WEALTH SECURITIES INC Melco Resorts and

Equity Research Entertainment (Phils) Corp

(MRP)
BUY
Gaming
Target Price: P14.82 (from P9.56)

Company Update 4 Sep 2017

Higher earnings estimates, TP on strong 1H17 results

Share price correction renders valuation more attractive. The share price of
Melco Resorts and Entertainment (Phils) Corp (MRP) has corrected by 13.4% from Company Snapshot
its recent peak. This has rendered the company’s valuations more compelling. At last
Friday’s close, MRP was trading at 6.3x 2018E EV/EBITDA. In the meantime, MRP Price (P) 8.89
has been sustaining its turnaround. Even if we factor in higher promotional and Shares O/S (m) 5,665
Market Cap (Pm) 50,365
marketing costs in 1H17 amid tight competition, the strong growth momentum for 52-wk price range (P) 3.53-10.27
gross gaming revenues has led us to upgrade our 2017E/2018E earnings estimates 12-mo ave T/O (Pm) 51.42
to P486m/P1.77b from (P274m)/P1.53b previously. The continued ramping up of
operations, rising contribution of junket operators, increased visitations, and Major Shareholders
resurging regional gaming sector should all contribute to MRP’s earnings rebound MCE Phil Invstmnt Ltd 72.8%
Others 0.2%
and provide catalysts to the share price. We now have our TP at P14.82 which
equates to 10x 2018E EV/EBITDA and maintain our BUY rating on MRP. Free Float 27.0%
Earnings rebound triggers share price rally. MRP has sustained the rebound in
earnings over the past two quarters, thanks to the strong growth in gross gaming
revenues (GGR). 1H17 VIP GGR grew 109% YoY to P9.79b owing to the 88% rise in
rolling chip volume and the 34bps increase in win rate to 3.5%. Mass market GGR Price Performance
also grew 34% to P4.63b as the 35% increase in table games growth more than
compensated for the 20bps decline in hold rate to 28.6%. Total machine GGR also 1m 6m 12m
rose 67% to P4.51b given the 64% growth in machine handle and the 11bps rise in MRP -1.2% +75.7% +133.9%
hold rate to 6.05%. Total non-gaming revenues, meanwhile, grew 12% to PP1.1b. PSEi -0.7% +10.4% +2.2%
These enabled net revenues to grow 64% to P16.68b. However, this outpaced the
48% rise in operating expenses largely due to higher gaming taxes (+60%), payment
to its partners (+102%), and other expenses which include junket fees and marketing
costs (+106%). On the other hand, these were partly cushioned by lower employee
benefit expenses (-0.5%) and depreciation and amortization (-5.6%).
Better-than-expected results lead to earnings estimates upgrade. EBITDA grew
67% to P3.91b, yielding an EBITDA margin of 23.5% (vs. 23% in 1H16). These
accounted for 57% of our full-year estimates. In light of MRP’s strong earnings
performance in 1H17, we have adjusted our earnings estimates. Even if we assume
higher promotional and marketing costs in 2H17 in light of tighter competition, our
2017E/2018E earnings estimates are now at P486m/P1.77b from (P274m)/ P1.53b
previously.
TP raised to P14.82. We also now have our target price at P14.82 as we roll over
into our upgraded 2018E estimates. Our TP equates to 10x 2018E EV/EBITDA.
What could support MRP’s share price going forward is the continued rebound in
MRP earnings as it further ramps up operations. MRP should also benefit from
increased visitations arising from concerted efforts by casino operators at the
Entertainment City to promote their facilities, improved access with the completion of
the NAIA expressway, and warming ties with China that should provide a boost to
tourism. The country’s gaming sector should also benefit from the ongoing
resurgence in gaming demand across the region.

Financial and Valuation Highlights

in Pm 2014A 2015A 2016A 2017E 2018E
Revenues (Pm) 430 13,727 23,419 32,823 37,701
Net Income (6,303) (9,144) (1,585) 486 1,773
EPS (P) (1.35) (1.82) (0.28) 0.09 0.31
P/E (x) (6.6) (4.9) (31.7) 103.1 28.3
EBITDA (3,945) (1,901) 5,642 7,666 9,000 Analyst : Jason Lee
EV/EBITDA (x) (17.3) (37.7) 12.2 8.2 6.3 T: 634.5038 local 8165
BVPS (P) 2.6 1.2 0.9 1.0 1.3 E: jason.lee@wealthsec.com
Source: Wealth Research estimate, company data
A - Actual results E - Wealth estimates
4 Sep 2017 MRP

