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Morningstar | Melco’s Morpheus Recent Momentum Is Strong; COD Manila Will Continue to See Weakness This Year

Normalized for VIP win rate and adding back the bad debt provision of USD 11 million, adjusted EBITDA would still decline 8% year-over-year to USD 347 million in the first quarter for narrow moat rated Melco Resorts and Entertainment. VIP luck-adjusted property EBITDA margin for the Macau operations was approximately 27%, flat sequentially and down from 30% in the year-ago quarter. VIP luck adjusted EBITDA at COD Manila was down 9% year over year. Melco’s VIP gaming revenue was down 8% in the quarter year over year, outperforming a 13% decline for the wider Macau market, as reported by DICJ. Melco’s non-VIP gaming revenue was up 6% year over year in the quarter, stronger than DICJ’s reported 16%. The non-VIP segment represented over 90% of luck-adjusted EBITDA at its Macau operations, which means Melco will be more resilient compared with VIP-centric competitors in Macau that have not recently added capacity in the near term. We maintain our fair value estimate at USD 21.00 for Melco.

Flagship City of Dreams’ adjusted EBITDA was down 1% sequentially. Mass hold rate was down 151 basis points sequentially and mass drop was up 1% sequentially. Part of the decline in mass hold rate was due to the casino playing less luckily, according to management. Management noted premium mass has slowed a little bit while mid mass has seen good growth. We expect Morpheus to bring in more premium players and longer play, which should increase the hold rate, and we think we need a few more quarters to test the thesis. VIP rolling at the property declined 11% sequentially, hurt by the construction disruption earlier in the quarter. The opening of the new VIP junket area before the Chinese New Year has led to a pick up in demand, according to management. Both direct VIP and junket VIP demand was good during the Golden Week. Management commented it is still early in the ramp up process after being open for nine months, and it expects to see stronger cost control going forward.

Studio City’s VIP rolling volume declined 23% sequentially, much higher than the 10% drop at City of Dreams Macau. This has dragged the adjusted EBITDA of Studio City, declining at 12% year over year. Mass revenue was up 7% year over year and 8% sequentially, helped by a good growth in players hours, according to management.

City of Dreams Manila adjusted EBITDA was down 11% sequentially. We think COD Manila was adversely affected by the ramp up of Okada Manila--additional room supply in hotel tower A and an addition of a new junket in March. Okada Manila saw a 146% increase in VIP gaming revenue (versus negative 9% at CODM), 61% in mass revenue (negative 11% at CODM) and 49% in slot revenue (versus +14% at CODM) in the first quarter. Okada will open more rooms in hotel tower B in 2019 and expects to see further increase in VIP, mass, and slot revenue in 2019. Resorts World Manila also increased room supply and opened a new gaming area. We expect to see 4% decline in gaming revenue at City of Dreams Manila this year, versus 3% in the first quarter. CODM will open new casual junket space with 10 tables next month, renovate the overall VIP space and that for top junkets to increase its competitiveness. Management has hired additional sales hosts and increased its focus on the premium mass segment. Going forward, Okada plans to add more rooms, expand the gaming area, add a casino for VIPs, open more restaurants, and enlarge the shopping mall. While this will increase the competition in Manila, we think this will increase the attractiveness of Manila as a gaming destination and grow the pie for Manila. We maintain our assumption of slower revenue growth of midsingle digits for CODM in the long term.