January 31, 2007, 8:09 am


Our pre-ipo piece on HF. As always, we put together in depth analysis pieces on every ipo well before they price/open....including all four of todays ipos HF/AHII/EIG/DEP.


Disclosure: at time of this blog post tradingipos.com does have a position in HF at 18.20

HF - HFF Holdings

HF - HFF Holdings plans on offering 16.5 million shares(assuming over-allotment) at a range of $15-$17. Goldman Sachs and Morgan Stanley are lead managing with BofA, Wachovia, JP Morgan and Lehman co-managing. Post-offering HF will have 39 million shares outstanding for a market cap of $624 million on a $16 pricing. Approximately 3/4 of the ipo proceeds will go to pay partnership holders as HF converts from a partnership to a publicly traded company. 1/4 of the ipo proceeds will go to repay debt.

As HF was structured as a partnership prior to ipo, management, board and employees will own essentially all outstanding shares not sold on ipo. Assuming over-allotment is exercised that equals 55%-60% of ownership in HF. Note that these shares will still be listed as partnership units post-ipo, much as the Evercore IPO was structured.

From the prospectus:

'We are a leading provider of commercial real estate and capital markets services to the U.S. commercial real estate industry based on transaction volume and are one of the largest private full-service commercial real estate financial intermediaries in the country.'

HF is an expertise operation. Expertise ipos rely heavily on their employees/management, one reason why HF was structured as a partnership pre-ipo. Expertise ipos tend to do rather well overall. We've seen a number of successful 'expertise' ipos the past few years including GFIG/EVR/GHL/LAZ and HF's direct comparable CBG. Note that CBG is up approximately 500% since the 2004 ipo, reason enough to take this HF offering seriously.

HF operates out of 18 offices in the US staffed by 130 transaction professionals. In 2005, HF advised clients in transactions covering 44 states and 500 cities. Revenues are derived from client fees on a transaction by transaction basis.

HF operates as 'one stop shop' for commercial real estate including debt placement, investment sales, structured finance, investment banking/advisory, private equity, note sales and commercial loan servicing.

Note what HF does not do: They are not involved in leasing or property management nor does HF engage in principal commercial property investing. HF feels this allows them to provide objective advice to clients and to act as impartial broker to both sides of their deals.

A quick look at HF's services:

Debt placement - Construction loans, adjustable and fixed rate mortgages, entity level debt, mezzanine debt, forward delivery loans, tax exempt financing, and sale/leaseback financing. Clients are owners of various types of property, including, office, retail, industrial, hotel, multi-family etc... Debt is placed with every imaginable possible debt placement client including life insurance companies, investment banks, commercial banks, thrifts, agency lenders, pension funds etc.... Keep in mind HF is transacting and placing the debt, not carrying the mortgages on their own books. HF makes money from the deal flow, not the appreciation or depreciation of the assets in the future. In 2005 HF's value in debt placements was approximately $22 billion, an approximately 11% share of the entire US commercial debt placement market.

Investment Sales - HF provides investment sales services to commercial real estate owners who are seeking to sell one or more properties. Essentially HF acts as a commercial real estate agent. In 2005 HF was the agent for $7.6 billion in investment sales, which was approximately a 3% US market share.

Structured Finance - Alternative investment expertise in mezzanine, preferred equity, participating and/or convertible debt structures, bridge loans. HF will participate in structuring these alternative financing options to fit the clients needs. In 2005 HF acted as broker/dealer in approximately $2.1 billion of structured finance

Private equity, Investment banking, and Advisory services - HF serves as a real estate investment banker/adviser for clients desiring to access the private equity investment market as well as advising clients in financial transactions. Services include commercial real estate investment banking/advising services for direct private equity investments, joint ventures, private placements, management buyouts,and mergers and acquisitions(M&A). HF really just kicked off their real estate investment banking/advisory services in 2005. HS was involved in $100 million in total transactions in this niche in 2005 and over $1 billion through the first 9 months of 2006. It appears this niche will be a prime growth driver for HF going forward as they grab commercial real estate M&A market share.

Typical clients for HF's services include both users of capital, such as property owners, and providers of capital, such as lenders and equity investors.Clients will often act as both users and providers of capital in different transactions. Over the past three years no single client represented more then 4% of overall revenues.

