20171130-交银国际证券-新濠国际发展-00200.HK-Narrowing_competitive_edge_5页_924kb

Melco International (200 HK) Summary

Core Content

Melco International is a major player in the Macau gaming sector, operating through its 51.2% owned subsidiary, Melco Resort (MLCO US), which manages four casinos in Macau, including Studio City and City of Dreams. The company also has a presence in the Philippines and is part of the broader Melco Group, a significant conglomerate in Macau.

Financial Highlights

Key Financial Insights

• Revenue Growth: The company experienced a dramatic increase in revenue in 2016, with a 5,937.4% YoY growth, but growth slowed significantly in subsequent years.
• Net Profit: Net profit surged in 2016, but declined in 2017 and remained relatively stable in 2018 and 2019.
• EPS Growth: EPS saw a significant increase in 2018 (119.5%) and 2019 (9.7%), reflecting improved profitability.
• Valuation Metrics: The P/E ratio dropped from 357.1 in 2015 to 13.0 in 2019, indicating a significant valuation correction. The EV/EBITDA ratio is 10.9x for 2018E, below the sector average of 14.6x.
• EBITDA Growth: EBITDA increased by 3.6% in 2017E, 6.9% in 2018E, and only 0.7% in 2019E, suggesting a slowdown in operational performance.

Market Performance and Outlook

• Current Price: HK$ 23.30
• Upside: +5.2%
• Target Price: HK$ 24.50 (up from HK$ 22.00)
• Stock Data:
  • 52-week high: HK$ 24.10
  • 52-week low: HK$ 9.91
  • Market Cap: HK$ 35,757 million
  • Issued Shares: 1,535 million
  • Avg Daily Vol: 3.71 million
  • 1-Month Change: +13.66%
  • YTD Change: +121.28%
  • 50-day MA: HK$ 21.95
  • 200-day MA: HK$ 18.20
  • 14-day RSI: 57.40

Competitive Position and Challenges

• VIP Market: Melco successfully expanded its VIP business since 4Q16, capturing significant market share in the VIP segment.
• Mass Market: However, the Mass market share remained flat YoY in 9M17 and may even decline in 2018E due to increased competition from Wynn Palace and potential faster growth from MGM Cotai.
• Sector Comparison: The company's growth in VIP and Mass markets is broadly in line with the sector average, but its relative strength in VIP has narrowed, resulting in a 1.4ppt market share loss in 3Q17.
• Cluster Momentum: The impact of new properties like MGM Cotai and Morpheus Hotel on the eastern Cotai cluster is still uncertain, and the company's performance may be affected by the competitive landscape.

Analyst Recommendations

• Rating: Downgraded from Buy to Neutral
• Reason: The upside has narrowed due to the challenges in the Mass market and the limited value-add from the proposed spin-off of Studio City.
• EV/EBITDA Target: Maintained at 11.0x, reflecting a 25% discount to the sector average.
• Spin-off Impact: The spin-off of Studio City may not add significant value, as MLCO is only trading at par to Melco in terms of 18E EV/EBITDA.

Strategic Considerations

• Holding Company Discount: The stock is expected to trade at a discount due to its holding company structure, even though its financial performance is stable.
• Dividend Policy: Dividend yield has remained constant at 0.2% across the years, indicating a consistent payout to shareholders.

Conclusion

Melco International's performance in the Macau gaming sector has shown significant growth in the past, but recent trends suggest a slowdown. The company's strategic initiatives in VIP have been successful, but the Mass market share has been affected by competition. Despite this, the stock remains attractive based on its EV/EBITDA valuation, which is below the sector average, and the company's holding structure. However, the downgrade to Neutral reflects the narrowing upside and potential risks associated with the competitive environment and the spin-off proposal.