Details on Melco Resorts & Entertainment Ltd’s share of earnings from the Sri Lanka casino venture announced in April have been aired by banking group Morgan Stanley, following a meeting with management of John Keells Holdings Plc, Melco Resorts’ partner on the US$1-billion scheme (pictured in an artist’s rendering).
Melco Resorts had already mentioned it would spend US$125 million as its contribution toward the resort, and that the casino would launch in mid-2025.
The firm has referred to it as “City of Dreams Sri Lanka”, reflecting a resort branding it already uses in the Macau, Philippines and Cyprus markets.
The casino firm would “start fitting out the gaming space this year” at the new scheme in Colombo, the Sri Lankan capital, said Morgan Stanley in its Monday note.
“It has received an independent 20 years gaming licence in Sri Lanka,” noted analysts Praveen Choudhary and Gareth Leung.
They added Melco Resorts would get earnings before interest, taxation, depreciation and amortisation (EBITDA) generated “from the gaming space after paying John Keells 50 percent to 55 percent of EBITDA, and will then pay 30 percent to 40 percent income tax on the remainder”.
Melco Resorts would also get management fees for 113 hotel rooms under the Nüwa accommodation brand. The firm already uses the brand in the Macau market at City of Dreams and at City of Dreams Manila, a property it manages in the Philippine capital.
For City of Dreams Manila as a whole, “Melco pays approximately 38 percent of EBITDA to its local partner/landlord,” said Morgan Stanley’s memo.
The Sri Lanka site – developed by John Keells and due to have 800 hotel rooms in total – has already seen commercial space opened, said Morgan Stanley.
“Most hotel rooms will open from October this year, and the casino will open mid-2025,” noted the institution.
The analysts wrote: “John Keells has spent US$900 million, with a… hurdle… of 15 percent return on invested capital. It expects to generate US$100 million of cash flow.
“We estimate Melco [Resorts] could get around 50 percent of [the] EBITDA from the casino, so return could be attractive” for the casino firm, based on its US$125 million investment.
Though Morgan Stanley added: “We are sceptical of the potential GGR [gross gaming revenue], which we calculate needs to be above US$300 million to achieve US$100 million EBITDA.”
That would translate to cash flow to Melco Resorts of US$30 million, based on 50 percent EBITDA share and 40 percent tax, suggested the analysts.
They also noted that Melco Resorts took the view that Indian nationals’ spending on casinos is “much lower” than such spending by people from China – a pattern also seen in Singapore’s casino duopoly. Indian citizens have been identified by Melco Resorts as a key target market for this Sri Lanka gaming project.
Nonetheless, Morgan Stanley took the view that Melco Resorts’ “approach and low capex [capital expenditure] provides optionality to capture growing Indian wealth and outbound tourism.”