Growth plan - Expand geographic penetration, increase market share and capitalize on cross-selling opportunities. HF's growth focus will be to locate and bring on board commercial real estate transaction professionals in smaller US market not currently covered by HF. Also note that HF has quickly grown their commercial real estate M&A arm in 2006, from essentially start-up stage in 2005.

Risks - HF is heavily leveraged to overall commercial real estate activities. To make money, HF needs to see sustained interest in commercial real estate transactions. As HF notes in the prospectus, 'Historically, commercial real estate markets, and in particular the U.S. commercial real estate market, have tended to be cyclical and related to the condition of the economy as a whole and to the perceptions of the market participants as to the relevant economic outlook.' Overall the commercial real estate market has been in a cyclical upswing for most of the US after a 2002/2203 trough.


no substantial cash or debt on the books post-offering.

No dividends planned.

Revenues - HF has grown revenues annually throughout the decade, with strong growth of 40%-55% coming in 2004-2005. For full year 2005, HF booked revenues of $206 million. As with most expertise companies, compensation to producing partners is the greatest expense line. HF's transaction professional are primarily paid in commissions, salary and bonus. The direct expense line for all employee compensation appears to be approximately 65% of revenues the past 18 months. Expect this % to remain fairly robust as is common with this type of operation.

In 2005 HF had operating margins of 23%, fully taxed net margins of 16% and earnings per share of $0.82.

2006 - Through the first 9 months of 2006, HF appears as if they will grow revenues 15% for the full year to $235-$240 million. Operating and net margins will be in the same ballpark as 2005. Full year 2006, HF should earn approximately $1 per share. On a $16 pricing, HF would be trading 16 X's 2006 earnings.

2007 - As long as the commercial real estate market remains active, HF is positioned to have a very good year. With their burgeoning private equity placement and M&A arm to go with their strong debt placement and commercial agent segments, another 10%-20% revenue growth year should be achievable. The largest expense item, employee compensation, does not look to drop as a % of revenues so there will not be a significant margin increase as revenues increase. At a 15% 2007 revenue increase that would mirror 2006's % increase, HFF should earn $1.15-$1.20. This number is a ballpark number only at this point and could change each way depending on HF's success in garnering a larger slice of the pie and general commercial real estate activity. I would surmise that the earnings per share would not be a whole lot lower then this forecast unless the US economy ran into a recessionary climate the back half of 2007. At those estimate, HFF would be trading 13-14 X's 2007 earnings on a $16 pricing.

Concern - I would prefer to see a smaller employee related expense % here. 65% total appears rather steep and it doesn't appear as if HF has any plans on lowering that number going forward. Many of the broker/dealer and investment banking ipos we've seen the past 3-4 years have committed to capping employee compensation going forward at 55%-60%. HF's 65% is a bit above there.

CBG is HF's closest publicly traded comparable. Keep in mind that CBG is a behemoth in the sector, much larger, more diverse and covers a larger geographic area then HF. A quick glance at each:

CBG, $8 billion market cap. Currently trades 24 X's 2006 earnings and 19 X's 2007 estimates with a projected 25% 2007 revenue growth, fueled in part from acquisitions.

HF, $624 million market cap on a $16 pricing. At $16 would trade 16 X's 2006 earnings and 13-14 X's conservative 2007 estimate with a projected revenue growth in 2007 of approximately 15%.

CBG is up 500% since ipo late in 2004. If the commercial real estate market just remains stable, HF is a solid ipo coming at a very reasonable multiple. Really I would only be concerned in pricing range if the US economy slows in a recession like climate. Otherwise the multiple is reasonable enough in range that HF should do quite well. Whenever an ipo's closest comparable is up 500% from offer, you've got to take notice. Factor in also that 'expertise' ipos have as a rule done very well this decade and HF should work quite well. I like this deal quite a bit.

HF is not a direct play on the valuation and strength of the real estate market. They're a play on the transaction growth this decade of structured finance and debt placement in the commercial real estate market. In a fashion this is similar to the growth of derivatives and the resultant effect on the broker/dealer and exchange sector. For HF, the underlying price does not matter so much as long as there is sustained demand for transactions, refinancings, alternative debt structuring, debt placement etc...This is a big reason that CBG's chart looks a lot like those of the derivatives exchanges and derivatives broker/dealer GFIG since ipo. They've all benefited from the heavy growth in transaction flow in their markets, not the overall valuation of the underlying assets. This is a key difference to a business linked directly to the underlying prices involved in said transactions.

