Global Gaming and Casinos Industry Specialist, Casino Business Review LLC

Howard J Klein

I am a 25+ year c-level executive of the casino industry in operations, marketing, international development and strategic planning. Currently, a consultant specializing in the casino space. Industry expert contributor and publisher of a subscription letter called "The House Edge". Extensive experience in marketing and development in the Asian gaming market while a senior executive at Caesars, Ballys Grand and Trump Taj Mahal.
Part of senior executive teams that valued acquisitions and mergers with companies in the casino, hotel, d entertainment rant  and restaurant space.

Global Gaming and Casinos Industry Specialist

Equity Bottom-Up

Melco Resorts & Entertainment / Equity Bottom-Up

<ul>
<li>Melco's current trading range does not yet reflect its long term vision to become a global leader in gaming, entertainment and integrated non-gaming projects wherever opportunities arise. It's latest targets development in the Greater Bay Area.</li>
<li>At US$17 a share investors can not only buy into a Macau recovery cycle for early 2022 but the first, true integrated casino resort aimed at the EU and Mideast markets.</li>
<li>It huge undertaking in Guangdong will resonate positively in Beijing when Macau reconcession negotiations begin upstream.</li>
</ul> Long- term analysts of the Asian gaming sector have periodically called everything from strong buy to underweight on the shares of Melco Resorts &amp; Entertainment Ltd. (NASDAQ:MLCO). Naturally these gyrations reflected both macro headwinds and catalysts impacting investor sentiment on the stock. Pre-pandemic 2019 saw 12 analyst calls on MLCO to BUY, none to sell or underperform. But most recently, Morgan Stanley and Credit Suisse have downgraded MLCO respectively from overweight to equal weight and from neutral to underperform.   Such swings are understandable given the current macro environment still reflecting pandemic travel bans in place.  Also 1Q21 operating results for most stocks in the sector are showing an early trickle rather than a headlong rush of pent up demand in progress. That rush should begin by mid-Q3 across the board if travel bans begin to fall. Unlike many peers, MLCO as a company, has been a bit harder to understand for investors. That is because its high energy, fast moving CEO/founder, Mr. Lawrence Ho, 45, is one of the most active global asset allocators in the industry. He has speedily moved into deals and likewise, having been dissatisfied with results, sold out of deals.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/215/455/original/5048.png?1624705543" class="editor-image img-responsive" data-smartkarma-image-id="215455"></figure><div class="content-caption">Melco is positioned for price recovery at near 52 week low.</div></section>The relatively recent history of the company’s moves demonstrate this proclivity. But beneath it all there is in our view, a crystal clear agenda, a keen business model and firmly implanted corporate goal at work here: MLCO sees itself as a global leader and not only in pure play Asian casinos. Just this week the company announced a bold, new non-gaming project of its parent, Melco International Development Ltd  (HK 0200). It has won a joint bid with Hong Kong listed Agile Group (HK3383) to develop a multi-billion dollar entertainment/hospitality project in Zhongshan, Guangdong. Estimated completion date is 2025.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/215/456/original/%E9%9B%85%E5%B1%85%E4%B9%90%E6%8B%BF%E5%9C%B0%E6%B5%B7%E6%8A%A5-bg-750x421.jpg?1624705673" class="editor-image img-responsive" data-smartkarma-image-id="215456"></figure><div class="content-caption">The huge project in Guangdong will be a major contribution to the development of the Greater Bay Area.</div></section>The complex will cover 750,000 square meters in a site just north of Zhuhai. It is expected to contain commercial, residential, recreational, entertainment elements in addition to offices, hotels, apartments, wellness centers, restaurants, shopping malls and a theme park. It will be jointly managed and owned by the two companies and is a bold expression of conviction shared with Beijing of the high goals for the Greater Bay area.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/215/457/original/ZS-Project-Information-1140x641.jpg?1624705755" class="editor-image img-responsive" data-smartkarma-image-id="215457"></figure><div class="content-caption">It is partnered with Mainland realty giant Agile.</div></section>Corporately, the project will be a JV to be known as Zhongshan Yachen and a subsidiaries to be called Melco Zhongshan  and Creation Elite Ltd which will acquire the land for ~ US $616M as well as fund the project and divide profits from its various verticals across the diverse elements. EO Ho, left little doubt that the non-gaming project extends Melco’s reach into its stated goal of becoming a global leader in integrating world class entertainment facilities, using he says, “a distinctive model of integrating quality leisure, culture and entertainment”.   