Melco Resorts Earnings: Solid Recovery Continues, With Studio City Phase 2 Driving Further Upside

In line with Macao’s gross gaming revenue recovery, Melco Resorts & Entertainment MLCO 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.

Labor shortage constraints have largely been resolved, and Melco is now operating at full capacity, compared with a temporary closure of 30% of hotel rooms in the first quarter. Melco launched its Studio City phase 2 project in April, with 338 rooms already in use. It 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% by the end of 2023 from 14.1% in 2022. This will make Melco one of the key beneficiaries of the recovery in Macao.

Management continues to expect that 20%-25% of the cost savings achieved during the three-year pandemic period will be permanent. We think the cost-cutting efforts, along with a favorable mix shift toward high-margin mass business and growing nongaming income, will drive adjusted EBITDA margin to 27.2% in 2023, up from 23.6% in 2019.