Fig 1. Salient points of MRP’s 1H17 results

1H17 1H16 YoY Wealth % of FY 2Q17 2Q16 YoY
(Pm) (Pm) Chg (%) 2017E (Pm) 2017E (%) (Pm) (Pm) Chg (%)
Revenues
Casino 15,560 9,161 69.9 27,482 56.6 8,261 5,109 61.7
Rooms 520 472 10.3 1,039 50.1 256 245 4.5
Food and beverage 340 337 0.9 748 45.5 165 172 (3.9)
Retail and others 256 189 35.8 456 56.2 114 98 17.1
Net revenues 16,677 10,158 64.2 29,725 56.1 8,796 5,624 56.4
Opex (14,910) (10,091) 47.8 (27,115) 55.0 (7,881) (5,189) 51.9
EBITDA 3,910 2,337 67.3 6,906 56.6 1,972 1,551 27.1
Depreciation & amort (2,143) (2,270) (5.6) (4,296) 49.9 (1,057) (1,116) (5.3)
EBIT 1,767 67 2,528.0 2,610 67.7 915 435 110.4
Other income (loss) (1,384) (1,490) (7.1) (2,884) 48.0 (700) (723) (3.2)
Profit before tax 382 (1,423) (126.9) (274) (139.6) 215 (288) (174.5)
Tax expense (30) (1) 2,465.3 - NA (11) (0) 9,252.9
Net profit 352 (1,424) (124.7) (274) (128.6) 204 (288) (170.6)

Source: Company Data, Wealth Securities Research Estimates

Fig 2. Summary of earnings revisions for MRP

Old New Variance
2017E 2018E 2017E 2018E 2017E 2018E
(Pm) (Pm) (Pm) (Pm) (%) (%)
Revenues
Casino 27,482 31,604 30,603 35,194 11.4 11.4
Rooms 1,039 1,173 1,039 1,173 - -
Food and beverage 748 845 675 762 (9.8) (9.8)
Entertainment, retail and others 456 515 506 572 11.0 11.0
Net revenues 29,725 34,137 32,823 37,701 10.4 10.4
Operating Costs and Expenses (27,115) (29,737) (29,453) (33,056) 8.6 11.2
EBITDA 6,906 8,755 7,666 9,000 11.0 2.8
Depreciation and amortization (4,296) (4,355) (4,296) (4,355) - -
EBIT 2,610 4,400 3,370 4,645 29.1 5.6
Other income (loss) (2,884) (2,872) (2,884) (2,872) - -
Net profit (274) 1,528 486 1,773 (277.7) 16.0

Source: Company data, Wealth Securities Research Estimates

Fig 2. Quarterly gross gaming revenue of City of Dreams Manila

12,000

10,000

8,000

6,000

4,000

2,000

-
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17
Source: Wealth Securities Research Estimates

Wealth Securities, Inc. 2

4 Sep 2017 MRP

Financial Summary
Fig 4. Income Statement
2014A 2015A 2016A 2017E 2018E
(Pm) (Pm) (Pm) (Pm) (Pm)
Revenues
Casino 300 11,901 21,299 30,603 35,194
Rooms 7 719 982 1,039 1,173
Food and beverage 26 677 707 675 762
Entertainment, retail and others 97 429 431 506 572
430 13,727 23,419 32,823 37,701
Operating Costs and Expenses (4,661) (20,001) (22,166) (29,453) (33,056)
EBITDA (3,945) (1,901) 5,642 7,666 9,000
Depreciation and amortization (286) (4,372) (4,389) (4,296) (4,355)
EBIT (4,231) (6,273) 1,253 3,370 4,645
Other income (loss) (2,072) (2,847) (2,752) (2,884) (2,872)
Profit before tax (6,303) (9,120) (1,499) 486 1,773
Tax expense - (24) (82) - -
Net profit (6,303) (9,144) (1,585) 486 1,773
Source: Company data, Wealth Research estimates

Fig 5. Balance Sheet

2014A 2015A 2016A 2017E 2018E
(Pm) (Pm) (Pm) (Pm) (Pm)
ASSETS
Current Assets
Cash and cash equivalents 7,651 7,460 10,351 16,646 22,790
Restricted cash 2,231 43 240 240 240
Accounts receivable, net 25 1,284 1,391 2,302 2,644
Inventories 195 269 230 336 386
Prepayments and other current assets 190 376 472 606 670
Total Current Assets 10,292 9,431 12,685 20,129 26,730