Added Ho, “We are determined to play an active role in the development of the Greater Bay area and to leverage the incredible expertise of our group in non-gaming activities.” Read between the lines and it becomes apparent that this project represents a highly perspicacious effort by Ho that plays wisely into Melco’s long- term casino vision as well. The project will be in Guangdong sitting in the heart of Macau’s most fecund feeder market. And clearly it will be music to the ears of Beijing, which has gone repeatedly on record as pushing Greater Bay Area development, particularly in non-gaming. Ho has made an assiduous effort over time both in business as well as serving on many mainland public interest boards to position his company favorably with Beijing’s educational as well as its  economic goals. Although the project will not realistically begin being accretive of MLCO earnings at least after 2025, it exposes a value deep in the company’s business model: CEO Ho, will move anywhere, at any time, to produce projects that not only add new value, but enhance existing value to its properties. And that is one of the catalysts for the stock we have not seen finding their way into the MLCO trade for several years. It has been stuck in a narrow trading range due to the pandemic, but also because the market does not apparently see a premium in Ho’s agenda. Agile Group owns two companies listed on the Hong Kong exchange. It conducts business in 200 Chinese cities and has over RMB300b in assets. Its skill sets are firmly established in property development, renewal and environmental management. We note here that MLCO has long been a casino industry leader in environmental management. MLCO’s ESG activism presents the JV as a seamless partner match. The recent history of MLCO reveals a vision beyond Macau Followers of the stock were not surprised by this major Greater Bay Area development move by MLCO. MLCO’s recent investment history<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/215/458/original/Lawrence_Ho%2C_2007%2C_Horasis.jpg?1624705853" class="editor-image img-responsive" data-smartkarma-image-id="215458"></figure><div class="content-caption">Lawrence Ho continues a pattern of asset development, sales and acquisitions established since 2014.</div></section>2004: Melco partnered with James Packer to develop casino resorts in Macau under the corporate name of Melco Crown. The company built properties successfully. But after Beijing arrested Crown marketing people for overly aggressive recruitment of Chinese VIP play, and other disputes, Ho exited the partnership in 2017. 2012: MLCO entered the Vladivostok Russian Far East market with its Tigre de Cristal casino aimed at the north China gaming customer. 2015: Against what had been a huge Beijing crackdown on Macau junkets and money laundering in general, Melco opened its very successful City of Dreams property in the Entertainment Zone of Manila. 2016: Japan finally passed its controversial integrated resorts legislation. Melco was among the earliest potential developers to express avid interest. It promptly dispatched executive teams to Tokyo as a would-be, skeletal management team. Since then, most global gaming giants who originally shared Ho’s enthusiasm for Japan, have left citing ROIC concerns. Melco remains steadfast, hoping to win the bid for the Yokohama IR. Realistically the launch may be seven to eight years away, but Melco remains committed. 2017: Melco was the successful bidder for an integrated resort project on the Mediterranean island of Cyprus. Construction is in progress despite the pandemic. The fully integrated casino resort will have 500 rooms and a complete amenity package to offer EU and Middle East gamblers. It will be the first truly, modern integrated casino resort in that area. 2017: Ho divested his entire interest in the Russian asset dissatisfied with its performance, but mostly due to what he saw as  Moscow’s confused, punative tax structure that inhibited the potential of long -term profitability there. 2018: Melco opened its design forward 770 room Morpheus Tower in Macau aimed at building its market share of premium mass and VIP play there. Its exoskeleton design is unique in the marketplace and indicative of Ho’s vision to depart from norms to achieve the goals of the long term MLCO business model. What this history shows is a nimble management mind -set that has not set geographical or financial limits against opportunities it sees coming near term and long term.  During this period Ho has also shifted management teams between properties, exited some, added others to maximize revenues, cost savings and an assured grasp on their markets’ opportunities and challenges. In its most recent earnings report, MLCO showed a dramatic increase in market share moving from 15% to 21.4% y/y in Macau. Gains we made in both VIP and mass segments. While results continue to be highly impacted by the pandemic as long as travel bans are in place, MLCO’s significant upside market share performance YTD warrants investor attention.<blockquote> Several portfolio managers we spoke to who are long term holders of the stock agreed that despite Ho’s visionary propulsion globally, it still trades largely based on Macau and Manila results only. “Even before the pandemic hit, MLCO’s price never seemed to find support substantially above the US$40 level,” said one source. “Investors saw stronger upsides in many Macau peers. Melco was respected and believed   to be well run, but other major players seemed to present more positive sentiment at support levels trading much higher.