Bricks and Mortar: Look Past Melco's Losses

One concern is that higher construction costs in China will force Melco to increase the $2.1 billion budget for its next casino property, City of Dreams, which is set to open in late 2008. The company's finalization of the design of the project "is occurring within a context of rising costs of construction, services and materials in Macau," Melco said.

Questions on the conference call focused on rising costs in Macau, and frankly, the company didn't do a great job of giving guidance on the possible ramifications. One of the largest owners of the stock told me the rising costs are not a big concern since Melco, like Las Vegas Sands(LVS Quote), can monetize assets from real estate sales.

Melco is planning 600 condo units at its City of Dreams project, which will be located on the Cotai Strip -- the hotbed of development in Macau. Las Vegas Sands is building at least 3,000 condos at its master-planned developments on Cotai, centered around the Venetian Macau, which will open this summer.

"The Las Vegas experience has shown that consumers like the idea of having living spaces within close proximity to entertainment tourism options, and Asia's consumers would likely see Cotai-centric condos to provide that same value proposition," says Jonathan Galaviz, a partner with Globalysis Ltd., a boutique casino and lodging consultant that closely studies the Macau market.

Sheldon Adelson, the chief executive of Las Vegas Sands, is a master at explaining to analysts and investors the fact that his company is great at asset monetization. So when Las Vegas Sands announces construction cost issues in Macau, investors don't worry.

Melco's management could take a lesson from Adelson on this front. Melco's conference call was heavy on the cost side of the equation, but management didn't spend enough time focusing on the real estate side, which will be a very profitable piece of its business.