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Morningstar | Melco Resorts Also See Signs of Weakness Amid Weak Macros

We are planning to bring forward our assumptions of the start of a cyclical downturn to 2019-20 from 2020-21. As such, we expect a single-digit change to our $22 valuation for narrow-moat Melco Resort, which incorporates a single-digit decline in revenue in 2020 and 2021 and license renewal risks in the form of higher gaming taxes. We now forecast gross gaming revenue growth to be negative 4% in 2019 (positive 15% prior), up 3% in 2020 (negative 1% prior) and lift 5% in 2021 (negative 5% prior). We think total social financing growth will slow down, and export and business confidence will weaken because of the trade war between the United States and China. We believe that could put pressure on Melco Resorts’ earnings over the near term. Management has also seen lower spend per premium mass customer and signs of weakness in the VIP segment recently, partially offset by the novelty effect of opening its new facility, Morpheus. Nevertheless, we adhere to the long-term Macau gaming opportunity that stands to benefit from the growing Chinese middle income class Thus, we believe this is a good time for long-term investors to accumulate Melco Resort shares.

Net revenue for the third quarter decreased 5% year over year and adjusted property EBITDA decreased 26% due to the company playing less luckily in the rolling chip segment and a one-off special gift of one month's salary to non-management employees. Adjusted for VIP win rate, EBITDA was down 11% compared with the year-ago period.

City of Dream’s rolling chip volume and mass drop for the third quarter grew 10% and 17% year over year, respectively, helped by the opening of Morpheus. The 110-basis-point lower rolling chip win rate in the third quarter, 450 basis point lower hold percentage, together with an one-off special gift to non-management employees led to a 40% year-over-year decline in adjusted EBITDA. The lower hold rate was due to the loss of the mass smoking area on the second floor. Management noted mass hold rate are more likely to be at the low-30s compared with mid- to high-30s previously.

Studio City’s performance is a better reflection of the general market compared with City of Dreams that benefited from the opening of Morpheus. Studio City’s adjusted EBITDA was down 6% year over year due to the one-off special gift to non-management employees and a 90-basis-point lower VIP win rate. Studio city’s rolling chip volume growth was flat year over year, while mass drop was up 8%.

City of Dreams Manila’s VIP rolling chip volume was flat year over year, while mass drop was up 18%. Despite the casino playing more luckily in the quarter, adjusted EBITDA was down 4% year over year.

The VIP area on the second level of City of Dreams is under renovation, and the renovation of Nüwa will commence after the Chinese New Year in 2019 and be finished by Chinese New Year in 2020. The entertainment elements of Studio City will be enhanced with an esports stadium in July, a stunt show in December, and a virtual reality zone, a trampoline park, and a dining street in 2019. Additionally, 940 rooms, a 12,000 square meter waterpark, a cineplex, and gaming space will be added beyond 2019.