</blockquote> MLCO a capsule case for a higher PT: USD At writing, analyst consensus has a PT of $21.47, which is ~ $10 higher than its price at writing of $17.23. On the surface that would seem to suggest a nice upside that is expected to rise directly linked to the potential lifting of travel bans by late 3Q or early Q421.  Yet in our view, it follows something of a historic pattern for the stock with no baked in premium for what we see as a far more bullish outlook for the company both short and long term. Melco Market cap: $8.2b 52 week range: $14.50-$23.65. The stock is only ~$3 higher than its 52 week low which takes into account performance during the worst quarters of the pandemic. And as noted, we think the 52 week high doesn’t bake in performance increases we see coming in the 3rd Quarter of 2021, but mostly in the first two quarters of 2022. Among the catalysts we see is the completion of Phase One of MLCO development in Macau which will add 900 rooms to the Studio City property, water parks, a Cineplex theater, expanded dining and MICE capacity. The room supply will make a contribution in 2022 to MLCO’s mass business. Property upgrades are already underway at City of Dreams. Investment dollars earmarked for both existing properties as well as the new projects just announced signals MLCO’s continuing execution if its ambitious goals firmly in place.  1Q21 earnings shows a pandemic impacted adjusted net loss of -$208m vs. -$343m in 2020. Cash and debt 1Q21 cash and cash equivalents: $1.5b vis $1.7b for 2020 reflecting largely the cash burn level during the deep pandemic months of 2020 Overall assuming a diminishing cash burn level going forward, plus a rising share of market even in a very slowly improving visitation level until Q3/4 we believe MLCO will have more than enough cash on hand to see it through  past the effective end of the pandemic. Long term debt: $6.3b. Current ratio (mrq) 1.89. If we presume that a standard “healthy” measure of current ratios for most companies would be ~1.5, MLCO’s does not appear to be excessive given the damage of the pandemic to all balance sheets in the sector.( Also as is widely understood, brick and mortar casino businesses are voracious consumers of capex due to two factors. One, the nature of the business requires a constant upgrade of facilities to remain competitive. And two, they must be ever ready to pounce on opportunities as they are often a result of the quixotic actions of legislatures in legalizations). Interest expense for 1Q21 was $114m vs. $202m for 2020. So with a growing share of market in its core Macau business, its continuing commitment to expand and upgrade and its longer term vision to break into the EU market with an IR and now its move into a massive non-gaming project on the mainland of China, we have a buy scenario. Using standard data points to measure MLCO stock performance in normal times simply does not provide a deeper picture of a company in unusual times as those we are now beginning to exit. On a standard basis MLCO may appear to be fully valued if not overvalued. But taking a larger business model perspective in the hands of a visionary, skilled management, we believe MLCO has more run room than consensus PTs.On that basis we revise guidance on the stock to $37.50 post pandemic by 1Q22 or before. We in the early recovery stage of the pandemic with many uncertainties still looming before the Asian gaming industry. Most critical among them of course is the continuing travel bans remaining in place due to concerns about isolated flare ups of the virus or variants. While China continues to move rapidly toward its inoculation goals, overall revenue streams and arrivals in Macau have not yet reached the levels of growth that suggest a higher level of 2021 revenue goal than what has previously been targeted by some analysts. Most recently estimates of 2021 GGR have been downgraded to ~44% of the 2019 base year. Understandably this has kept the PT's of many players in the space hemmed in by a far more narrow trading range than what would be the case. Among them, MLCO's price relative to its peers continues at a level we believe remains attractive.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/215/460/original/Monthly-gambling-revenue-in-2013-and-2014-million-MOP.png?1624707075" class="editor-image img-responsive" data-smartkarma-image-id="215460"></figure><div class="content-caption">Note the growth rate until 2013. It was powered by VIP and post pandemic will continue growing mass at a much faster pace. Since 2015 the Macau market was on a pace to recovery that was stopped cold by the pandemic. The decline in VIP began in 2014 related to many factors emanating from Beijing concerns over corrupt officials showing up in large numbers at Macau casinos.</div></section>


Melco's current trading range does not yet reflect its long term vision to become a global leader in gaming, entertainment and integrated non-gaming projects wherever opportunities arise. It's latest targets development in the Greater Bay Area.
