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Melco Resorts and Entertainment Ltd ADR MLCO

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Uncertainty Ahead on Macao Gaming Sector Amid More Government Scrutiny

Jennifer Song Senior Equity Analyst

Analyst Note

| Jennifer Song |

The planned review of Macao's gaming laws sparked a significant sell-off of casino-operator shares as the proposals by Macao's Gaming Supervision and Coordination Bureau signal tighter regulatory control. We think this could reduce the visibility on casino operators’ long-term business outlook, and we raise our fair value uncertainty rating for the Macao gaming companies to very high from high, and we lower our fair value estimates by 22%-45%, as we believe some of the measures may limit the pandemic recovery and impact the sector’s business model. We adjust our cost of equity 2% higher to 12%, to reflect an increased risk premium tied to lower visibility of Macao gaming companies' long-term outlook. As such, we lower Sands China to HKD 26.50 per share from HKD 43.00, SJM Holdings to HKD 8.60 from HKD 12.60, Wynn Macao to HKD 9.20 from HKD 17.00, Melco Resorts to USD 13.80 from USD 25.00, MGM China to HKD 8.60 from HKD 15.00, and Galaxy to HKD 48.50 from HKD 62.00. Additionally, we also assume VIP contribution to remain at 20% of the prepandemic levels, with Wynn Macau, Melco Resorts, and MGM China seeing more downside, given their higher position in VIP segment. Our base case assumes revenue from the mass segment to return to prepandemic levels in early 2023, which incorporates a prolonged pandemic impact.

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Company Profile

Business Description

Melco Resorts is one of only six companies with a licence to operate casinos in Macao, the only region in China with legalized gambling. It operates Altira, a complex focused on VIP customers; City of Dreams, an integrated resort in Cotai serving both mass-market and premium-end patrons; and Mocha Clubs electronic gaming machines. In addition, the company also has a majority interest in Studio City, a new casino in Cotai that opened in October 2015. Outside Macao, Melco also owns City of Dreams Manila in Philippines, and 75% stake in City of Dreams Mediterranean in Cyprus. The business mix in term of adjusted EBITDA was about 84% from Macao, and the rest largely from Philippines as of 2019.

Contact
60 Wyndham Street, 36th Floor, The Centrium
Hong Kong, Hong Kong
T +852 25983600
Sector Consumer Cyclical
Industry Resorts & Casinos
Most Recent Earnings Jun 30, 2021
Fiscal Year End Dec 31, 2021
Stock Type
Employees 19,746

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