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Harrah's Speculation Lights Up Melco

Editor's note: "Bricks and Mortar" is a series of columns written by real estate reporter Nicholas Yulico meant to help readers generate real estate and gaming-related stock ideas.

Melco PBL (MPEL - Get Report) shares rose 7% Thursday after an analyst speculated that the company could eventually team up with Harrah's (HET) on a Macau casino.

Any partnership deal would provide a strong boost for Melco, a casino operator that I have as a buy pick in my Bricks and Mortar mock portfolio.

Late Wednesday, Harrah's said it had purchased Macau Orient Golf resort, which totals over 100 acres on the Cotai Strip section of Macau, the Chinese island that is the world's largest casino market.

While Harrah's currently says it plans to keep the site open as a golf course, many industry analysts expect a casino to eventually be built on the property. Harrah's does not hold any of the six casino licenses in Macau.

As an alternative to holding the license, it could build the property and bring in a management partner. Melco would be likely to receive the management deal, according to a research note published late Wednesday by JPMorgan analyst Harry Curtis.

The golf course site is located across from eSun's Macau Studio City development, which Melco also will manage when the project opens in 2009. A deal with Harrah's could allow Melco to "earn a management fee with zero invested capital," Curtis wrote in his note.

Melco could not be reached for comment.

If a partnership were to be formed, it likely would be several years away. But if such a deal comes to fruition, it would provide a very attractive additional earnings stream for Melco.

Melco shares slumped over the summer because of credit facility fears and a botched opening of its first casino, Crown Macau. But the shares have rebounded in recent weeks, and investors should be in for better months ahead. The strong opening of Las Vegas Sands' (LVS - Get Report) Venetian Macau in late August is boosting overall demand for the region.

Melco shares were up 6.8%, or 94 cents, to $14.77 in afternoon trading. Shares are right near where I recommended buying them in mid-March at $15.46. I continue to expect that this stock will see considerable upside over the next 12 months.

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 $22.40 -21.9%
Global Real Estate ETF (RWX) 1/23/2007 $64 Own $60.81 -5.0%
Ryland (RYL) 1/23/2007 $56 Flag $24.71 55.9%
Trump (TRMP) 1/23/2007 $17.50 Flag $6.83 61.0%
Penn National (PENN) 2/6/2007 $45.56 Own $59.42 30.4%
Hilton (HLT) 3/2/2007 $34.69 Own $45.99 32.6%
Melco PBL (MPEL) 3/12/2007 $15.46 Own $13.83 -10.5%
Home Solutions of America (HSOA) 4/24/2007 $4.98 Flag $2.60 47.8%
Starwood Hotels 7/12/2007 $72.37 Own $55.17 -23.8%
Average Total Return, Unweighted 18.5%
Close At Start of Portfolio Current Value
S&P 500 1427.99 1471.56 3.1%
U.S. MSCI REIT Index 1140.36 956.88 -16.1%
*(9/12/07 closing prices)
**For "flagged" stocks, a drop in price is tracked as a positive for the portfolio, and a rise in price is a negative.

'Bricks and Mortar' is a mock portfolio meant to generate investing ideas. 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.

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