Pareto Capital Short Melco Crown: Target Price Under $1.00
• Pareto Capital believes that shorting Melco Crown Entertainment Ltd (ADR) (NASDAQ: MPEL) is the best way to play the bursting of the Chinese fixed-asset bubble.
• The firm argues that Macau’s revenue growth since 2008 has been the result of government stimulus.
• Pareto believes that Macau revenue per customer numbers will revert back to pre-2008 levels once the government eventually stops its stimulus program.
In a new interview with SumZero, Pareto Capital Management analyst Stanley Wang claims to have found a modern-day short-selling opportunity comparable to the opportunity presented in the mortgage market during the U.S. housing bubble: the Chinese economy.
Wang believes that the Chinese economic stimulus that has been in place since 2008 is now reaching the limits of its effectiveness and he has identified the single stock that provides the best short-selling opportunity to profit from China’s coming economic downfall: Melco Crown Entertainment.
According to Wang, the growth that Macau has experienced since 2008 has been a direct result of Chinese government stimulus.
“I believe it’s a relatively small amount of people who made a lot of money lending/building/using government money and wanted to celebrate their good fortune gambling in Macau,” he explained.
As the government eventually turns away from the stimulus program, Wang predicts that Macau will revert back to pre-2008 revenue levels. He singled out the Macau casino industry because of its high capital expenditures, high debt loads, stimulus-linked revenue and ambitious expansion initiatives.
Wang sees Melco and Macau-focused casino operators such as Las Vegas Sands Corp. (NYSE: LVS) and Wynn Resorts, Limited (NASDAQ: WYNN) as extremely over-priced stocks if Macau earnings per customer revert back to pre-2008 levels.
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Plenty Of Downside Remaining
Melco’s share price is already down more than 64 percent from its all-time highs in early 2014, but Wang believes there is still major downside remaining. “If the thesis fully plays out, debt restructuring is not out of the question, implying a stock price of less than $1,” he concluded.
Disclosure: the author owns shares of Melco Crown Entertainment and Wynn Resorts.
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