At US$17 a share investors can not only buy into a Macau recovery cycle for early 2022 but the first, true integrated casino resort aimed at the EU and Mideast markets.
It huge undertaking in Guangdong will resonate positively in Beijing when Macau reconcession negotiations begin upstream.
 Long- term analysts of the Asian gaming sector have periodically called everything from strong buy to underweight on the shares of Melco Resorts &amp; Entertainment Ltd. (NASDAQ:MLCO). Naturally these gyrations reflected both macro headwinds and catalysts impacting investor sentiment on the stock. Pre-pandemic 2019 saw 12 analyst calls on MLCO to BUY, none to sell or underperform. But most recently, Morgan Stanley and Credit Suisse have downgraded MLCO respectively from overweight to equal weight and from neutral to underperform.   Such swings are understandable given the current macro environment still reflecting pandemic travel bans in place.  Also 1Q21 operating results for most stocks in the sector are showing an early trickle rather than a headlong rush of pent up demand in progress. That rush should begin by mid-Q3 across the board if travel bans begin to fall. Unlike many peers, MLCO as a company, has been a bit harder to understand for investors. That is because its high energy, fast moving CEO/founder, Mr. Lawrence Ho, 45, is one of the most active global asset allocators in the industry. He has speedily moved into deals and likewise, having been dissatisfied with results, sold out of deals.Melco is positioned for price recovery at near 52 week low.The relatively recent history of the company’s moves demonstrate this proclivity. But beneath it all there is in our view, a crystal clear agenda, a keen business model and firmly implanted corporate goal at work here: MLCO sees itself as a global leader and not only in pure play Asian casinos. Just this week the company announced a bold, new non-gaming project of its parent, Melco International Development Ltd  (HK 0200). It has won a joint bid with Hong Kong listed Agile Group (HK3383) to develop a multi-billion dollar entertainment/hospitality project in Zhongshan, Guangdong. Estimated completion date is 2025.The huge project in Guangdong will be a major contribution to the development of the Greater Bay Area.The complex will cover 750,000 square meters in a site just north of Zhuhai. It is expected to contain commercial, residential, recreational, entertainment elements in addition to offices, hotels, apartments, wellness centers, restaurants, shopping malls and a theme park. It will be jointly managed and owned by the two companies and is a bold expression of conviction shared with Beijing of the high goals for the Greater Bay area.It is partnered with Mainland realty giant Agile.Corporately, the project will be a JV to be known as Zhongshan Yachen and a subsidiaries to be called Melco Zhongshan  and Creation Elite Ltd which will acquire the land for ~ US $616M as well as fund the project and divide profits from its various verticals across the diverse elements. EO Ho, left little doubt that the non-gaming project extends Melco’s reach into its stated goal of becoming a global leader in integrating world class entertainment facilities, using he says, “a distinctive model of integrating quality leisure, culture and entertainment”.   Added Ho, “We are determined to play an active role in the development of the Greater Bay area and to leverage the incredible expertise of our group in non-gaming activities.” Read between the lines and it becomes apparent that this project represents a highly perspicacious effort by Ho that plays wisely into Melco’s long- term casino vision as well. The project will be in Guangdong sitting in the heart of Macau’s most fecund feeder market. And clearly it will be music to the ears of Beijing, which has gone repeatedly on record as pushing Greater Bay Area development, particularly in non-gaming. Ho has made an assiduous effort over time both in business as well as serving on many mainland public interest boards to position his company favorably with Beijing’s educational as well as its  economic goals. Although the project will not realistically begin being accretive of MLCO earnings at least after 2025, it exposes a value deep in the company’s business model: CEO Ho, will move anywhere, at any time, to produce projects that not only add new value, but enhance existing value to its properties. And that