Casual Clients Lift Sales as Melco Rises: China Overnight

Melco Crown Entertainment Ltd., the second-most expensive Chinese casino stock after last year’s 75 percent surge, will extend gains as recreational gamblers in Macau drive revenue growth, according to Union Gaming Group.

American depositary receipts of Melco climbed 2.7 percent last week to $18.69, and traded at 24.2 times estimated fiscal-year earnings, the highest level among 10 casino operators domiciled in China behind Sands China Ltd., data compiled by Bloomberg show. The Bloomberg China-US Equity Index of the most-traded Chinese stocks in the U.S. lost 0.4 percent in the first weekly slump since the end of November as quickening inflation damped prospects of more economic stimulus.

Melco, a joint venture between Australian billionaire James Packer and Lawrence Ho, son of gambling tycoon Stanley Ho, has doubled its ADR price since reaching a seven-month low in July. Through September, the Hong Kong-based company had three casinos in Macau, including City of Dreams on the territory’s Cotai Strip. Sales from the casual gambling market will rise as much as 30 percent this year, according to Union Gaming.

“Melco is inexpensive relative to its growth profile and it’s disproportionately exposed to our favorite part of the Macau story, which is mass-market customers,” Bill Lerner, an analyst at Union Gaming in Las Vegas who recommends buying Melco stock, said by phone Jan. 11. “They have brands that are relevant and a balance sheet that’s strong. They have the wherewithal to compete with the other big guys for sure.”

Melco’s ADRs lost 1.9 percent Jan. 11, falling with other Chinese stocks traded in the U.S., after government data showed consumer prices rose more than economists expected last month.

Index Declines

ADRs of Sands China, which is 70.3 percent owned by billionaire Sheldon Adelson’s Las Vegas Sands Corp., slipped 1.7 percent to $47.74. Sands, whose operations include the Venetian Macau, trades at 30.7 times estimated fiscal-year earnings, data compiled by Bloomberg show.

The China-US gauge followed the Shanghai Composite Index lower for the first decline since November last week.

Rising food prices stoked inflation last month to 2.5 percent from a year earlier, a government report showed Jan. 11, compared with the 2.3 percent median of economists’ estimates. The climb in consumer prices comes after December data from retail sales to exports showed signs of improvement and damps prospects of further monetary policy easing.

Semiconductor Manufacturing International Corp. led declines on the China-U.S. index Jan. 11, sliding 5.3 percent, while Aluminum Corp. of China Ltd. dropped the most since October.

China ETF Falls

The iShares FTSE China 25 Index Fund, the largest Chinese exchange-traded fund in the U.S., declined 1 percent to $41.09 Jan. 11, extending its weekly loss to 1.3 percent. The Standard & Poor’s 500 Index gained 0.4 percent in the week.

Macau casino revenue rose 20 percent to a record 28.2 billion patacas ($3.5 billion) in December, beating analysts’ estimates, Macau’s Gaming Inspection and Coordination Bureau said Jan. 2. Full-year casino revenue grew 14 percent from 2011 to 304 billion patacas, also a record. Macau is the only city in China where casinos are legal.

Middle-class Chinese tourists have helped fuel sales growth, even as high rollers cut spending, Union Gaming’s Lerner said.

Investors should buy Melco shares on potential declines spurred by reports of an investigation by Taiwanese authorities, Cameron McKnight, a senior gaming analyst at Wells Fargo Advisors LLC, wrote in a Jan. 11 note. Taiwanese prosecutors are probing a Hong Kong firm on allegations it made money transfers for use in Macau casinos, circumventing currency exchange rules, reported Jan. 11.

‘Growth Drivers’

“We see several strong near- and medium-term potential catalysts and growth drivers, with a strong fourth quarter report being the most immediate one,” McKnight wrote.

None of Melco’s units have been charged in the investigation and the company will cooperate with authorities where necessary, Maggie Ma, a Hong Kong-based spokeswoman for Melco, wrote in an e-mail Jan. 11.

Bank of America Merrill Lynch named Melco its top Macau gambling stock Jan. 7 as it raised a 2013 gross gambling revenue growth estimate to 10.4 percent from 8.2 percent. The same day, Nomura International Plc said Melco shares should be bought on weakness ahead of fourth-quarter earnings. The company is set to release its results for the last three months of 2012 Feb. 8.

Melco’s shares traded in Hong Kong rallied 7.4 percent last week to HK$51, even after falling 1 percent Jan. 11.

‘Bit Skeptical’

Semiconductor Manufacturing, the Shanghai-based technology manufacturer known as SMIC, fell to $3.06 Jan. 11. The company’s ADRs had surged 117 percent from a July 20 low to Jan. 10, and still gained 13 percent last week.

“I wouldn’t chase after SMIC at the moment given its nice run-up recently, but rather wait for pull back and buy on any technical correction,” Rick Hsu, an analyst at JPMorgan Chase & Co. who rates SMIC the equivalent of buy, said by e-mail Jan.

10. “I feel sentiment remains a bit skeptical on how it competes against Taiwanese peers, as well as how sustainable and significant it could turn around into profitability.”

ADRs of Aluminum Corp., known as Chalco, dropped 3.5 percent to $12.82, the biggest decline since Oct. 26. Shares of the nation’s biggest aluminum producer had previously gained 43 percent from a two-year low reached Sept. 5.

Chalco rose 3.4 percent last week in Hong Kong to HK$3.95, while SMIC jumped 13 percent to 49 cents.

The Shanghai Composite gauge of domestic Chinese shares fell 1.8 percent to 2,242.997 Jan. 11, capping a 1.5 percent weekly decline, the first since the end of November. The Hang Seng China Enterprises Index dropped 0.7 percent to 11,842.59, adding to a weekly loss of 0.8 percent.

Before it's here, it's on the Bloomberg Terminal.