Company Reports

We maintain our fair value estimate for Melco Resorts at USD 11.60 per share, following the firm’s in-line first-quarter results, with hold-adjusted EBITDA rising 3% from a quarter ago to USD 314 million, reaching 93% of 2019 level. In addition, the bottom line has also returned to a breakeven level, from a net loss of USD 177 million in the prior quarter. Its liquidity profile improved through a USD 250 million debt reduction and a series of refinancing activities. This helped to mitigate refinancing risk in 2025 and bolster the firm’s financial stability. We keep our earnings forecasts unchanged, and the shares are undervalued currently, in our view. We think Melco is now back on track to restore its competitiveness, following a consolidation of the new management team, and we expect the firm’s strength in the premium mass segment, its leadership in product innovation, and continued its ramp-up at Studio City phase 2 to drive a meaningful market share gain in gross gaming revenue, or GGR, in the longer term.

Following Galaxy’s special interim and final dividend offerings, MGM China and Wynn Macau have followed suit and both declared final dividends on March 21. We view this as a positive surprise, which came in at least one year earlier than our expectations, suggesting that management groups are confident in Macao’s gaming demand recovery. We maintain our assumption that industry gross gaming revenue will rise to 85% of 2019’s level in 2024, up from 63% in 2023. With that, we believe Macao casinos will record meaningful improvements in profitability and cash flows in 2024. We also expect Sands China to resume its dividend program in 2024, while Melco Resorts and SJM will likely be later in 2025 given the still-stretched balance sheet for both companies.

We believe the gambling market in Macao will enjoy solid growth in the longer term. This structural tailwind is driven by the rising middle class in China and the penetration rate of less than 2% in Macao, compared with Las Vegas' 13%. New hotel rooms by major operators in the next few years should accommodate increased and extended visits from bigger spenders from these provinces, and drive the top line for integrated resort operators like Galaxy Entertainment. With the gradual ramp-up of traffic allowed on the Hong Kong-Zhuhai-Macao bridge, new Hengqin border, and the Gongbei-to-Hengqin extension rail, Macao's carrying capacity for tourists should increase. In addition, neighboring Hengqin Island, 3 times the size of Macao, is under rapid development to complement Macao's growth.

We lower our fair value estimate of Melco Resorts to USD 11.60 per share from USD 12.60, to factor in a slower volume ramp-up at the newly launched Studio City phase 2, which has yet to help the firm gain market share in gross gaming revenue, or GGR, despite the addition of 900 hotel rooms. In addition to a seasonal volatility in premium mass volumes, the disappointing performance reflects the focus on cost-cutting and reduced emphasis on business promotion under old management. To that end, the firm reported it is seeking a new chief operating officer following the departure of COO David Sisk.

We believe the gambling market in Macao will enjoy solid growth in the longer term. This structural tailwind is driven by the rising middle class in China and the penetration rate of less than 2% in Macao, compared with Las Vegas' 13%. New hotel rooms by major operators in the next few years should accommodate increased and extended visits from bigger spenders from these provinces, and drive the top line for integrated resort operators like Galaxy Entertainment. With the gradual ramp-up of traffic allowed on the Hong Kong-Zhuhai-Macao bridge, new Hengqin border, and the Gongbei-to-Hengqin extension rail, Macao's carrying capacity for tourists should increase. In addition, neighboring Hengqin Island, 3 times the size of Macao, is under rapid development to complement Macao's growth.

We lower our fair value estimate of Melco Resorts to $12.60 per share from $13.50, following the company’s weaker-than-expected third-quarter results. We think the miss is primarily due to a weaker VIP volume and win-rate at the company’s Macao properties, while the mass segment performance and overseas business were largely in line with expectations. Management remains upbeat about the overall recovery trend in Macao, with nonjunket VIP revenue in October hitting the 2019 levels. However, elevated debt, coupled with the rising interest rate, have dampened the bottom line and Melco remained in net loss of $121 million in the quarter. This is slightly disappointing, as major peers have already returned to net profit in the first half of 2023. The shares fell sharply by 15% after the earnings release on Nov. 7, amid market concerns over the company’s elevated debt and interest expense. We think the selloff is overdone, and the shares are undervalued currently.

We believe the gambling market in Macao will enjoy solid growth in the longer term. This structural tailwind is driven by the rising middle class in China and the penetration rate of less than 2% in Macao, compared with Las Vegas' 13%. New hotel rooms by major operators in the next few years should accommodate increased and extended visits from bigger spenders from these provinces, and drive the top line for integrated resort operators like Galaxy Entertainment. With the gradual ramp-up of traffic allowed on the Hong Kong-Zhuhai-Macao bridge, new Hengqin border, and the Gongbei-to-Hengqin extension rail, Macao's carrying capacity for tourists should increase. In addition, neighboring Hengqin Island, 3 times the size of Macao, is under rapid development to complement Macao's growth.

