Executive Summary / Key Takeaways

• Melco Resorts & Entertainment Limited (MLCO) is demonstrating a robust recovery and strategic repositioning, particularly in Macau, driven by strong operational execution and a focus on premium customer experiences. Macau property EBITDA surged 35% year-over-year and 13% quarter-to-quarter in Q2 2025, with mass table games revenue reaching all-time highs.
• The company's "asset-light" strategy, evidenced by the ongoing strategic review of City of Dreams Manila and the successful opening of City of Dreams Sri Lanka, aims to enhance financial flexibility and reallocate resources for long-term growth.
• Operational discipline has led to significant cost efficiencies, with Macau OpEx reduced to approximately $3 million per day in Q2 2025, contributing to a Macau property EBITDA margin of 29.2%—the second highest on record.
• Technological advancements, such as the full deployment of RFID "smart tables" across Macau properties by Q1 2025, are refining marketing and player reinvestment strategies, enhancing the competitive moat.
• While debt reduction remains a primary objective, opportunistic share repurchases, totaling $120 million in April and May 2025 at an average price of approximately $5 per ADS, underscore management's commitment to shareholder value amidst perceived undervaluation.

Macau's Resurgence and a Differentiated Approach

Melco Resorts & Entertainment Limited, a prominent developer, owner, and operator of integrated casino resorts across Asia and Europe, is currently experiencing a powerful resurgence, particularly within its core Macau market. The company, which rebranded from Melco Crown Entertainment Limited in 2017, has built a portfolio of high-end properties including City of Dreams, Studio City, and Altira, alongside its international ventures. This historical foundation has shaped its current strategy, which emphasizes premium product offerings and operational excellence to capture the evolving demands of the Asian gaming and leisure market.

The broader industry is witnessing a shift in Chinese consumer behavior, with a growing preference for experiences over luxury goods, a trend Melco is strategically leveraging. Chinese policy, increasingly supportive of domestic consumption, discretionary spending, and travel, further underpins the positive market dynamics for Macau operators. In this competitive landscape, Melco differentiates itself by focusing on superior product and service rather than engaging in aggressive promotional wars. This approach positions Melco against major rivals like Las Vegas Sands (LVS), Wynn Resorts (WYNN), MGM Resorts (MGM), and Caesars Entertainment (CZR), by offering a distinct, high-quality experience tailored to regional preferences.

Technological Edge and Operational Excellence

Melco's competitive advantage is significantly bolstered by its technological differentiators and commitment to operational excellence. A prime example is the ongoing deployment of RFID "smart tables" across its Macau properties. All Baccarat tables at Studio City were converted to RFID by the end of March 2025, with City of Dreams expected to complete its installation in the first quarter of 2025. This technology enables a more refined approach to marketing and player reinvestment, allowing for "better and better data out of walker and better and better insight into the player," leading to more strategic allocation of reinvestment dollars.

Beyond gaming, Melco has invested in enhancing its non-gaming attractions with new technologies. The House of Dancing Water, a signature show at City of Dreams, reopened in May 2025 with a refreshed storyline and enhanced visuals, incorporating a variety of new technologies. This spectacle has been met with great feedback, achieving an average theater occupancy of approximately 98% since its reopening. While it serves as a positive EBITDA contributor and significantly boosts non-gaming revenue and visitation, management acknowledges an opportunity to further optimize the conversion of these visitors into gaming customers.

These technological and operational initiatives are integral to Melco's strategy of offering a "premium experience" and maintaining its market share in a highly competitive environment. The company's focus on product and service, rather than aggressive deals, allows it to stand apart from competitors. For instance, City of Dreams' luxury hotels and entertainment offerings, alongside Studio City's family attractions, provide a differentiated product that attracts a broad customer base without needing to be the "most aggressive" in the market.

Financial Strength and Strategic Investments in Macau

Melco's financial performance in Macau has been robust, reflecting the success of its strategic initiatives. In the second quarter of 2025, Macau property EBITDA grew by an impressive 35% year-over-year and 13% quarter-to-quarter. This growth was accompanied by record-high mass table games revenue at both City of Dreams and Studio City. The company's operational discipline is evident in its cost management, with Macau OpEx reduced to approximately $3 million per day for the entirety of Q2 2025, outperforming earlier expectations. This efficiency contributed to a Macau property EBITDA margin of 29.2%, the second highest on record.

Group-wide adjusted property EBITDA for Q2 2025 increased 25% year-over-year to approximately $378 million, with favorable win rates at City of Dreams Macau positively impacting EBITDA by about $31 million. The momentum from Q1 and Q2 is expected to continue into Q3 2025, with management expressing confidence in a "great 3Q" as the Chinese economy stabilizes and consumer spending increases.