Yes a sustained downturn in the commercial real estate market would have an impact on these activities. However it would most likely take a pretty severe overall economic downturn to curtail HF's core revenue streams. HF stands to do well as long as commercial real estate transaction activity overall remains fairly strong, regardless of the underlying pricing fluctuations. In very simple terms, if the US economy avoids recession, HF should do quite well.

January 23, 2007, 4:07 pm


AVAV debuted earlier today and it is this week's free ipo blog piece. As a reminder the subscriber section of http://www.tradingipos.com has an analysis piece on every single ipo before they price/open. Also on our forum we track pre-opening indications for the interesting nasdaq stocks such as AVAV. In addition, on the forum we post trading entries/exits on these ipos. As if that is not enough we've a also a very lively discussion group on said forum.

All this from the perspective of someone that has made a living trading ipos in the aftermarket for going on 8 years now. Alright, end of commercial.

disclosure - at time of posting tradingipos.com does hold a position in AVAV at an average price of $23.

AVAV - AeroVironment

AVAV - AeroVironment plans on offering 7.7 million shares(assuming over-allotment) at a range of $14-$16. Insiders plan on selling 2.2 million shares in the deal. Goldman Sachs is lead underwriting this deal, Friedman Billings, Jefferies, Raymond James, Stifel, and Weisel are co-managing. Post-offering AVAV will have 19.2 million shares outstanding for a market cap of $288 million on a $15 pricing. IPO proceeds will be used for general corporate purposes.

Founder & Chairman of the Board Paul MacCready and President & Chief Executive Officer Timothy Conver will each own approximately 25% of AVA outstanding shares post-offering. Dr. MacCready, age 81, founded AeroVironment in 1971 and has had a very distinguished career. Dr. MacCready is an inventor and entrepreneur who invented the Gossamer Condor, which in 1977 made the first sustained controlled flight powered solely by its pilot’s muscles. Dr. MacCready has received the Engineer of the Century Gold Medal from the American Society of Mechanical Engineers, the NASA Public Service Grand Achievement Award and Aviation Week’s Aerospace Laureate designation. In addition, Dr. MacCready was selected Graduate of the Decade by the California Institute of Technology and was named one of the 100 greatest minds of the 20th century by Time Magazine. Pretty impressive to say the least.

From the prospectus:

'We design, develop, produce and support a technologically-advanced portfolio of small unmanned aircraft systems that we supply primarily to organizations within the U.S. Department of Defense, and fast charge systems for electric industrial vehicle batteries that we supply to commercial customers.'

AVAV has two business segments, unmanned aircraft systems(UAS) and fast charge battery systems designed for industrial vehicles such as forklift trucks and airport ground support equipment. The ipo driver here is the UAS segment. Unmanned aircraft systems accounted for 80% of revenues the past 18 months and have been the growth driver for AVAV. AVAV is coming public because of their unmanned aircraft systems, not the fast charge battery systems.

Unmanned aircraft systems(UAS)

Due to founder Dr. MacCready, AVAV was a pioneer and now a leader in unmanned aircraft systems(UAS). Nearly all AeroVironment's UAS are sold directly to the US Department of Defense. AVAV's UAS are designed to be launched and operated by a single person through hand held controls. They're electrically powered, configured to carry electro-optical or infrared sensors, provide real-time situational awareness and intelligence, fly quietly at speeds reaching 50 miles per hour and travel up to 20 miles from their launch location on a modular, replaceable battery pack. AVAV believes these features make their UAS optimal for intelligence, surveillance and reconnaissance missions.

Thus far the US Department of Defense has awarded two competitively bid small UAS contracts. AVAV has won 100% of both contracts. Just like founder Dr. MacCready's career, pretty impressive.

War is good for AVAV's unmanned aircraft systems sales. The bulk of AVAV's UAS sold to the DoD have been deployed in Iraq and Afghanistan. Current funded backlog is $64 million, much of which is in the form long-term, high-volume contracts. Current contracts are sole supplier contracts with the U.S. Army, U.S. Marine Corps and U.S. Special Operations Command, or SOCOM. The U.S. Army projects its total demand for AVAV's Raven small UAS at approximately 1,900 new systems, of which AVAV had delivered approximately 25% as of October 28, 2006. AVAV's small UAS fit nicely with the US Department of Defense initiatives to shift towards information based network-centric warfare, which emphasizes networked and distributed forces with enhanced situational awareness.

