Melco’s Q3 In Line; Recovery in Philippines, Restarting E-Visa Travel in Macao Drive a Better 2023

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.