Systematic Ideas - Asia Pacific - 2 Nov
Long Melco Resorts & Entertainment (MLCO US)
Melco’s increased focus on the VIP segment of revenue has been working well for them. Studio City consequently recorded over 300% EBITDA YoY growth on the back of their VIP ramp up. The Manila property is trading well with revenue rising 12% too.
Melco is adding a new luxury hotel with premium amenities at Phase 3 of City of Dreams in their push to gain more premium-mass as well as VIP revenue.
Gross Gaming revenue for Oct 2017 in Macau is up 22% YoY in a confidence boost for the sector as it climbs back from the luxury clampdown by authorities. We buy Melco on our systematic process as exemplified by the breakout of the long term downtrend relative to Macau Gaming peers (Fig. 1). MCLO is shaping up for margin and market share gain.
Long Wynn Macau (1128 HK)
Recent results were in line with consensus. However there were a few bright spots worth pointing out. Wynn Palace was a stand out as it showed gross gaming revenue (GGR) up across the board. The VIP rolling segment GGR grew 18% QoQ, mass table GGR was up 15% (QoQ) and slot machine GGR was up 21% QoQ.
Here too, growth was driven by VIP, premium and mid-tier mass affluents. However, the growth seen in the latter is a lot higher than competition and the ramp up of Wynn Palace’s mass business over the coming quarters could surprise to the upside.
The stock has been languishing versus peers for several years and is now starting to break this pattern (Fig. 2) as investors start to see the potential in Wynn’s high quality assets. Get long.
Long Galaxy Entertainment (27 HK)
Galaxy Entertainment has been a source of outperformance over the years as it performed better than most competitors even during the slowdown in Macau. This can be seen in Fig. 3 where at no point did it materially underperform the Bloomberg Macau Gaming Index and remains the strongest among them.
Galaxy Entertainment has steadily growing cash on the balance sheet and has more stable margins with relatively little debt. Their cost-cutting efforts coupled with their strength in capturing VIP as well as mass-market business should keep profitability improving.
Galaxy have maintained their market share lead and with phase 3 & 4 expansions expected. They should be able to cement their lead while GGRs for Macau are on the rise. We recommend a long here.
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