Currently DoD represents essentially 100% of AVAV's UAS sales. AVAV does believe there is a market for their UAS in local law enforcement, border control and homeland security. Additionally AVAV plans to focus on growing sales to international governments allied with the US.

PosiCharge fast charge systems - Account for 14% of AVAV's revenues the past 18 months. Designed to improve productivity and safety for operators of electric industrial vehicles, such as forklifts and airport ground support equipment, by improving battery and fleet management. Using proprietary technology the PosiCharge system recharges electric industrial vehicle batteries rapidly during regularly scheduled breaks or other times the vehicle is not in service, eliminating the need to remove and replacing the battery. PosiCharge is able to recharge a typical electric industrial vehicle battery up to six times faster than a conventional charger. Customers include Ford Motor Company, SYSCO Corporation, Southwest Airlines and IKEA.


Nearly $4 per share in cash post-offering.

2.7 X's book value on a $15 pricing.

Winning two exclusive DoD UAS contracts have been the revenue driver here. Revenues doubled in FY '05(ending 4/30/05) to $105 million, as the first of those contracts resulted in heavy order flow for AVAV's unmanned aircraft systems. Revenues increased 33% in FY '06(ending 4/30/06) again driven by the increase in order flow of the UAS to the Department of Defense. Through the first 6 months of revenues appear on track to increase 7%-10% in FY '07 to $150 million or so.

Note that AVAV's revenues would appear to have plateaued the past four quarters, as there has been very minimal revenue growth during this period. This is indicative in the slowing annual growth rates from 100%+ in FY '05 to 33% in FY '06 to the current pace of 7%-10% for FY '07. Why? The revenue driver for UAS has been winning 100% of the two DoD small unmanned aircraft systems contracts. Both of those contracts hit their stride about four quarters ago. UAS is only 25% or so through fulfilling those contracts so they should each continue to provide steady revenues going forward. However for UAS to take that next step up revenue wise from the $150 million area, they will need to find other revenue streams for their small unmanned aircraft systems.

FY '06(ending 4/30/06) - Total revenues of $139 million. Gross margins of 41%. UAS sales accounted for 80% of overall revenues and essentially the entire 33% revenue growth over FY '05. Research & Development as well as SGA both increased at a faster pace then revenues, reducing operating margins from FY '05. It appears UAS ramped up both in an attempt to open up additional sales avenues for their small unmanned aircraft systems. Operating margins were 11% down significantly from FY '05's 19%. Again you do not want to see declining operating margins as the company is growing revenues. Net margins(factoring in full taxes) were 7 1/2%. Earnings per share were $0.57. On a $15 pricing, AVAV would be trading 26 X's FY '06 earnings.

FY '07(ending 4/30/06) - Through first 2 quarters(ending 10/28/06) revenues appear on track for $150 million. As noted the slowing growth is due to the two DoD contracts plateauing at a strong level. Gross margins appear on track for 40%. Operating margins look to be in the same ballpark as FY '06 13% or so. Net margins are currently on track for 8%. Earnings per share for FY '07 should be in the $0.65 - $0.70 range. On a $15 pricing AVAV would trade 22 X's FY '07 earnings.

note - there is a chance that FY '07 projections may be a bit conservative. To grow revenues AVAV will need to develop additional customers and contracts for their UAS. AVAV realized this and ramped up R&D and SGA expense lines the past 18 months in an effort to broaden and grow their UAS program. In September/October 2006 there may be initial indications they've made inroads in doing so: 1) AVAV received a full-rate production decision from the U.S. Army/SOCOM for the new Raven B program in October 2006; 2) AVAV entered into a proof of concept development contract with the DoD in October 2006 for a hand-held, lethal small UAS; 3) AVAV entered into an advanced concept technology demonstration contract in September 2006 with the Office of the Secretary of Defense, SOCOM and the U.S. Army to develop advanced UAS technologies; 4) executed two commercial service agreements beginning in October 2006 for oil and gas pipeline and offshore platform monitoring using small UAS;

Winning sole providership of the Department of Defense only two open bid small UAS contracts is a key here. Also it appears that with the new development contracts with the DoD in late 2006, the US Department of Defense prefers AVAV's small unmanned aircraft systems technology over the competition. I would go so far to say it appears the DoD believes AVAV's UAS to be superior to the competition.