Non-current Assets
Property and Equipment 32,830 32,940 26,867 23,125 19,323
Contract acquisition costs 968 916 864 812 760
Other intangible assets 9 7 5 4 2
Other noncurrent assets 3,648 1,464 1,270 1,797 2,050
Total Non-current Assets 37,455 35,327 29,006 25,737 22,135

Total Assets 47,747 44,758 41,691 45,867 48,865

LIABILITIES
Current Liabilities
Accounts payable 160 151 139 197 225
Accrued Expenses and other current liabilities 4,632 8,204 5,415 8,960 10,222
Current portion of obligations under finance lease 1,042 1,402 1,525 1,639 2,079
Other current liabilities 1,786 617 1,282 1,282 1,282
Total Current Liabilities 7,619 10,374 8,361 12,078 28,657

Non-current Liabilities
Long term Debt 14,721 14,782 14,849 14,849 -
NonCur portion of oblig under finance lease 12,379 12,745 13,061 13,024 12,495
Deferred rent liability 122 177 219 219 219
Other noncurrent liabilities 18 72 166 176 201
Total Non-current liabilities 27,240 27,776 28,296 28,268 12,915

Total Liabilities 34,859 38,150 36,657 40,346 41,572

EQUITY
Capital Stock 4,911 5,643 5,663 5,663 5,663
Additional paid-in capital 19,647 21,933 22,077 22,077 22,077
Share compensation 759 606 417 417 417
Equity reserves (3,614) (3,614) (3,614) (3,614) (3,614)
Retained Earnings/(Accumulated deficits) (8,816) (17,961) (19,508) (19,022) (17,249)
Total Equity 12,887 6,608 5,034 5,521 7,293
LIABILITIES AND EQUITY 47,746 44,758 41,691 45,867 48,865
Source: Company data, Wealth Research estimates

Wealth Securities, Inc. 3

4 Sep 2017 MRP

Fig 6. Cash flow statement

2014A 2015A 2016A 2017E 2018E
(Pm) (Pm) (Pm) (Pm) (Pm)
Cash flow from operations
Income(loss) before income tax (6,303) (9,120) (1,499) 486 1,773
Depreciation and amortization 345 4,441 4,462 4,296 4,355
Other operating cash flows 2,720 4,152 3,064 2,884 2,872
Working capital changes (918) 1,671 802 1,937 606
Net cash flow from operations (4,154) 1,143 6,452 9,602 9,605

Cash flow from investments

Acquisition of additional PPE (11,669) (4,526) (2,113) (500) (500)
Other investing cash flows (3,807) 3,219 (277) - -
Net cash flow from investments (15,476) (1,307) (1,234) (500) (500)

Cash flow from financing

Net proceeds from availment of loans 15,000 - - - -
Other financing cash flows 3,812 (168) (2,629) (2,808) (2,962)
Net cash flow from financing 18,812 (168) (2,629) (2,808) (2,962)

Effect of forex changes on cash (130) 141 294 - -

Net increase (decrease) in cash (949) (191) 2,884 6,295 6,144
Source: Company data, Wealth Research estimates

Wealth Securities, Inc. 4

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Wealth Research Analysts Rating System

Ricardo P. Puig Wealth Securities Research follows the following

Research Head rating definition
Strategy, Conglomerates, Property, Buy We expect total return of more than 12% in
Telecommunications the next 12 months
rpuig@wealthsec.com
Tel: (+632) 634-5038 ext 8128 Hold We expect total return of -12% to 12% in the
next 12 months
Laura Dy-Liacco Sell We expect total return of less than -12% in
Deputy Head of Research the next 12 months
Utilities, Conglomerates
ldyliacco@wealthsec.com
Tel: (+632) 634-5038 ext 8153

ND Fernandez
Banking
nd.fernandez@wealthsec.com
Tel: (+632) 634-5038 ext 8158
Wealth Securities Inc
Matthew Sy-Tan 2103 A&B, East Tower, PSE Center
Consumer, Mining Exchange Road, Ortigas Center
matthew.sytan@wealthsec.com Pasig City 1600
Tel: (+632) 634-5038 ext 8168 Tel: (+632) 634-5038
Fax: (+632) 634 5043
Jason Lee
Gaming, Construction, Media www.wealthsec.com
jason.lee@wealthsec.com
Tel: (+632) 634-5038 ext 8165

Melanie Ong
Services
melanie.ong@wealthsec.com
Tel: (+632) 634-5038 ext 8119