Strategic investments continue to enhance Melco's Macau portfolio. The main entrance to City of Dreams is undergoing renovation to improve visibility and accessibility, and plans are being finalized for the full renovation of the Countdown hotel. This hotel, slated to open in Q3 2026, will be rebranded with approximately 150 high-end luxury suites, each exceeding 1,000 square feet, aiming to provide a "one-of-a-kind experience". Furthermore, the company is implementing enhancements across gaming areas to elevate the experience for premium mass customers.

Portfolio Optimization and Global Expansion

Melco is actively optimizing its global portfolio through an "asset-light" strategy. This approach, which began with the Sri Lanka project, involves capitalizing on existing investments and reallocating resources to enhance financial flexibility and strengthen the balance sheet. As part of this strategy, Melco is exploring strategic alternatives for City of Dreams Manila, with a short list of potential buyers currently being evaluated. While the Philippines market faced a "heightened competitive environment" in Q1 and Q2 2025, Melco's cost reduction initiatives have led to higher profitability and a recovery in gaming revenue in July.

The company's global footprint expanded with the opening of City of Dreams Sri Lanka on August 1, 2025. This marks the first integrated resort in Sri Lanka and South Asia, strategically targeting the premium Indian customer base. Management anticipates a "ramp period" as they effectively create a new industry and educate the consumer base on the quality of the integrated resort experience. In Cyprus, City of Dreams Mediterranean and its satellite casinos, despite being impacted by the Iran-Israel war in June 2025, have shown a "faster than expected" recovery, with GGR surpassing pre-war levels. Forward bookings suggest strong results for the remainder of the peak season.

In Macau, Melco is also consolidating its operations by closing Grand Dragon Casino and three Mocha Clubs over the second half of 2025, resulting in a $56 million goodwill impairment in Q2 2025. This move is seen as an opportunity to optimize gaming units by reallocating machines to City of Dreams and Studio City, and to strengthen Altira's position as a key gaming destination in Taipa.

Capital Allocation and Shareholder Value

Melco's capital allocation strategy prioritizes debt reduction, yet it remains opportunistic in enhancing shareholder value. The company refinanced $1 billion in Melco bonds in June 2025 and $222 million in Studio City bonds in July 2025, utilizing revolving credit facilities and available cash at lower interest rates. Management expects to pay down more debt in the second half of 2025 using free cash flow from operations.

Despite the focus on deleveraging, Melco repurchased approximately $120 million of its shares in April and May 2025 at an average price of about $5 per ADS, seizing a "unique opportunity that the dislocation in the equity markets provided". This demonstrates a commitment to shareholder value, with management viewing the shares as significantly undervalued. While a programmatic share repurchase program is not planned, future buybacks are not ruled out if significant equity value dislocations occur. The potential for dividend resumption is "potentially possible in the second half of next year," subject to business conditions and a holistic decision-making process.

Risks and Outlook

While the outlook for Melco is largely positive, certain risks and challenges warrant attention. Geopolitical events, such as the Iran-Israel war, can impact regional operations, as seen in Cyprus, though recovery has been swift. The heightened competitive environment in markets like the Philippines necessitates continuous cost management and strategic adjustments. The ramp-up period for new ventures like City of Dreams Sri Lanka will require sustained effort to educate the customer base and realize full potential.

For the third quarter of 2025, Melco anticipates total depreciation and amortization expense to be approximately $135 million to $140 million, corporate expense between $25 million and $30 million, and consolidated net interest expense between $115 million and $120 million. The company's full-year 2025 CapEx guidance remains unchanged at $415 million. Management is cautiously optimistic about strong results in Cyprus for the remainder of the peak season and expects the momentum in Macau to continue into Q3.

Conclusion

Melco Resorts & Entertainment stands at a pivotal juncture, leveraging a strong operational recovery in Macau and a disciplined "asset-light" strategy to drive future growth. The company's commitment to enhancing customer experiences through strategic investments and technological innovation, particularly with RFID smart tables and refreshed entertainment offerings like the House of Dancing Water, provides a distinct competitive edge in a dynamic market. This focus, coupled with rigorous cost management, has translated into impressive financial performance, notably the 29.2% Macau property EBITDA margin in Q2 2025.

The ongoing portfolio optimization, including the strategic review of City of Dreams Manila and the expansion into new markets like Sri Lanka, underscores Melco's proactive approach to capital allocation and long-term value creation. While debt reduction remains a priority, management's opportunistic share buybacks signal confidence in the company's intrinsic value. As Melco continues to execute its strategy, its ability to differentiate through product and service, adapt to market shifts, and capitalize on new opportunities positions it favorably for sustained growth, making it a compelling consideration for discerning investors.