For the first time since prior to the pandemic, Melco Resorts & Entertainment CEO Lawrence Ho met with stateside investors. J.P. Morgan analyst Joseph Greff described the meetings as “well attended” and departed “incrementally positive on [Melco’s] position within Macau and see it as having ammunition to grow faster than its Macau peers in 2024.”
Ho and his executive team have an incentive to make that come about, Greff noted, as their compensation is tied to company performance. Although Melco’s early 2023 performance “lagged the market a bit,” Greff believes that makes for easier year-over-year comparisons in the near future, unlike its Macanese rivals.
Other drivers of performance include the February or March grand opening of Phase Two of Studio City, Melco’s signature megaresort, as well as increased marketing and events. Greff believes these will propel both mass-market traffic and premium play at Studio City and City of Dreams.
The Macanese market, Greff chronicled, is experiencing week-to-week improvement, particularly in November, despite being in a seasonally slow stretch when Chinese families traditionally don’t travel. Both mass-market play and slot-machine business is ahead of 2019 in the fourth quarter.
“The market continues to peak during weekends, as concerts become more frequent and [Melco] sees an opportunity to provide bespoke opportunities to visitors that tag onto these large weekend events, with incremental opportunities for midweek on the horizon as well,” Greff penned.
There is still room to recover for the premium mass-market player, particularly at his highest stratum. Premium-mass action is the new focus of Macanese casinos now that VIP play has been attenuated.
Ho and his team told Greff that investments in offerings for the premium-mass tier by Melco’s competitors are moderating. This, along with an increase in personalized offerings, was seen as presenting an opening for Melco to exploit and grow market share.
“Historically, [Melco] considered its core demographic to be ages 45-65, but now sees visitation to Macau coming from an increasingly younger cohort,” Greff wrote. Perhaps to that end, the opening of Studio City’s second phase was viewed as presenting a tailwind for the company and Ho was confident that return on investment for the mostly completed resort would match 2019 levels.
The analyst forecast that Melco would reduce leverage (“the top priority for capital in the near to medium term”), in part from free cash flow. He also reported that the return on investment from Melco’s Manila casinos was “steady,” to the tune of $200 million a year. He reiterated his “overweight” rating on Melco shares, which were trading at $8.64 apiece.
However, Melco’s investment in Cyprus is being negatively affected by the wars in Ukraine (Russian players were a catchment market during the property’s inception) and Israel. Greff added that the Cypriot casino has the prospect of steady sequential return on investment.
“We note that management is committed to being in front of investors with greater frequency,” Greff wrote, “as it sees its current valuation multiples … as too cheap in light of sequential improvements (and market share gains).” He added that continued involvement with investors would buttress Melco’s valuation multiple and better convey its strategy.
Greff felt Melco would take a pass on large-scale projects for the time being. He also opined that reinstatement of stock dividends would be held off until a full restoration could be achieved and “we don’t expect a partial dividend.”
