Why Melco Crown Entertainment (MPEL) is overvalued
Current price: $35.66
Price target: $16
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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