Source: Melco Crown Entertainment

We are closing out our bullish call on Melco Resorts & Entertainment (MLCO) and are moving to a neutral posture.  Since we made our bullish call on MLCO 2 months ago, the stock has appreciated from $16.06 to a recent price of $21.70, for a gain of about 35%.  While we still believe the bullish fundamental arguments for MLCO shares we laid out in the article, we believe that these arguments are now widely understood and accepted by market participants.  Specifically, we believe that investors now understand the significant benefit that the launch of VIP gaming at Studio City represents for the company’s operating results.  As a result, we no longer believe that MLCO will outperform its peers in Macau going forward, and see more attractive risk-rewards elsewhere. 

To be clear, we would be shocked if MLCO reported anything but a spectacular first quarter next week.  As we explained in detail in our article in early March, the company’s results likely benefited both from strong overall Macau trends, as well as company-specific events including the Suncity “Night of Legends” event at Studio City.  This exceptional first quarter could, however, be the high water mark for MLCO’s relative performance for a while.  Put differently, it will be difficult for the company to top the success of some unique events in 1Q17 in upcoming quarters. 

If anything, the fight for market share in Macau may get slightly more intense going into the seasonally slower summer months.  This could relatively favor other operators with stronger competitive positioning in specific market segments, namely Wynn Resorts (WYNN) in VIP and Las Vegas Sands (LVS) in the mass market.  Moreover, MLCO will have to contend with the upcoming openings of MGM Cotai and Lisboa Palace.  As strong 1Q17 results move into the rear view mirror, we believe that investors will likely focus to an increasing extent on these plausible headwinds.  In turn, we believe that MLCO’s recent strong run of outperformance may not last.