Description

In a market where many “reopening” stocks are trading close to or above pre-Covid levels, MLCO stands outs as a stock that could appreciate significantly as the global Covid pandemic continues to fade. In the US, the Covid pandemic is disappearing in the rear-view mirror, but many Asian geographies that had done a great job containing the pandemic (due largely more strict travel/quarantine restrictions) are now seeing upticks in Covid (low vaccination rates combined with a relaxation of restrictions). Within geographies with high vaccination rates, case counts have fallen dramatically so I believe it is a matter of when (not if) vaccinations become more widely distributed in Asia, and regular travel resumes. As regular travel patterns resume, MLCO earnings should recover to pre-pandemic levels. While Chinese domestic travel has largely returned to pre-pandemic levels, Chinese overseas tourism remains constrained suggesting there is pent up demand for Chinese to travel abroad. Since Macau is part of China but not on the mainland, I believe that Macau will be one of the first geographies to benefit from the resumption of Chinese overseas tourism.

Macau gaming industry revenues fell over 90% YoY in Apr 2020 - Sep 2020 as China stopped issuing visas for Macau. From Oct 2020 - May 2021, gaming revenues have recovered somewhat but are still down 60-70% from pre-Covid levels. From a high-level perspective, I believe that MLCO (and other Macau casinos) will return to 2019 earnings levels as travel in Asia resumes. MLCO’s earnings recovery path has puts and takes including potentially decreased VIP volumes vs pre-pandemic history, offset by expense cuts and the $1.2-1.3bn 900-room expansion of the Studio City property (opening late 2022). But overall, there seems to be a reasonable path to getting back to 2019 earnings some time in 2022-2023. Admittedly, the timing of the recovery could be pushed out, so it is hard to be precise on timing. However, I believe the stock market will begin to price in a recovery in earnings when Covid is viewed as under control and well before the actual earnings materialize. This is evidenced by MLCO’s stock briefly breaching $23/share in March on reopening optimism.

Based on current balance sheet values, MLCO has a market cap of $8.2bn, net debt of $4.7bn, and minority interest of $0.7bn, resulting in a TEV of $13.6bn. This is a multiple of 8.6x 2019 EBITDA of $1.6bn. However, I estimate that the minority interests in two casinos (~45% share of the Studio City casino in Macau and the ~40% share of the City of Dreams casino in the Philippines) are worth ~$2.3bn rather than the balance sheet value of $0.7bn, resulting in an “Adjusted TEV” of $15.2bn, or 9.6x 2019 EBITDA. The average TEV / 2019 EBITDA for other publicly traded Macau casinos (Wynn Macau, Sands China, and MGM China) is 12.2x. Thus, MLCO trades at a ~20% TEV / EBITDA discount to other Macau casinos. Assuming MLCO trades at 12.0x Adjusted TEV / 2019 EBITDA (slight discount to comps), MLCO’s stock is worth $25/share, resulting in ~45% appreciation over the next 1-2 years.

Catalyst

Covid recedes in Asia, allowing Chinese travel patterns to normalize