Melco Resorts Earnings: Solid Recovery Underway; Studio City Phase 2 Is Online

In line with its Macao MLCO 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.

Labor shortage led to the temporary closure of around 30% of Melco’s hotel room capacity in the first quarter. But management says that, as of the May golden week holiday, room availability is back to 90% of capacity and it expects to bring all the remaining rooms online by end-June. In addition, Melco also launched its Studio City Phase 2 project in April, with 338 rooms already in use. The company targets to open the W hotel tower in September, which will add another 550 rooms. We estimate the company’s market share, based on hotel room capacity, should rise to 15.6% at the end of 2023 from 14.1% in 2022, which will make it one of the key beneficiaries of the recovery in Macao.

We note that the market had been concerned that Melco, along with Wynn Macau, which had proportionately more VIP visitors before the pandemic, would see gaming revenue more intensely affected by the drop in the VIP market. While we have seen the share of the VIP segment to overall gaming revenue decline to 28% for Melco from 46% in 2019, this is not materially worse off than the decline to 25% seen in Macao as a whole. In addition, the higher profit margins of the mass premium segment—which has grown in place of the VIP segment—are mitigating the impact of the decline in VIP visitors.