Downtrodden Melco Resorts & Entertainment (NASDAQ:MLCO) could be facing the specter of losing its US equity listing. But one research firm says that threat isn’t imminent, and the gaming company has options that could ultimately create shareholder value.
The Holding Foreign Companies Accountable Act (HFCAA) went into effect in January. That policy brings with it new standards for treatment by the Securities and Exchange Commission (SEC) of foreign companies trading on US equity exchanges.
HFCAA is sparking fear among investors that Chinese companies trading on the Nasdaq or New York Stock Exchange will ultimately be forced off those marquee equity bourses. Those concerns are creating a raft of selling pressure. In the case of Lawrence Ho’s Melco, the Macau concessionaire plunged 15 percent last Friday, suffered another double-digit decline on Monday, and is off 19.23% over the past week, extending its year-to-date decline to 40.18%.
The City of Dreams operator is far from the only offender among Chinese equities trading in the US. The widely followed MSCI China Index is off 27.4% this year, while Alibaba, Meituan, Pinduoduo, and Tencent collectively shed $1.66 trillion in market value from the stocks’ highs.
Options for Melco to Avoid Delisting
Melco is the only one of the three Macau concessionaires that doesn’t have ties to a US company that lists American depositary receipts (ADRs) on a US exchange.
At issue for the gaming company is that the aforementioned HFCAA mandates that audits of foreign companies trading in the US be inspected by the US Public Company Accounting Standards Board (PCAOB). However, the PCAOB says it cannot evaluate Melco’s audits, which are conducted by Ernst & Young, in Hong Kong — the gaming company’s headquarters.
Companies have three years to come into compliance, so it’d be 2024 before Melco faces delisting. In the meantime, Bernstein says the casino operator has options, including listing in Hong Kong.
If no agreement occurs, the solution would be for Melco to do a listing on the Hong Kong Stock Exchange (HKSE) or to potentially merge with Melco International Development,” says the research firm.
Melco International Development is also controlled by Ho. Melco Resorts previously traded in Hong Kong, but scrapped that listing in 2015, noting that investors preferred the ADRs. The company filed plans to trade in the US in September 2018.
Melco International Makes Sense, Would Take Time
While there are complexities associated with merging with Melco International, and such a transaction is likely to be time-consuming, it could make sense for the gaming company and its shareholders.
“There is a scenario where such a transaction makes perfect sense, and should be value creating for shareholders,” Bernstein said. “There is no pressing timetable to resolve the US listing issue. The current valuation of Melco, partly impacted by the perceived risk, is unwarranted in our view, as there are several realistic solutions which should also be value enhancing.”
On the other hand, a Hong Kong listing could generate cash for Melco Resorts to purchase an interest in Macau Studio City.
Bernstein rates Melco Resorts “outperform,” with a $12.20 price target, or more than double where the shares currently reside.
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