Melco Liquidity Strongest Among Macau Peers, Says Research Firm

Posted on: August 24, 2022, 02:22h. 

Last updated on: August 25, 2022, 12:59h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Melco Resorts & Entertainment (NASDAQ: MLCO) can survive well into 2024 at current cash burn rates, assuming near-zero revenue persists in Macau, according to a research firm.

Melco Resorts CEO Lawrence Ho
Melco Resorts CEO Lawrence Ho. A research firm says the operator can survive 22 months at current cash burn rates. (Image: Bloomberg)

That implies the City of Dreams operator has a superior “liquidity runway” relative to Macau rivals such as MGM China, Sands China, SJM Holdings, and Wynn Macau, notes Lucror Analytics senior credit analyst Leonard Law. At the end of the second quarter, Melco had $1.65 billion in cash on hand and access to $1.1 billion in credit.

We estimate that this would be sufficient to support 22 months of cash burn — until April 2024 — under the worst-case scenario of zero revenues,” said Law.

In Macau, Melco operates City of Dreams, Morpheus, Studio City, and Altira. On the company’s recent second-quarter earnings conference call, CEO Lawrence Ho signaled an ongoing commitment, including new investments, to the special administrative region (SAR). That’s despite a strict coronavirus policy making it impossible for operators to generate profits there.

Melco, Rivals Just Trying to Survive

For much of 2022, analysts expressed concern about cash burn rates at Macau’s integrated resorts. They were also worried about the ability of gaming companies to survive under harsh operating conditions.

Issues include high cash-burn rates, mounting debt, and what some analysts view as limited financing avenues. Regarding access to capital, some market observers believe US-based parent companies may need to funnel cash to Macau units, as Wynn Resorts (NASDAQ: WYNN) and Las Vegas Sands (NYSE: LVS) recently did to support those operations.

Earlier this week, MGM China announced it’s injecting $594 million into MGM Grand Paradise to comply with Macau’s new gaming laws.

Law, the Lucror Analytics analyst, said Melco’s 22-month survival timeline far exceeds the 14, 12, and 11 months he estimates for Wynn Macau, Sands China, and MGM China. It’s also more than double the nine months he forecasts for SJM Holdings, which is almost universally viewed as the most financially vulnerable of the six Macau concessionaires.

His report doesn’t mention Galaxy Entertainment, which is widely seen as the most financially sturdy of the Macau operators.

Melco Liquidity Details

Law’s forecast on Melco’s expenses and liquidity accounts for various factors, including daily expenses and enhancements at the operator’s Macau properties.

The outlook assumes “an operating expenses run rate of US$1.7-million per day — unchanged from second quarter 2022 — and maintenance capital expenditure of US$5 million per month,” said the analyst.

His view also accounts for $250 million allocated for Phase 2 at Studio City and the $620 million in cash Melco needs to set aside to comply with capital reserve requirements included in Macau’s updated gaming laws. However, analysts believe Melco needs to identify avenues for trimming debt.

Moody’s Investors Service forecasts Melco’s adjusted debt to earnings before interest, taxation, depreciation, and amortization (EBITDA) will be 7.3x in 2023. That’s before declining to 4.8x in 2024. But even the 2024 figure is well above the 3.3x seen in 2019.