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

My bullish thesis on Macau casino developer

Melco PBL


is taking longer than expected to play out -- but I stand by my views.

Lately, Melco shares have been slammed because of fears about the Chinese government's recent decision to restrict travel visas to Macau, the only region of China where gambling is legal. There also has been a rising short interest in the stock.

On Tuesday, Melco shares were down 4.9% to $12.50, hitting a 52-week low.

But Melco's management is finally taking steps to reassure investors, who have watched shares fall 35% since late April.

Melco recently hired Geoffrey Davis, a former Citigroup casino analyst, to work as a senior vice president handling U.S. investor relations, says a buy-side source who owns Melco shares. Davis is based in the U.S. and has already held meetings with several institutional shareholders, the source says.

The hiring of Davis is very positive news, since investors previously have had to call Hong Kong to get any information on the stock.

A call to the Citigroup equity research gaming desk confirmed that Davis left in recent months. Melco and Davis couldn't be immediately reached for comment.

Visa Vexations

Davis' primary agenda will be to explain just how bad the new China visa restrictions are for Melco. The company opened its first casino, Crown Macau, in May. Two more casinos will be developed in coming years, and I expect Melco to become a dominant player in Macau. (You can read more about my bullish views on Melco

here and


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) - Get Report

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.

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.