Risks/Concerns - AVAV needs warlike activities to increase Department of Defense contract flow going forward. Taken from AVAV, their UAS are designed to provide intelligence, surveillance and reconnaissance. These activities are more in need during a warlike environment then not. Quarterly revenues have been stagnant the past four quarters and AVAV will need to develop additional revenue streams for their UAS. It does appear they may be in line to be awarded additional contracts with the DoD going forward. To be a successful public company going forward though, AVAV will also need to begin selling to allied governments as well as other US departments and private industry. There are some indications of this beginning to occur with the small sale for energy platform monitoring as well as a pilot program monitoring the US/Mexico border.

Competition - AVAV does have competition. In the small UAS space AVAV competes with Advanced Ceramics Research, Applied Research Associates, Elbit Systems, L-3 Communications Holdings and Lockheed Martin. While Elbit, L-3 and Lockheed are all public companies, there is not a direct pure-play comparable to AVAV. With all three of the public competitors the small UAS is a segment of operations, not the company's primary revenue and earnings driver.

Conclusion - Easy recommend here in pricing range and a bit above. Yes there are a few concerns here with the stagnant revenues the past four quarters. However AVAV has carved out a dominant position in the small unmanned aircraft systems space. The multiple here is also very reasonable for a company with such a promising future. At a projected $288 million initial market cap(assuming a $15 pricing) there is plenty of room for appreciation mid to long term here. Strong ipo overall.

January 14, 2007, 11:24 am


LGCY - Legacy Reserves

LGCY - Legacy Reserves plans on offering 4.3 million units at a price of $18.50 - $20.50. Note that LGCY filed an additional offering registration back in November. It appears the total number of shares that will be offered over in January 2006 will actually total 7.7 million units at a range of $18.50 - $20.50. Essentially all the shares in this offering will be coming from selling shareholders. There are no proceeds going to LGCY from this offering.

Wachovia will be lead managing the deal. Post-offering LGCY will have 25.4 million units outstanding for a market cap of $495 million in a $19.50 pricing.

LGCY was formed in 10/05 by combining various oil and gas properties in the Permian Basin of Texas and New Mexico. Controlling ownership post-ipo is made up of the original majority owners of those properties.Moriah Properties will own 32% of all outstanding units post-offering and along with Brothers Production will control the general partnership. Note that LGCY's general partnership will have no incentive distribution rights.

Note that in 10/06 LGCY held a private equity offering for accredited investors. The price of this offering was $17.25 per unit.

From the prospectus:

'We are an independent oil and natural gas limited partnership, headquartered in Midland, Texas, focused on the acquisition and exploitation of oil and natural gas properties primarily located in the Permian Basin of West Texas and southeast New Mexico...Our primary business objective is to generate stable cash flows allowing us to make cash distributions to our unitholders and to increase quarterly cash distributions per unit over time through a combination of acquisitions of new and exploitation of our existing oil and natural gas properties.'

Via acquisition, the formation of LGCY and exploitation of their properties, as of 12/31/06 LGCY has: proved reserves of approximately 20.0 MMBoe, of which 70% were oil and 81% were classified as proved developed producing. Proved reserves to production lifespan is 16 years.

As a unit offering, LGCY will distribute essentially all cash on hand to unit-holders quarterly. LGCY plans on paying $0.41 quarterly to unit holders, $1.64 on an annualized basis. On a pricing of $19.50, LGCY would be yielding 8.4% annually. This is a strong initial yield. Keep in mind however that since LGCY is primarily an oil E&P operation, they've substantial yield reliance on the underlying price of oil. LGCY is similar in structure and scope of two recent E&P ipos, CEP/ATN. The biggest difference is that CEP/ATN focus primarily on natural gas exploration and production, while LGCY's is mostly oil. Also LGCY does not have the strong 'parent' relationships that CEP/ATN possess. At current prices ATN/CEP both yield approximately 7 1/2% annually. E&P unit offerings due tend to trade at a higher yield level then the traditional midstream asset unit ipos dues to 1) the underlying resource price risk to yield and 2) E&P activities generally require a hefty amount of capital expenditures, which can effect future cash flows and in turn future yield growth.