In line with Macao’s gross gaming revenue recovery, Melco Resorts & Entertainment delivered a strong second-quarter performance, with revenue and adjusted EBITDA returning to 66% and 60% of 2019 levels, respectively. With hotel room supply and transportation capacity continuing to recover, we expect Melco Resorts to extend this robust growth momentum in the second half. We have raised our Melco 2023 forecasts for revenue by 22% to $4.1 billion and for adjusted EBITDA by 29% to $1.1 billion after lifting our industry GGR to MOP 181 billion, or 62% of 2019 levels (up from 50% in our earlier assumption), to reflect a more upbeat recovery outlook in 2023. We are maintaining our longer-term GGR and profit forecasts. Accordingly, we have raised our fair value estimate for Melco to $13.50 per share from $12.80. We think the shares are fairly valued currently, with a continued recovery of tourism traffic to Macao likely supporting the price in the near term.

We believe the gambling market in Macao will enjoy solid growth in the longer term. This structural tailwind is driven by the rising middle class in China and the penetration rate of less than 2% in Macao, compared with Las Vegas' 13%. New hotel rooms by major operators in the next few years should accommodate increased and extended visits from bigger spenders from these provinces, and drive the top line for integrated resort operators like Galaxy Entertainment. With the gradual ramp-up of traffic allowed on the Hong Kong-Zhuhai-Macao bridge, new Hengqin border, and the Gongbei-to-Hengqin extension rail, Macao's carrying capacity for tourists should increase. In addition, neighboring Hengqin Island, 3 times the size of Macao, is under rapid development to complement Macao's growth.

In line with its Macao peers, narrow-moat Melco Resorts witnessed a solid recovery in the first quarter, with revenue and adjusted EBITDA reaching 53% and 47%, respectively, of 2019 levels, despite fewer available rooms from the ongoing labor shortage. Performance is within our expectation. With hotel room supply and transportation capacity continuing to recover, we expect Melco Resorts to see growth accelerate in the coming quarters. We maintain our profit forecast and fair value estimate of USD 12.80 per share, and we think the shares are fairly valued as of market close on May 10.

Melco’s lackluster fourth-quarter results were well anticipated by the market, and the company has seen a strong recovery in demand after China eased coronavirus restrictions, leading to its daily EBITDA hitting USD 6 million during the Lunar New Year holiday, compared with a daily average of USD 3.8 million in first-quarter 2019. Management also indicated that post-holiday demand has been resilient, with mass-market gaming volume tracking 70% of 2019 levels, similar to its January performance. We think these positive data points confirm a solid recovery of the Macao gaming sector, and Melco’s plan to open its Studio City phase 2 project in the second quarter positions it to capture the return of traffic to Macao. We maintain our assumption of industry gross gaming revenue returning to 50% of 2019 level in 2023, and we raise our fair value estimate for Melco to USD 12.80 per share from USD 12.40, after updating the property opening schedule and rolling our model forward one year. Our tweaks to the earnings forecast are minor; we expect adjusted EBITDA of USD 856 million in 2023. We think the shares are fairly valued as of the March 3 market close.

We believe the gambling market in Macao will enjoy solid growth in the longer term. This structural tailwind is driven by the rising middle class in China and the penetration rate of less than 2% in Macao, compared with Las Vegas' 13%. The new hotel rooms by major operators in the next few years should accommodate increased and extended visits from bigger spenders from these provinces, and drive the top line for integrated resort operators like Galaxy Entertainment. With the gradual ramp-up of traffic allowed on the Hong Kong-Zhuhai-Macao bridge, new Hengqin border and the Gongbei to Hengqin extension rail, Macao's carrying capacity for tourists would increase. In addition, neighboring Hengqin Island, 3 times the size of Macao, is under rapid development to complement Macao's growth.

We have lowered our Morningstar Uncertainty Rating to High from Very High for the Macao gaming companies under coverage, as the removal of China’s COVID-19 restrictions from Jan. 8 should have removed the major hurdle that has been hindering Macao’s recovery over the past three years. Although it is likely that Macao and China will experience additional COVID-19 waves, which may cause demand to fluctuate, the evidence from other countries shows that the impact on the recovery trend was shorter and less impactful with each wave. We expect the same in Macao, and we have improved visibility around our existing base-case assumption that industry gross gaming revenue, or GGR, will return to 50% of 2019’s level, or MOP 145 million, in 2023, up from 14.4% in 2022. This is slightly higher than the Macao government’s estimate of MOP 130 million, reflecting a more upbeat outlook on the pent-up demand from both mainland China and Hong Kong.

