Premium Mass Dependence And Rising Promotions Will Pressure Margins Yet Support Long-Term Upside

Catalysts

About Melco Resorts & Entertainment

Melco Resorts & Entertainment operates integrated casino and entertainment resorts across Macau, the Philippines, Cyprus and Sri Lanka.

What are the underlying business or industry changes driving this perspective?

• Although Macau properties are seeing solid property EBITDA and record mass tables GGR at City of Dreams, the focus on premium mass customers keeps earnings sensitive to competitive promotions and concentrated high value play. This can cap margin improvement and limit the durability of EBITDA growth.
• While the company is reallocating tables and machines from closed venues into higher traffic areas in Macau to support revenue efficiency, ongoing closures of smaller properties and renovation of the Countdown Hotel introduce execution risk and potential disruption. This could pressure near term revenue and property EBITDA.
• Although integrated resorts in the Philippines and Cyprus reported higher property EBITDA in the latest quarter, exposure to regional geopolitical tension, seasonality and reliance on tourism flows may create volatility in visitation and spend. This can lead to uneven consolidated revenue and earnings.
• While City of Dreams Sri Lanka opens up access to the growing South Asian tourism and gaming market, the property is still in very early ramp up with a need to win share from incumbents through promotions. This can weigh on net margins until a broader base of higher end customers is established.
• Although group adjusted property EBITDA of about US$380 million and a liquidity pool of US$2.6b provide some support for future investment, higher promotional spending, special events and support for large scale activities in Macau can lift daily OpEx and keep EBITDA margins and net earnings under pressure if revenue does not keep pace.

Assumptions

This narrative explores a more pessimistic perspective on Melco Resorts & Entertainment compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Melco Resorts & Entertainment's revenue will grow by 4.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.1% today to 7.9% in 3 years time.
• The bearish analysts expect earnings to reach $460.0 million (and earnings per share of $1.13) by about January 2029, up from $104.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 8.5x on those 2029 earnings, down from 24.9x today. This future PE is lower than the current PE for the US Hospitality industry at 22.2x.
• The bearish analysts expect the number of shares outstanding to decline by 6.92% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.46%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The focus on premium mass and high value players, both in Macau and in new markets like Sri Lanka, concentrates revenue in a relatively small customer base, so any pullback in spending from these guests or a shift in preference toward lower stakes play could weigh on gaming volumes, property EBITDA and earnings over time.
• Management repeatedly highlights a very competitive but "not irrational" promotion environment in Macau. However, ongoing efforts by all six concessionaires to gain or defend market share could keep reinvestment costs elevated for longer, limiting the scope for margin expansion and putting pressure on net margins and group earnings.
• The ramp up of City of Dreams Sri Lanka targets mainly Indian tourists and aims to win share from incumbents through better product and higher promotions. If tourism growth or customer adoption is slower than hoped, the property may require higher support costs for longer, weighing on consolidated revenue growth and group net margins.
• The business is continuing to spend heavily on projects such as the US$125 million Countdown Hotel renovation and an indicated US$400 million of 2026 CapEx. If these projects do not translate into sustained higher visitation and spend, the incremental depreciation and operating expenses could drag on future property EBITDA and earnings.
• Although the company has been paying down debt and has no material maturities in 2026, interest expense guidance of US$115 million to US$120 million for the fourth quarter of 2025 highlights that leverage is still meaningful. If operating trends soften or promotional intensity rises, the fixed interest burden could limit flexibility and constrain net earnings growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Melco Resorts & Entertainment is $8.5, which represents up to two standard deviations below the consensus price target of $10.83. This valuation is based on what can be assumed as the expectations of Melco Resorts & Entertainment's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $12.5, and the most bearish reporting a price target of just $8.5.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $5.8 billion, earnings will come to $460.0 million, and it would be trading on a PE ratio of 8.5x, assuming you use a discount rate of 13.5%.
  
• Given the current share price of $6.65, the analyst price target of $8.5 is 21.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.