House of Dancing Water and de-leveraging potential position Melco to outperform: MS

Investment bank Morgan Stanley is bullish on Melco Resorts & Entertainment and MGM China, emerging as top picks amid a ‘hard to predict’ Macau gaming market.

In a note series called ‘Casino Tale’, Morgan Stanley analyst Praveen K Choudhary notes that Melco Resorts stands to benefit significantly from multiple factors. The company’s revival of the iconic “The House of Dancing Water” entertainment show is expected to drive increased visitation and spending. Additionally, Melco possesses substantial de-leveraging potential and offers an attractive free cash flow to equity (FCFE) yield.

The refreshed entrance and improved table configuration at Melco’s Studio City property have already enhanced performance, positioning the company to capitalize on Macau’s recovery. The ongoing ramp-up of Studio City Phase 2 presents another opportunity for growth in the coming months.

Contrary to some competitors who are priced for substantial market share gains in fiscal year 2025, Melco has more reasonable growth expectations built into its current valuation. This creates a favorable setup for potential upside surprises as the year progresses.

Morgan Stanley’s base case valuation for Melco uses a target yield on 2025 estimated FCFE of 8.5 percent, which is 50 basis points higher than the long-term average since 2012, reflecting the current elevated interest rate environment.

Meanwhile, MGM China also received a positive outlook from the investment bank. The company has maintained its market share in April and May despite having less room capacity than competitors. MGM recently opened 10 new villas at its Peninsula property, further strengthening its premium offerings.

Morgan Stanley notes that MGM China benefits from relatively low growth expectations compared to competitors. The firm believes MGM can maintain its EBITDA share, potentially leading to upward revisions of 2025 earnings estimates.

Like Melco, MGM China offers attractive FCFE yield and dividend prospects. Morgan Stanley’s base case valuation uses the same 8.5 percent target yield on 2025 estimated FCFE.

The broader Macau market showed mixed signals during the analysts’ May visit. The May holiday period demonstrated strong performance with visitation up 40 percent and revenue increasing 12 percent year-over-year. However, this surge didn’t maintain momentum, unlike the Chinese New Year period earlier in 2025.

Room capacity remains a critical factor for driving both gaming and non-gaming revenue in Macau. The market continues to see substantial capital expenditure, with a significant portion of the projected $17 billion industry-wide investment not yet deployed.

Morgan Stanley concludes that favorable valuation and free cash flow metrics should benefit select operators, particularly if gross gaming revenue grows more than 5 percent year-over-year, driving operating leverage and positive earnings revisions.

Regarding potential risks, Melco’s outlook could be affected by market share losses and high interest expenses, while MGM could face challenges from competitors’ new capacity additions and potential increases in operating expenses that might compress margins.