We believe the gambling market in Macao will enjoy solid growth in the longer term. This structural tailwind is driven by the rising middle class in China and the penetration rate of less than 2% in Macao, compared with Las Vegas' 13%. The new hotel rooms by major operators in the next few years should accommodate increased and extended visits from bigger spenders from these provinces, and drive the top line for integrated resort operators like Galaxy Entertainment. With the gradual ramp-up of traffic allowed on the Hong Kong-Zhuhai-Macao bridge, new Hengqin border and the Gongbei to Hengqin extension rail, Macao's carrying capacity for tourists would increase. In addition, neighboring Hengqin Island, 3 times the size of Macao, is under rapid development to complement Macao's growth.

As expected, the Macao government granted the fresh 10-year gaming concession to the six existing casino operators on a provisional basis. We think the announcement will remove many of the remaining concerns on casino licenses. Although detailed terms of the contracts haven’t been disclosed yet, including the investment pledged by each company and nongaming activities each company planned to develop, we don’t expect material risks toward the finalization of the license grants by the end of December, as Macao’s gaming law amendment has concluded, with major changes in line with majority opinions.

Melco Resorts’ third-quarter results, which were better than peers, reflected the company’s diversified business mix, with a decent recovery in the Philippines helping to buffer a widened loss in Macao amid COVID-19 headwinds. We expect the Philippines casino to continue its recovery toward prepandemic levels, as the country has eased COVID-19 restrictions and casinos are allowed to operate at 100% capacity. In Macao, the Chinese authorities have reopened e-visa travel from Nov. 1, which we think is a significant step toward a durable recovery of Macao gaming demand. We retain our long-term constructive outlook for Macao's gaming sector but slightly tweak our assumptions of industry revenue to 50% of 2019 levels in 2023 from 60% in our earlier forecast, to reflect the challenges resulting from: 1) an extended zero-COVID-19 period, which may continue to disrupt tourism, and 2) slow economic growth that will likely weigh on customer spending and patron betting sizes. As such, we lower our fair value estimate for Melco Resorts to HKD 12.40 per share from HKD 12.80, and the shares remain significantly undervalued as of market close Nov. 02.

We believe the gambling market in Macao will enjoy solid growth in the longer term. This structural tailwind is driven by the rising middle class in China and the penetration rate of less than 2% in Macao, compared with Las Vegas' 13%. The new hotel rooms by major operators in the next few years should accommodate increased and extended visits from bigger spenders from these provinces, and drive the top line for integrated resort operators like Galaxy Entertainment. With the gradual ramp-up of traffic allowed on the Hong Kong-Zhuhai-Macao bridge, new Hengqin border and the Gongbei to Hengqin extension rail, Macao's carrying capacity for tourists would increase. In addition, neighboring Hengqin Island, 3 times the size of Macao, is under rapid development to complement Macao's growth.

Malaysia Genting Group’s participation in Macao’s gaming concession bidding surprised the market, which brings some uncertainty as to whether the existing players will win renewed licenses, given Genting’s strong presence in global gaming markets and successful track record in diversification of non-gaming business. Nevertheless, we think Genting’s bid is unlikely to threaten the existing players’ competitiveness in the tendering process, as the six have put two-decade efforts in supporting Macao’s economy and employment, which include more than two years’ downturn resulting from COVID-19 restrictions. We think it is unlikely for the Macao government to rule out any of the six, if they could meet the requirements of the new concession tendering process. As such, our base-case scenario is unchanged, which assumes all six existing casino operators would be granted new gaming concessions, and we keep our fair value estimates of Macao casino operators unchanged.

Macao’s new gaming law has been approved by the city’s Legislative Assembly, with no major revisions compared with the earlier draft. This provides a basis for the upcoming tender process of new gaming concession, and we expect all six existing casino operators to take part in the fresh tender for a 10-year concession with the possibility of a three-year extension. We think the key negative is the increase in the gaming tax and special levy by 1 percentage point to 40%, but the new law provides casino operators with tax incentives of up to 5% for diversifying their customer base outside of China. The new gaming law framework also highlights a tighter scrutiny on liquidity, with requirement of a minimum capital requirement and net asset value of MOP 5 billion at concessionaires. In addition, the upfront license fee, requirements of non-gaming investment, and minimum gross gaming revenue are also the keys to watch in the upcoming tender documents.

Macao is considering a cut of gaming tax up to 5%, if casino operators can demonstrate efforts to bring in players from outside of China, according to media reports including GGR Asia. We think this signals the government’s willingness to support the city’s gaming sector amid the challenges of China’s crackdown on cross-border gambling and ongoing COVID-19-related travel restrictions. The gaming sector not only contributes about 80% of Macao’s fiscal income, but is also the most important employer in the city. However, given the pandemic-related travel restrictions are still in place in Macao, and competition from regional markets is high, particularly after Singapore and Philippines have eased travel restrictions, we think casino operators may face difficulties in diversifying the customer base at least in near-term.