Melco Resorts Could Solidify Premium-Mass Share with New Projects

Although shares of Melco Resorts (NASDAQ: MLCO) have increased by about 51% year to date due to a recovery in Macau gross gaming revenue (GGR), this does not mean there is little room for further growth.  The price may continue to rise as a result of new developments.

Among these are initiatives to broaden its nongaming menu in Macau, which may aid the concessionaire in securing market share in the crucial premium-mass category, which is the group of gamblers and tourists who are above the mass market but below VIPs.

"We see Melco making greater efforts in increasing nongaming business in its new Studio City phase 2 project, where it has built various nongaming facilities, including 900 luxury hotel rooms, an additional indoor/outdoor water park, and state-of-the-art meetings, incentives, conventions, and exhibitions (MICE) space, as well as other nongaming attractions,” notes Morningstar analyst Jennifer Song. “All these would help the Macao government to diversify its economy and position it well amid Macao’s long-term development.”

Since Melco is currently trading at about $8.70, the research firm's fair value estimate of $10 suggests that the company is fairly undervalued.

More Than Macau Could Increase Melco's Stock Price

Melco, one of Macau's six concessionaires, is usually seen by investors as a bet on the biggest casino center in the world.  That is true to a certain degree, and it is a good thing when tourists and gamblers are swarming to the special administrative region (SAR).

“We believe its [Melco’s] strength in the premium mass segment and its leadership in product innovation, along with the launch of Studio City phase 2 in 2023 with 900 rooms, will drive solid market share and earnings growth in the mid to long term,” adds Song.

There is more to the Melco story, though.  The City of Dreams Sri Lanka property launched earlier this month and is anticipated to play a significant role in increasing employment and tourism in the nation.  With a 20-year license, the venue is effectively acting as a monopoly.

Moreover, adding by subtraction could be advantageous for Lawrence Ho's business.  For its City of Dreams Manila casino hotel, the operator is presently reviewing its options strategically.  The proceeds from the sale of that property might be used in Macau or elsewhere.  Although the firm hasn't stated that it is currently considering it, analysts have also suggested that Melco should think about splitting from City of Dreams Mediterranean in Cyprus.

Melco has a strong financial foundation.

The Macau concessionaire's low liquidity risk and emphasis on debt reduction strengthen the bullish argument for Melco shares.

"Although net debt remained high at USD 5.90 billion as of the end of 2024, its debt maturity profile has improved after a series of refinancing transactions,” observes Song. “As of end-2024, Melco has around USD 1.3 billion in cash and USD 2.0 billion of credit facilities available, totaling USD 3.3 billion. This is well above its debt of USD 1.2 billion due in 2025, sharply reducing the firm’s refinancing risk in 2025.”

Melco may resume paying dividends in the upcoming year, the Morningstar analyst notes.