Melco Resorts and Entertainment

Melco Resorts' second-quarter gross gaming revenue, or GGR, and adjusted property EBITDA in Macao fell 10% and 25% quarter on quarter, respectively. The company now expects to only resume its dividend program in 2027, a one-year delay from prior guidance.

Why it matters: The results slightly missed our expectations, with a sequential market share loss of 0.9 percentage point to 14.6%, and a 4.4-percentage-point decline in adjusted property EBITDA margin, reflecting a seasonal demand weakness and competitive pressure. The dividend postponement is disappointing, underscoring that balance sheet deleveraging remains a priority given the company's heavy debt and interest burden. We lower our 2026-30 adjusted EBITDA forecasts by 4%-6% to reflect slower revenue growth and slightly lower margin assumptions, as intensified competition and Melco's increased focus on premium clientele should temper margin expansion.

The bottom line: We cut our fair value estimate for narrow-moat Melco Resorts to USD 8.00 per share from USD 9.00. We continue to view the shares as undervalued, which are trading at 5.8 times of our forecast 2026 EV/EBITDA, at the lower end among Macao casino peers. Meanwhile, Melco is set to launch its all-suite REM Hotel in October. Combined with a revamp of retail space, and food and beverage offerings, this should further strengthen Melco's presence in the premium market and drive foot traffic and earnings growth.

Key stats: Melco's overseas operations—including Manila and the Mediterranean—remained solid, with adjusted EBITDA rising 15% quarter on quarter to USD 54 million, accounting for 17% of total adjusted EBITDA. We expect these businesses to hold steady in the second half of 2026.

Our fair value estimate is $8.00 per share, which implies a forward enterprise value/adjusted EBITDA of 6 times for 2026. Our weighted average cost of capital assumption is 10.8%.

We expect a 3% compound annual growth rate in revenue between 2025 and 2030, as a steady increase in mainland Chinese visitor arrivals to Macao, coupled with the opening of Studio City phase 2 in 2023 and the upgrade of its 330-room Countdown hotel into an all-suite property in 2026, will drive gaming and nongaming revenue growth for Melco Resorts. We forecast an average adjusted EBITDA margin of 26.5% for 2026-30, compared with 27.2% on average in the prior three years, as competition among Macao casinos remains intensifying, and we expect costs to rise amid higher reinvestment in both gaming and nongaming offerings to boost revenue and defend market share. As such, we forecast Melco's adjusted EBITDA to grow at a five-year CAGR of 2.5% between 2025 and 2030.

We believe Melco Resorts warrants a narrow economic moat rating because of its casino license in Macao, a valuable intangible asset that creates a high regulatory barrier to entry. Melco Resorts is one of the six primary concessionaires with a license to operate casinos in Macao, the only legal gaming hub in China.

We believe Macao has a strong structural demand story, and we think the low penetration rate, which is defined as visitations to Macao from a region divided by the regional population, and rising income levels in China, will continue to support growing demand over the next decade. According to Macao SAR Statistics and Census Service, the number of visits to Macao from mainland China was 29 million in 2025, implying a penetration rate of only 2%, compared with 12% of Las Vegas. Although the visits from the Greater Bay Area, which includes Hong Kong and nine larger cities within the Pearl River Delta, were as high as 25%, other regions outside Guangdong province, where 92% of China’s population resides, saw extremely low penetration rates lower than 2%. Nevertheless, the infrastructure facilities continued to improve, including the high-speed rail networks and the Hong Kong-Zhuhai-Macao Bridge, which sees increasing connectivity from mainland cities to Macao SAR. And now, five-hour rail travel to Macao covers about 25% of the mainland population, and two-hour air travel connects more than 40% of the population.

On the supply side, the Macao SAR government sets a cap of 6,000 tables for the new 10-year concession period between 2023 and 2032. This will help ensure the Macao gaming industry’s healthy growth over the long term, allowing casino operators’ return on invested capital to exceed the weighted average cost of capital easily.

The Chinese central government seeks to contain gambling to a single, localized region; it’s unlikely to legalize gambling in another city in mainland China. Legalizing gambling in another Chinese city, especially in the south of China near Macao, would lead to substantial cannibalization of gaming revenue in Macao and undermine Macao’s unique appeal as the Las Vegas of the East, which we highly doubt is a consequence the Chinese central government would like to see. Hence, we believe Macao casinos operate in a long-lasting oligopoly, at least for the next decade.

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 MICE space, as well as other nongaming attractions. All these would help the Macao government to diversify its economy and position it well amid Macao's long-term development.

With the competitive advantage from intangible assets, we think Melco will be able to maintain excess normalized returns in midcycle, providing support for our narrow moat rating. However, we do not think the company warrants a wide moat rating, given that the next concession is shortened to 10 years, with uncertainty on the terms of future casino license renewal.

The Macao gaming sector is well positioned to benefit from gaming demand recovery in Macao, which will allow the sector to restore its profitability meaningfully.

Melco's strengths rest in serving high-margin premium mass patrons, so we think the migration of former junket clients to the premium mass segment brings opportunity for Melco.

The launch of the luxury, all-suite REM Hotel in October 2026 will further strengthen Melco's presence in the premium market and drive earnings growth.

Macao casinos face harsher license-renewal terms such as shorter license duration, a requirement of nongaming investment, and a 1% increase in gaming taxes.

As regional and Macao casino operators expand their footprint in Asia’s gaming market, competition for the premium market is likely to intensify. Higher reinvestment may also be needed to attract premium mass businesses to Melco.

Stricter enforcement of government policies, such as junket regulations, visa restrictions, visitor caps, antigraft campaigns, or a smoking ban, could have a significant adverse impact on Melco.