Visa Worries Maul Melco

Chinese authorities announced in recent weeks that they plan to limit the amount of individual Macau visitor visas by increasing their issuance times and reducing the number of allowed monthly visits from two to one, according to Macau press reports.

Authorities also are reportedly looking to cancel the issuance of business visas given to political figures and members of government companies, according to the reports.

The visa issue appears to most directly apply to residents of the Guangdong region, one of the richest provinces in China, which funnels many visitors to Macau.

So far, Wall Street analysts have yet to determine the full impact of this visa issue. Wynn Resorts(WYNN Quote) recently told investors it will slow down expansion of its Macau casino because of the new travel restrictions.

In a research note Tuesday morning, Morgan Stanley analyst Celeste Mellet Brown said, "It is too early to know the real impact, as the bulk of the tightening took place in May."

However, she added, "The visa restrictions will likely be temporary, and most believe they will be lifted within six months (although we don't really know until the government moves to eliminate them. The restrictions were put in place to curb Chinese officials gambling and to slow growth to allow infrastructure to catch up, etc.)."

To try to estimate the downside in Melco's stock, I've come up with a disaster scenario for the company.

Under my calculation, I give no credit for the company's Macau condo sales; I cut my 2010 EBITDA estimate to $500 million from $600 million, and I apply an 11 multiple to that, rather than a 15 multiple.

Under this scenario, Melco stock falls to $11.50.

On the upside, I think the stock hits $21, based on $600 million of EBITDA in 2010, a 15 multiple and $1 billion of condo sales. The fact that Melco is one of just six licensed casino operators in Macau also provides downside protection.

Thus, at its current price of around $12.50, Melco offers a very favorable risk-return proposition for investors.

Bricks and Mortar Portfolio A look at how Nicholas Yulico's picks have performed
	rating date	price at rating	rating	current price*	return
Brookfield Properties (BPO)	1/23/2007	$28.67	Own	$25.39	-11.4%
Global Real Estate ETF (RWX)	1/23/2007	$64	Own	$66.80	4.4%
Ryland (RYL)	1/23/2007	$56	Flag	$42.74	23.7%
Trump (TRMP)	1/23/2007	$17.50	Flag	$15.15	13.4%
Penn National (PENN)	2/6/2007	$45.56	Own	$50.40	10.6%
Hilton (HLT)	3/2/2007	$34.69	Own	$34.84	0.4%
Melco (MPEL)	3/12/2007	$15.46	Own	$13.15	-14.9%
Home Solutions of America (HSOA)	4/26/2007	$4.98	Flag	$6	-20.5%
*(6/11/07 closing price)
**For "flagged" stocks, a drop in price is tracked as a positive for the portfolio, and a rise in price is a negative.

In keeping with TSC's editorial policy, Yulico doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.