Permian Basin - LGCY's properties are all located in the Permian Basin, one of the largest oil and natural gas producing basins in the US. The Permian Basin extends over 100,000 square miles in West Texas and southeast New Mexico and has produced over 24 billion Bbls of oil since its discovery in 1921. The top five producers in the Permian Basin account for 40% of production.

Hedging - Much like previous E&P unit ipos, LGCY does participate in hedging a significant amount of their forward production. As of 12/31/06, LGCY has hedged approximately 69% of expected oil and natural gas production through 2007 and approximately 61% of expected production from 2008-2010. This hedging does help protect the yield going forward, however with 30-40% of expected production next 4 years currently unhedged, there does remain commodity price risk for LGCY. However, since LGCY hedges their oil production up to 4 years out, the company actually received a higher price in 2006 for unhedged production. Unhedged oil sales were over $60 per barrel, while total sales factoring in hedging were $49 per barrel. LGCY has actually hedged future production at much higher levels then overall in 2006. For example 2007 hedged oil production is over $67 per barrel. In fact LGCY has locked in such a large % of oil production through 2010 at $60+ per barrel, I would expect any drop in oil prices going forward to have little effect on LGCY's yield until 2011+.


Debt post-offering of $107 million. This will not impact LGCY's operations all that much. Debt servicing costs however will total approximately $0.30 per unit annually. I would fully expect LGCY to lay on greater debt going forward as they acquire additional properties in the Permian Basin.

Capital expenditures are expected to total roughly $10 million in 2007. This includes the costs of drilling 22 development wells.

LGCY has made numerous acquisitions, including the formation in October 2005. Due to the recent formation and these acquisitions, historical financials are not relevant here. Total net production will be 1,356 MBoe for the year ending December 31, 2007. LGCY is projecting cash levels to be strong enough to pay full dividend for 2007. Note however that LGCY has projected higher oil/natural gas sales prices on their unhedged production then current commodity prices. LGCY however is projecting approximately $0.15-$0.25 more available cash on hand per unit in 2007 then current expected distribution of $1.64 annually. I think LGCY can easily make the full 2007 distribution, with a good possibility of a bit of an increase later in the year.

Conclusion - Much like similar offerings over the past year, the strong yield here makes this deal work. On a pricing of $19.50, LGCY will yield 8.4%. In an environment in which long term treasuries yield below 5%, LGCY's strong yield is enticing. Also LGCY has hedged a substantial portion of their oil production through 2010 at $60+ per barrel. That alone should mean a fairly secure yield going out a few years, even if oil prices fall. LGCY is not as strong a deal as ATN/CEP, due to the strong 'parent' companies involved in those deals. However, I would put it in the class of 2006 E&P unit ipos LINE/BBEP/EVEP. The current yield on all those ipos is in the 6 1/2% - 7 1/2% range. At 7% yield, LGCY would trade at $23 per unit. I would expect LGCY to trade in that $19 - $24 range over the next year or so and yield in the 7% ballpark. Recommend in range due to strong yield. I'll be a buyer here on a muted pricing/open. Any initial pricing/open enthusiasm however will come close to pricing in that yield going forward. The higher the initial yield here, the more I'm interested - in other words the lower the pricing/open, the more attractive LGCY looks to me.

January 7, 2007, 2:12 pm

2007's first ipo

the first ipo of 2007 is on deck this week with LGCY. a Complete analysis piece for this one is available in the membership section. We'll be analyzing an expected 200+ ipos here at http://www.tradingipos.com in 2007.

this week's free blog piece is one of the larger ipos of 2006, MPEL. This piece was available to subscribers of the site well before pricing/open.

MPEL - Melco PBL Entertainment

MPEL, Melco PBL Entertainment plans on offering 61 million ADS(assuming over-allotment is exercised) at a range of $16-$18. Credit Suisse, Citigroup and UBS are lead managing the deal, CLSA, JP Morgan, CIBC and Deutsche Bank co-managing. Each ADS represents three ordinary shares. Post-offering, MPEL will have 395 million ADS equivalent shares outstanding for a market cap of $6.715 billion on a $17 pricing.

MPEL is a 50/50 joint venture between Hong Kong company Melco and Australian company PBL.

