This Chinese Stock Could Help You Score Triple-Digit Gains

There are only two ways to score huge gains. Find a stock that is relatively unknown, and build a position before the crowd arrives. Or find a stock that is widely known, but widely loathed.

In the case of Melco Crown Entertainment Ltd. (Nasdaq: MPEL), the first scenario has already played out, and the second scenario is just coming into play.

When I first looked at this Macau-focused casino operator, shares were trading under $5. I looked at this stock a few years later when shares traded at $18 and noted considerable remaining upside. Shares eventually moved above $35.

This stock’s meteoric rise was due to the fact that few investors knew about the company in 2010. Even as it gained adherents in subsequent years, many investors underestimated the powerful cash flow potential on Melco’s business model. Back in 2010, Melco Crown generated around $90 million in operating profits. By 2014, that figure had grown to $685 million.

Yet Melco Crown, along with other Macau-focused casino operators, is now making headlines for different reasons. A sharp crackdown on corruption in China has led many Chinese high rollers to stay close to home, avoiding any appearance of conspicuous consumption. And as traffic to Macau has slumped, this stock has completely fallen out of favor.

How bad are industry conditions? Monthly gaming revenue (for all casinos) plunged a whopping 49% in February, and the year-over-year monthly declines have been in excess of 30% every month since. Total industry revenues will likely drop to $30 to $35 billion this year from $45 billion in 2014. For Melco Crown Entertainment, that means profits will likely fall by half in 2015.

Still, it’s important to see the current slump in the proper context. “Though mindful of challenges Macau faces (e.g., regional competition), we still believe the slowdown is cyclical and see 2014-2015 as ‘adjustment’ years when Macau reduces its reliance on hardcore gamblers and clean up illegal practices,” note analysts at Goldman Sachs. Translation: industry conditions should improve next year.

#-ad_banner-#Recall that the Great Recession of 2008 appeared to portend a wave of deep distress in Las Vegas, yet that region rebounded smartly within a few years, delivering robust investor gains. A similar backdrop is in place for Macau.

More to the point, MPEL, in particular, is poised for much better results in 2016 and 2017. And that all has to do with plans made several years ago.

Since 2013, Melco Crown has been developing plans to open two new casinos, each of which are expected to be quite profitable at maturity, even without the traditional reliance on high-rolling gamblers. Each of these new complexes will have a broad emphasis on entertainment, mirroring the strategy being pursued by many Las Vegas casinos.

Sometime in the next few weeks and months, MPEL is expected to open Macau Studio City, on the island protectorate’s north end. That launch comes on the heels of a recently-opened gambling/entertainment complex in the Philippines. Known as “City of Dreams Manila,” that site has seen positive early signs in terms of bookings and revenue. Management is expected to discuss both of these launches in the Q2 conference call, slated for late July.

The two new facilities help explain why analysts expect MPEL to deliver around 25% sales growth in 2016 (to around $5.8 billion) and a commensurate jump in net income. Earnings before interest, taxes, depreciation and amortization (EBITDA) are on pace to jump 20% next year and a further 20% in 2017 (to around $1.45 billion).

Notably, analysts’ estimates don’t bake in some sort of heroic near-term rebound in traffic in Macau. However, a steadily growing middle class in China means that Macau is still poised for solid long-term appeal. The recent 40% plunge in shares simply gives investors another ground floor opportunity for a great long-term investment.

As a final catalyst, shares should benefit from a $500 million share buyback program that was announced last month. That should help create a floor under shares for now and have a beneficial long-term impact on shares outstanding.

Risks To Consider: The Chinese economy has slowed from previous peaks, and a hard economic landing would likely delay any eventual rebound in Macau.

Action To Take –> China’s current anti-graft campaign is having a strong impact on spending by high rollers. Yet over time, this political effort will fade, and former big spenders will return in waves to Macau. Current sentiment around investing in the Macau-based casinos is now quite low, which spells opportunity for far-sighted investors.

As I mentioned above, one of the ways to score triple-digit gains is by investing in unknown companies. My colleague Andy Obermueller devotes his time to identifying game-changing trends and the companies that should benefit. Since he began recommending these firms to Game-Changing Stocks readers, he has identified 23 investments that went on to gain triple-digits and countless securities that returned double-digits.

More recently, Andy has been talking about the profit potential for Apple’s newest technology, Apple Pay — and more importantly the company’s key suppliers. If you haven’t heard about this opportunity yet, then I urge you to check out his comprehensive report on how to profit from this technology, by clicking here.