Why Melco Crown Entertainment (MPEL) is overvalued

Current price: $35.66
Price target: $16
Recommendation: Sell

Over the long term I have no doubt that MPEL will be a major player in the gaming industry. In the short term (the next 5 years) I believe there are, and will be, too many downward pressures prohibiting the type of growth that we have seen of late in China. We have seen a deteriorating credit environment developing over the past 2 years which seems to be gaining momentum. This situation alone may destroy the foundation for continued growth within the industry. It is undeniable that China's credit growth trajectory is completely unsustainable, but the question is when will it correct?

Stemming from this macro outlook it is likely that MPEL's recent expansion plans may prove hazardous to the companies financial well-being if it were depending on its current growth trajectory to develop and maintain new properties.

If China decides to tighten the capital controls that they have loosened thus far it would be detrimental to the whole scene in Macau. The Chinese authorities are, obviously, well aware of the loop holes that exist regarding capital controls. Given the proper incentive they may tighten them at a moments notice. It is not difficult to imagine how a situation like this would play out with a general public sore from real estate losses or perhaps rampant credit fraud by shell companies sensationalized by the media. The aspect of capital controls is a real area of fragility that should not be overlooked.

The price target is based upon both fundamental and technical analysis with the assumption of increased macro headwinds.


Disclosure - I have an open position in this issue.

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