Melco is a leisure, gaming and entertainment business whose main focus is Macau gaming. In 2004 Melco acquired the Mocha Slot Group which through 9/30/06 garnered 30% slot market share by gross gaming machine revenues in Macau. Chairman and CEO Lawrence Ho is credited for initiating all of MPEL's Macau projects and appears to be extremely well connected. His connections were integral in Melco receiving Macau gaming licenses. Mocha Slots is part of the MPEL joint venture, however Melco's non-gaming assets are not. Those include an investment banking business a casino IT infrastructure operation and two restaurant chains.

PBL is Australia’s largest listed diversified media and entertainment company. PBL owns and operates the Crown Casino Melbourne and the Burswood Casino, in Perth, Australia. PBL also owns and operates the Australian television network Nine Network and Australia’s largest magazine publisher, ACP Magazines. PBL recently announced plans to sell 50% of their interest in the television and magazine network. None of PBL's Australian assets will be part of the MPEL joint venture.

MPEL then is a venture between Melco's Macau gaming licenses and PBL's casino operating expertise. Both PBL and Melco will be receiving monies from MPEL post-ipo through management and expertise contracts.

From the prospectus:

'We are a developer, owner and operator of casino gaming and entertainment resort facilities focused exclusively on the rapidly expanding Macau market. Our subsidiary Melco PBL Gaming (Macau) Limited, or MPBL Gaming, is one of six companies authorized by the Macau government to operate casinos in Macau.'

Wynn and Las Vegas Sands are two of the other 5 companies that possess Macau gaming licenses. Both stocks(WYNN/LVS) ipo'd earlier this decade and each is up significantly in large part due to the potential of their Macau gambling operations.

MPEL currently has two casino projects under development and a third planned. First is the Crown Macau Hotel Casino targeted to open in the second quarter of 2007. Second The City of Dreams casino complex phase I is expected to open in late 2008. Additional phases of The City of Dreams will open later. Third is a conditional agreement to develop a property located on the shoreline of the Macau peninsula. There is not a defined expected opening date for this last project.

In addition as mentioned above, MPEL currently operates six Mocha Clubs located in Macau featuring a total of approximately 1,000 slot machines.

In 2006 revenues generated in Macau will exceed those generated in Las Vegas. Through 9/30/06 revenues generated in Macau were $4.9 billion, compared to $4.8 billion in Las Vegas. In fact Macau has been a speeding train of gambling growth compared to Las Vegas and Atlantic City. It has been a good decade for gaming with Las Vegas growing revenues overall by 5% annually this decade, excluding sports and racing books. Macau however has been growing 23% annually. If trends/forecasts hold true Macau five years from now will be bringing in far greater gambling revenues annually then Las Vegas.

Macau is the only in Greater China to offer legalized gambling. Located about an hour hydrofoil ferry ride from Hong Kong(and Hong Kong's 7 million residents), Macau is within a 2500 mile radius of Taiwan, Japan, Korea, Thailand, Malaysia, Singapore, Indonesia and the Philippines.Until 2002 gaming in Macau was controlled by a single operator. China has since opened up bidding for gaming licenses. 3 gaming concessions have been awarded to SJM, Galaxy, Wynn. Those three were permitted to each grant(sell) one sub-concession. the three sub-concessions were awarded to Venetian, MGM and MPBL Gaming(MPEL). No additional gaming concessions will be awarded until April 2009. The bulk of the ipo proceeds from this MPEL ipo will go to repay debt laid on to pay Wynn for the sub-concession.

Competition in Macau is growing as the 6 licensees are all in the process of opening and/or constructing Las Vegas style hotels and casinos.

MPEL's future operations:

Crown Macau - Construction kicked off in 12/04, with a target opening in 2nd quarter of 2007. While all current Macau casinos and hotels target the day trip and weekend traveler, the Crown Macau will target the high roller and those seeking luxury accommodations. Think of the Bellagio of Macau.

