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Melco Resorts (MLCO US) Company Report Summary

Core Content and Key Highlights

• Performance in 3Q17: Melco Resorts exceeded expectations with a 40% YoY and 21% QoQ increase in property EBITDA, driven by strong performance at the City of Dreams (CoD) property.
• Financials: Net revenue for 3Q17 reached US$1,377 million, up 19% YoY and 6% QoQ. The company's EBITDA grew to US$366 million, reflecting a 40% YoY and 25% QoQ increase.
• Earnings Prospects: The 4Q17E and FY18E are expected to show strong performance, particularly due to the opening of Morpheus, an 800-room hotel in the CoD complex, which is projected to enhance the brand's market position.
• Valuation: The target price (TP) was revised upward to US$30.50, which is 15% higher than the previous price of US$26.52. This is based on a 25x FY18E P/E and 12x EV/EBITDA, aligning with the five-year average. The company trades at 10x EV/EBITDA, which is considered attractive.
• Market Position: Melco Resorts outperformed its HK-listed peers in terms of valuation and performance. It is recommended to maintain a BUY rating due to its favorable valuation and expansion prospects.

Main Points and Key Information

Financial Performance

• 3Q17 Results:
  • Net revenue: US$1,377 million (+19% YoY, +6% QoQ)
  • EBITDA: US$366 million (+40% YoY, +25% QoQ)
• Growth Trends:
  • FY17E: Revenue up 111.8% to US$5,241 million, EBITDA up 4% to US$1,311 million
  • FY18E: Revenue up 43.4% to US$5,481 million, EBITDA up 4% to US$1,482 million
  • FY19E: Revenue up 33.3% to US$5,765 million, EBITDA up 10.3% to US$1,634 million

Operational Highlights

• City of Dreams:
  • Recorded a 45% YoY and 41% QoY increase in EBITDA, driven by a favorable VIP hold of 3.5%, lower daily operating expenses, and recovery of doubtful debt.
  • CoD Manila also showed strong YoY growth, but experienced a QoQ decline due to a lower VIP win rate of 2.5% compared to 3.5% in 2Q17.
• Studio City:
  • Net revenue increased by 4% in FY17E and 6% in FY18E.
  • VIP win rate improved significantly, from 1.4% to 4.0%.

Earnings Prospects

• 4Q17E: Expected to be impressive, especially due to the high-roller business and a pick-up in Macau's October GGR.
• Morpheus: Expected to enhance the brand and protect market share from competitors like Wynn Palace and MGM Cotai.
• Expansion: The company's major expansion focus remains on Japan.

Valuation and Investment

• Target Price: US$30.50, reflecting a 10x FY18E EV/EBITDA and 25x FY18E P/E.
• Dividend Yield: Stabilized at 1.4% for FY17E and FY18E.
• ROE: Increased from 2.4% in FY15 to 18.8% in FY19E, indicating improved profitability.

Peer Comparison

• Valuation Ratios:
  • Melco Resorts (MLCO US) trades at 10x EV/EBITDA, which is lower than the industry average of 12x.
  • The P/E ratio is 24.3x for FY18E, which is lower than the industry average of 25.3x.
• Market Cap: US$13,047 million, with a 52-week range of US$13.78 to US$26.53.
• Dividend Yield: 1.4%, which is lower than some peers like Sands China (5.2%).

Key Risks

• Potential Negative Impact: A smoking ban in VIP areas could negatively affect the premium mass business at City of Dreams.
• Competition: Increased competition from MGM Cotai could impact City of Dreams' market share.

Conclusion

• Investment Recommendation: Maintain BUY with a new TP of US$30.50.
• Valuation: Attractive with a 10x EV/EBITDA and 25x P/E for FY18E, suggesting potential for growth.
• Outlook: Strong earnings prospects for 4Q17E and FY18E, supported by the opening of Morpheus and continued expansion in Japan.