The performance is lower than the growth rate of the industry, City of Dreams and Shadow Exchange brothers.
MLCO.US 2Q18, a subsidiary of 200.HK, a Hong Kong stock, had net revenue of $1.2 billion, down 5% from a year earlier and below expectations of $1.26 billion, while property EBITDA was $356 million, up 8% from a year earlier and higher than expected of $332 million. In gambling (excluding Manila casinos), gross gaming revenues rose 2.8 per cent year-on-year to $1.32 billion, below 17 per cent of the industry level. VIP flow rose only 2% year-on-year, gross revenue was flat at $640 million compared with last year, down from 14% in the industry; the slowing midfield growth rate was only 2% to $560 million, significantly lower than the industry's 21%; this quarter the company increased its dividend by 7%, from $0.045 per share to $0.048 per share, compared with 0.145/ADS, where the current dividend yield is 2.14%.
On the casino side, Cash Bull's performance slowed, with net revenue of $560 million, down 13 per cent from a year earlier to $170 million and 2 per cent from a year earlier. VIP's flow and gross revenues both fell 14% year-on-year, to $305 million. Midfield flow rose 10 per cent year-on-year, while gross revenue fell 3 per cent to $336 million. Due to the opening of the City of Dreams Morpheus Hotel on June 15, as well as the closing work of the new hotel in May-June and the modification of the Yingshang Hotel, the company also actively introduced its own VIP and high-end midfield customers after the opening of the hotel. For Studio City International Holdings, property net income fell 5 per cent year-on-year to $314 million, while EBITDA fell 9 per cent to $73 million. Dragged down by the midfield win rate, although the flow increased by 23% year-on-year, gross revenue increased by only 13% to US $200 million (24.5% lower than 18Q1's 27.4% and 17Q2's 26.8%). VIP streams rose 30 per cent year-on-year, while gross revenue rose just 6 per cent to $165 million. In addition, Xinhaofeng, which specializes in VIP, has performed relatively well this quarter, with VIP gross revenue rising 31 per cent year-on-year to $173 million. On the whole, although June belongs to the off-season of the industry, the performance of Melco 2Q is far below the industry level and the performance is far from satisfactory.
The July-August data is expected to rebound in a short period of time. September returns to the off-season, and Melco's performance is under downward pressure with the economy.
We believe that Melco's operating data may rebound in the short term from July to August, but there is a risk of volatility in the company's performance in the long run as macroeconomic downward pressure increases. As the summer vacation in August is the peak tourist season, and with the recovery of midfield passenger flow brought about by the end of construction of Morpheus, the company said that the flow of midfield in July has increased by 20% compared with the same period last year, but September will still be the off-season in Macau. At present, the tightening of domestic shed reform policy, the devaluation of RMB, the reduction of social finance and other factors have caused macroeconomic downward pressure since the second quarter, corresponding to the 18Q2 Macau VIP industry growth rate is lower than the midfield growth rate for the first time in nearly a year. According to our statistics since 2006, whenever Macau's VIP growth starts to be less than the midfield growth rate, Macau's overall gaming revenue will enter a downward cycle, and we believe that VIP business, which is dominated by large capital credit, will bear the brunt. Melco is dominated by high-end midfield and VIP. Melco's VIP revenue accounted for 49% in the second quarter, while gross revenue fell 14% from a year earlier, and has begun to show weakness. Although the domestic liquidity pressure has eased recently, the long-term effect remains to be seen.
The valuation gradually reflected weakness, lowering the revenue forecast of Melco Boya from "buy" to "hold", Melco Boya to US $26 and Melco International TP to HK $24.50.
Although 18Q3's operating data are expected to rebound in the short term, the economic downturn has a negative impact on the performance of VIP and Melco, which has a high proportion of high-end midfield. Combined with 18H1's performance, we reduced the company's 2018 revenue, VIP gross revenue from 16% year-on-year growth to 7% year-on-year growth, lower than our VIP industry forecast of 15%, midfield gross revenue from 22% to 13%, compared with our midfield industry forecast of 12%, the corresponding company's 2018 EBITDA revenue decreased from US $1.7 billion to US $1.45 billion. Due to Macau's lower-than-expected GGR growth in May-June, Macau gaming stocks also fell back with the market, and Melco's US and Hong Kong stocks all withdrew nearly 30%, which is related to the company's overall 18Q2 performance lower than the industry. Although MLCO.US 's TTM EV/EBITDA is 13x, valuations are lower than April highs of 15x and historic highs of 21x, but valuations are more difficult to improve under the trend of downside risks. On the whole, we think that the historical median level of EV/EBITDA valuation of MLCO.US in 2018 is 10.3x, and the corresponding target price is lowered from US $38 to US $26. At the same time, we believe that the discount of Melco International to Melco Boya may be difficult to narrow and maintain around 30%, corresponding to our reduction of the target price of 200.HK from HK $35 to HK $24.50. The parent company is also downgraded from "buy" to "hold".
Risk tips: tighter policies and lower-than-expected consumption upgrades lead to slow progress in the company's midfield business, etc.