is one of the catalysts for the stock we have not seen finding their way into the MLCO trade for several years. It has been stuck in a narrow trading range due to the pandemic, but also because the market does not apparently see a premium in Ho’s agenda. Agile Group owns two companies listed on the Hong Kong exchange. It conducts business in 200 Chinese cities and has over RMB300b in assets. Its skill sets are firmly established in property development, renewal and environmental management. We note here that MLCO has long been a casino industry leader in environmental management. MLCO’s ESG activism presents the JV as a seamless partner match. The recent history of MLCO reveals a vision beyond Macau Followers of the stock were not surprised by this major Greater Bay Area development move by MLCO. MLCO’s recent investment historyLawrence Ho continues a pattern of asset development, sales and acquisitions established since 2014.2004: Melco partnered with James Packer to develop casino resorts in Macau under the corporate name of Melco Crown. The company built properties successfully. But after Beijing arrested Crown marketing people for overly aggressive recruitment of Chinese VIP play, and other disputes, Ho exited the partnership in 2017. 2012: MLCO entered the Vladivostok Russian Far East market with its Tigre de Cristal casino aimed at the north China gaming customer. 2015: Against what had been a huge Beijing crackdown on Macau junkets and money laundering in general, Melco opened its very successful City of Dreams property in the Entertainment Zone of Manila. 2016: Japan finally passed its controversial integrated resorts legislation. Melco was among the earliest potential developers to express avid interest. It promptly dispatched executive teams to Tokyo as a would-be, skeletal management team. Since then, most global gaming giants who originally shared Ho’s enthusiasm for Japan, have left citing ROIC concerns. Melco remains steadfast, hoping to win the bid for the Yokohama IR. Realistically the launch may be seven to eight years away, but Melco remains committed. 2017: Melco was the successful bidder for an integrated resort project on the Mediterranean island of Cyprus. Construction is in progress despite the pandemic. The fully integrated casino resort will have 500 rooms and a complete amenity package to offer EU and Middle East gamblers. It will be the first truly, modern integrated casino resort in that area. 2017: Ho divested his entire interest in the Russian asset dissatisfied with its performance, but mostly due to what he saw as  Moscow’s confused, punative tax structure that inhibited the potential of long -term profitability there. 2018: Melco opened its design forward 770 room Morpheus Tower in Macau aimed at building its market share of premium mass and VIP play there. Its exoskeleton design is unique in the marketplace and indicative of Ho’s vision to depart from norms to achieve the goals of the long term MLCO business model. What this history shows is a nimble management mind -set that has not set geographical or financial limits against opportunities it sees coming near term and long term.  During this period Ho has also shifted management teams between properties, exited some, added others to maximize revenues, cost savings and an assured grasp on their markets’ opportunities and challenges. In its most recent earnings report, MLCO showed a dramatic increase in market share moving from 15% to 21.4% y/y in Macau. Gains we made in both VIP and mass segments. While results continue to be highly impacted by the pandemic as long as travel bans are in place, MLCO’s significant upside market share performance YTD warrants investor attention. Several portfolio managers we spoke to who are long term holders of the stock agreed that despite Ho’s visionary propulsion globally, it still trades largely based on Macau and Manila results only. “Even before the pandemic hit, MLCO’s price never seemed to find support substantially above the US$40 level,” said one source. “Investors saw stronger upsides in many Macau peers. Melco was respected and believed   to be well run, but other major players seemed to present more positive sentiment at support levels trading much higher. MLCO a capsule case for a higher PT: USD At writing, analyst consensus has a PT of $21.47, which is ~ $10 higher than its price at writing of $17.23. On the surface that would seem to suggest a nice upside that is expected to rise directly linked to the potential lifting of travel bans by late 3Q or early Q421.  