest balance sheet, and is currently the only Macau pure play listed on US markets. In the most recent quarter, 70% of WYNN revenues came from Macau operations, 64% for LVS, while MGM generated only 34% of net revenues in Macau. Expect to see gross gaming revenues continue to come in strong for the whole region for the remainder of this year and into next.  For more on MPEL check out our full report, The Best Bet in Macau is Melco Crown Entertainment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

Sep
27

The Best Bet in Macau is Melco Crown Entertainment (MPEL)

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Melco Crown Entertainment (MPEL): Pure Play on Booming Asian Casino and Gaming Market

The rise of Macau is a story that has been well documented over the years. Many have read of this booming microcosm nestled under mainland China, yet few domestic investors/ analysts have ever set foot in this gambling epicenter. After finishing up a stint with a hedge fund earlier this year, I spent the last 4 months in Asia, including 3 months in Macau. I leave very bullish on the region as a whole, having spent a significant amount of time at all of the major casinos and experiencing the massive volume of foot-traffic, the amount of disposable income in middle/upper class China, and the rapidly expanding infrastructure that will continue to drive increases in the number of visitors to the area for years to come. MGM Resorts (MGM), Las Vegas Sands (LVS), and Wynn Resorts (WYNN) all feature impressive properties in Macau and provide a means of gaining exposure, although they remain saddled by their US operations. However, Melco Crown Entertainment (MPEL) is a pure play on the region, while sporting the cleanest balance sheet and fastest growth rates of the group, making it our favorite of the 4 domestically traded casino operators with a presence in Macau.

Casino revenues in Macau for 2012 totaled $38 billion, a figure that is expected to reach $70 billion in 2017. Year to date, revenues are up 16.2% in 2013, with August up 17.6% year over year. Impressive as these numbers are, Melco Crown Entertainment’s growth rates dwarf these. In their most recent quarterly report they displayed rapid growth across the board…

  • Net revenue for the second quarter of 2013 was $1,295.0 million, representing an increase of approximately 38% from $938.5 million for the second quarter of 2012.
  • Adjusted EBITDA was $330.1 million for the second quarter of 2013, as compared to $203.8 million in the in Q2 2012.
  • Net revenue at City of Dreams was $967.0 million, up from $684.2 million.
  • Total non-gaming revenue at City of Dreams in Q2 2013 was $62.2 million, up from $56.0 million in Q2 2012. Occupancy per available room was 97% as compared to 90%.

City of Dreams Macau: Capturing the Mass Market and VIP Segments

In City of Dreams, Melco Crown owns and operates one of the most valuable properties in all of Macau. While other casino operators have been hesitant to build a Vegas-style resort in the area, unsure of how they would fare in a much different culture, MPEL ran with the idea and is reaping the benefits. Lodging options include a Grand Hyatt, Hard Rock Hotel, and Crown Towers. City of Dreams also features the House of Dancing Water, a $250m production best described as a Cirque du Soleil 2.0, their best of many shows. Also of note is Cubic, the only major nightclub in Macau, often hosting huge concerts and events. Construction on the final tower, which will be the largest and most extravagant of the 5 when finished, begins later this year and will contribute significantly to earnings/ revenue when complete. The 5th tower will be 1.5 million square feet in total gross floor area, compared to Altira which is only 1 million square feet. City of Dreams is by far the most integrated and complete resort experience offered in Macau. Already one of the largest casinos in Macau, it continues to gain market share, a fact that analysts seem to overlook based on their tepid projections for next year. The current consensus revenue estimate of $5.37 billion FY 2014, which would represent only 9% growth year/year over their FY 2013 expectations. Expected revenue growth of 20-25% is far more reasonable for Melco Crown Entertainment. Macau gaming revenues as a whole are expected to grow in excess of 15% annually. With the most prominent resort/ casino on the strip, the highest mass table yields in the market, and increasing market share, revenue growth should outpace the rest of Macau with no major casino openings slated for the near future.

Melco Crown also operates the Altira casino, which has seen revenue and EBITDA grow at rates almost identical to that of City of Dreams, but is about 1/4th of the size. As of June 30th, 2013, Melco is in a net cash position with about $300 million more cash on their balance sheet than debt. Given this strong financial footing, MPEL is poised to grow quickly, and grow quickly they intend to do.

Rapid Growth Potential: Studio City Macau and Entertainment City in Manila

Looking to expand their presence in Macau, Melco Crown purchased a 60% interest in Macau Studio City in June 2011. This $2.9 billion project is slated to open mid-2015 and will be a full integrated resort like City of Dreams, but featuring a cinematic theme. Located next to the Immigration Station, Studio City will be the first and most prominent casino on the strip to visitors arriving from mainland China. To give an idea of the size of this project, consider that City of Dreams boasts 450 gaming tables and 1400 slot machines. Upon opening in 2015, Macau Studio City is expected to feature 400 table games and over 1200 slots, as well as two 5-star hotels and a variety of entertainment and shopping options. It is reasonable to expect Studio City to do comparable numbers to City of Dreams in a few years, which will be a huge windfall for MPEL shareholders.

Opening before Studio City, Melco Crown is taking their first steps outside of Macau, teaming up with Filipino conglomerate SM Group to create a $1 billion resort/gaming/shopping complex in Manila. The Belle Grand Manila will feature 950 hotel rooms, 240 table games, and 1250 slot machines. Gambling revenues are expected to grow from $2.5 billion this year in the Philippines to over $10 billion by 2017. Belle Grand is the second of a planned 4 casino resorts that will make up Entertainment City in Manila. Management has recently reiterated that this project is on-schedule and will open its doors mid-2014. As one of only 4 casino operators granted a gambling license in the Manila Bay project, Melco Crown stands to capture a very large portion of this rapidly growing market that is expected to surpass Las Vegas in gaming revenues within 3 years.

MPEL Is a Buy at Current Levels, Top Pick in Macau

While WYNN, MGM, and LVS all appear poised to outperform; MPEL is currently the best in class of the domestically tradable Macanese casino operators. Already sporting the fastest growth rates of the group, Melco Crown should continue this trend with their pipeline of properties that will be opening in the next few years, which will more than double the amount of table games and slots they operate. With these projects already funded and MPEL’s strong balance sheet, management has stated that they will begin to look at a regular dividend policy beginning the end of this year. Look for them to continue to seek out opportunities to expand throughout Macau and Asia as a whole. They have been lobbying and supporting gaming initiatives in Japan for 8-9 years and for the past 4 years in Taiwan. Trading at a forward P/E of 20, while boasting growth rates near 40% and opening two massive casinos within the next 2 years, the street seems to be vastly underestimating the sustainability of their growth and operations. As a result I feel MPEL is extremely undervalued when compared to their peers, and shares could easily double by end of 2014. These are exciting times in Macau, and Melco Crown Entertainment’s positioning in the industry makes this one of our highest conviction buys in the market today.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

Sep
26

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Sep
25

Welcome to 5th Street Research

5th Street Research

5th Street Research: Independent Equity Analysis

Founded in 2013, 5th Street Research is an independent provider of investment analysis and equity research. We strive to provider unbiased, clear and concise information, highlighting companies that either present significant value or carry a high level of risk at their current valuation. Over the next few days we will be publishing our first reports here, starting with an analysis of Melco Crown Entertainment (MPEL) a resort/ casino operator with a strong presence in Macau. Be sure to follow us on Twitter @5thStResearch.

Joseph Urgo

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