City of Dreams - Construction kicked off in the 2nd quarter of 2006, with opening target for first phase in late 2008. The first phase will include all casino operations, retail space and two of the four planned hotels. The 2nd phase consisting of the other two hotels is targeted for completion the 2nd quarter of 2009. Unlike the Crown Macau, the target market is the mass market patron. From the prospectus: 'The City of Dreams is planned to feature an underwater-themed casino with approximately 450 gaming tables and 2,500 gaming machines, and four luxurious hotels with a total of approximately 1,600 rooms, consisting of: (1) a luxury premium hotel designed with the aim of exceeding the average five-star hotel in Macau to be operated under the Crown Towers brand by us with approximately 260 rooms, suites and villas; (2) two hotels to be operated under the Grand Hyatt and Hyatt Regency brands with a total of approximately 970 rooms and suites; and (3) a themed hotel to be operated under the Hard Rock brand with approximately 380 rooms and suites. The complex will also feature a performance hall that will be designed and built to the specifications of Dragone Entertainment GmbH, or Dragone, and which is expected to offer world-class performance shows. The complex will also feature an upscale shopping mall and a wide variety of mid- and high-end food and beverage outlets.'

Mocha Clubs - 6 slot only clubs in an upscale atmosphere.The Mocha Clubs will be MPEL's sole source of revenues until the Crown Macau opens in the spring of 2007.

Macau Peninsula site - if purchase is completed,MPEL would begin construction on a project for a mixed-use casino and hotel facility targeted primarily at day-trip gaming patrons, and target its opening in the middle of 2009.

The combined costs of all projects are expected to be approximately $3.3 billion.


MPEL will not begin to bring in substantial revenues until the opening of the Crown Macau in spring of '07.

$1.6 billion in debt post-offering. the debt is being brought on to finance construction costs.

Revenues to date have been derived from the Mocha Slot Clubs operation. Total revenues for 2006 should be approximately $25 million. MPEL is not coming public with a near $7 billion market cap on current operations however. They're coming public on the hope that the Crown Macau and City of Dreams will be raking in billions total by 2008/2009. In the meantime MPEL will lose $25-$30 million in 2006, mostly due to construction expenses on Crown Macau and City of Dreams.

The large risk here is that MPEL currently is not much more then a large construction project. Yes with the successful 'Crown' brand name, there is every indication the Crown Macau should do quite well. However keep in mind any delays in the Crown Macau and/or City of Dreams opening dates will undoubtedly put a dent in the market cap. MPEL is not a cheap stock and there are extensive future revenues built into the initial market cap. Should something(anything) go awry to slow or push out those revenues, MPEL's stock will fall.

In addition anything economically or politically in Greater China that could negatively impact the extent of gaming would hurt MPEL's properties...and stock price.

Conclusion - How to value a $6.7 billion operation that has not yet opened their revenue generating properties? Good question. A look at WYNN may help a little. WYNN currently owns and operates two destination resort hotels, one in Las Vegas and one in Macau. WYNN's current market cap is $9.6 billion. MPEL is planning to have two destination resorts in Macau by the end of 2008. Initial market cap for MPEL is $6.7 billion. I would submit that WYNN should currently trade at a nice premium to MPEL as both WYNN's properties are in operation and generating significant revenues and earnings. It doesn't appear though that MPEL's initial valuation is too much out of synch though. If both properties in Macau are in operation and as successful as anticipated it would not be out of the realm of possibility for MPEL's market cap to approach WYNN a few years from now. I honestly don't know if $6.7 billion is too much to pay here. Too much depends on revenues that won't be seen for 6 months in one case and 2 years in another. If the Crown Macau and City of Dream are both successful, I would expect MPEL's stock price to be higher then $17 two years from now. I suppose that is the best way to look at this ipo. This looks like a deal to me you accept on allocations and put away for a couple of years to see these projects to completion. LVS/WYNN have been on a roll the past year or so, predominantly because of their operations and pending operating in Macau. MPEL is going to be a big player in Macau. I also think that if MPEL prices and opens aggressively, the market cap might be valuing in an awful lot of success.

Even at the size of the offering, I think this deal works initially. Recommend in range and a bit above as a spec play on the strength of Macau gaming stocks. Over time, everything will depend on MPEL putting the two casinos into operation on time and then having them generate the expected significant revenues. Macau is soon to be the worlds largest gaming destination. MPEL has one of 6 concessions and sub-concessions. At even a $6.7 billion market, that combination is worth the risks. Keep in mind this is a very large offering and a $6.7 billion market cap mid-range on what is essentially a construction project at this point. This ipo is not a cheap one any basis and if conditions alter in Macau or Macau related stocks, MPEL could lose a significant chunk of market cap. This is a rather high risk type recommend for me....and if pricing and open gets carried away to the upside, I'll be neutral on the deal. In range though a speculative recommend.

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