Yet in our view, it follows something of a historic pattern for the stock with no baked in premium for what we see as a far more bullish outlook for the company both short and long term. Melco Market cap: $8.2b 52 week range: $14.50-$23.65. The stock is only ~$3 higher than its 52 week low which takes into account performance during the worst quarters of the pandemic. And as noted, we think the 52 week high doesn’t bake in performance increases we see coming in the 3rd Quarter of 2021, but mostly in the first two quarters of 2022. Among the catalysts we see is the completion of Phase One of MLCO development in Macau which will add 900 rooms to the Studio City property, water parks, a Cineplex theater, expanded dining and MICE capacity. The room supply will make a contribution in 2022 to MLCO’s mass business. Property upgrades are already underway at City of Dreams. Investment dollars earmarked for both existing properties as well as the new projects just announced signals MLCO’s continuing execution if its ambitious goals firmly in place.  1Q21 earnings shows a pandemic impacted adjusted net loss of -$208m vs. -$343m in 2020. Cash and debt 1Q21 cash and cash equivalents: $1.5b vis $1.7b for 2020 reflecting largely the cash burn level during the deep pandemic months of 2020 Overall assuming a diminishing cash burn level going forward, plus a rising share of market even in a very slowly improving visitation level until Q3/4 we believe MLCO will have more than enough cash on hand to see it through  past the effective end of the pandemic. Long term debt: $6.3b. Current ratio (mrq) 1.89. If we presume that a standard “healthy” measure of current ratios for most companies would be ~1.5, MLCO’s does not appear to be excessive given the damage of the pandemic to all balance sheets in the sector.( Also as is widely understood, brick and mortar casino businesses are voracious consumers of capex due to two factors. One, the nature of the business requires a constant upgrade of facilities to remain competitive. And two, they must be ever ready to pounce on opportunities as they are often a result of the quixotic actions of legislatures in legalizations). Interest expense for 1Q21 was $114m vs. $202m for 2020. So with a growing share of market in its core Macau business, its continuing commitment to expand and upgrade and its longer term vision to break into the EU market with an IR and now its move into a massive non-gaming project on the mainland of China, we have a buy scenario. Using standard data points to measure MLCO stock performance in normal times simply does not provide a deeper picture of a company in unusual times as those we are now beginning to exit. On a standard basis MLCO may appear to be fully valued if not overvalued. But taking a larger business model perspective in the hands of a visionary, skilled management, we believe MLCO has more run room than consensus PTs.On that basis we revise guidance on the stock to $37.50 post pandemic by 1Q22 or before. We in the early recovery stage of the pandemic with many uncertainties still looming before the Asian gaming industry. Most critical among them of course is the continuing travel bans remaining in place due to concerns about isolated flare ups of the virus or variants. While China continues to move rapidly toward its inoculation goals, overall revenue streams and arrivals in Macau have not yet reached the levels of growth that suggest a higher level of 2021 revenue goal than what has previously been targeted by some analysts. Most recently estimates of 2021 GGR have been downgraded to ~44% of the 2019 base year. Understandably this has kept the PT's of many players in the space hemmed in by a far more narrow trading range than what would be the case. Among them, MLCO's price relative to its peers continues at a level we believe remains attractive.Note the growth rate until 2013. It was powered by VIP and post pandemic will continue growing mass at a much faster pace. Since 2015 the Macau market was on a pace to recovery that was stopped cold by the pandemic. The decline in VIP began in 2014 related to many factors emanating from Beijing concerns over corrupt officials showing up in large numbers at Macau casinos.     

Melcos Bold Plan for a Non-Gaming Complex in Mainland China Reinforces Global Ambitions