Melco Resorts & Entertainment, in partnership with John Keells Holdings PLC, is embarking on a significant venture in Sri Lanka with the development of the Cinnamon Life Integrated Resort. This $1 billion project, soon to be rebranded as City of Dreams Sri Lanka, marks Melco’s strategic move into the South Asian market.
According to analysts from Morgan Stanley, Melco’s financial gains from this venture are expected to be modest due to high operating costs. Specifically, Melco will likely retain less than 30% of the EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) generated by the casino. This is primarily due to substantial payments required: between 50% and 55% of EBITDA to John Keells Holdings and an additional 30% to 40% in income tax.
Financial Breakdown
Morgan Stanley analysts Praveen Choudhary and Gareth Leung detailed that Melco’s share of EBITDA would be further reduced by income tax obligations, leaving the company with a relatively small percentage after all expenses are considered. They expressed cautious optimism about the potential Gross Gaming Revenue (GGR), estimating that a minimum threshold of $300 million in GGR would be required to achieve $100 million in EBITDA. This scenario would result in Melco retaining around $30 million in cash flow, factoring in their profit-sharing arrangement and tax liabilities.
Market Outlook and Strategic Considerations
Despite the financial challenges outlined, analysts highlighted Melco’s strategic advantages, particularly its low initial investment and management fees from its Nüwa hotel rooms. The project’s proximity to India presents a promising opportunity, with Melco aiming to tap into the Indian market despite lower gaming expenditure compared to Chinese players globally.
Tourism Impact and Recovery
Tourism in Sri Lanka, a critical factor for the success of the integrated resort, has faced setbacks such as the 2019 terror attack and the COVID-19 pandemic. However, there has been a notable recovery, with visitor numbers in early 2023 reaching 88% of pre-pandemic levels seen in 2018. This recovery is encouraging for the outlook of the Cinnamon Life Integrated Resort.
While Melco Resorts & Entertainment’s venture in Sri Lanka presents opportunities in a burgeoning market and potential benefits from a recovering tourism sector, the financial structure of the partnership and tax obligations pose significant challenges. The strategic positioning to attract Indian tourists and the operational efficiencies derived from its partnership with John Keells Holdings PLC will be critical in determining the venture’s success.