Melco Sees Solid Demand Recovery to 2023

Melco’s MLCO 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.

Melco lost 115 tables for the new 10-year concession period, implying a 13% decline in its table capacity, but management indicated the table cut was mostly related to the closure of junket activities, while its self-operated tables remain unchanged. In addition, Melco plans to open its Studio City Phase 2 project in the second quarter, which offers approximately 900 luxury hotel rooms and suites, an additional water park that is expected to be one of the largest in the world, as well as state-of-the-art meeting, incentive, conference, and exhibition spaces. We think these differentiated offerings will help expand its customer base and strengthen Melco’s leading position in the premium market, and maintain long-term market share with higher table volumes offsetting the cut to table numbers.