Macau has had a great start to the year, with gaming revenue up 18.9% through the end of June. In the second quarter, gaming revenue rose 17.2% to $9.2 billion, which should be a big benefit to the only six concessionaires with casinos there. But Melco Resorts (NASDAQ:MLCO) is actually shrinking in Macau as competitors take market share. 

Despite the declining results, investors saw a few things to like in Melco Resorts' second quarter 2018 results, and shares rose 3.7% the day after results were released. 

Macau's skyline from Cotai.

Image source: Getty Images.

Where Melco Resorts struggled in Q2

Overall, Melco Resorts' revenue fell 5% to $1.29 billion last quarter. Property EBITDA, a proxy for cash flow from a resort, fell 2.2% to $171.5 million. But it's where revenue fell that's most concerning.

City of Dreams, the company's flagship resort, had a 10.4% drop in revenue to $577.8 million, and property EBITDA fell 2.2% to $171.5 million. Most surprising was a 14% drop in rolling chip volume, a measure of the amount VIPs are betting at table games. Casinos want to attract high rollers, who account for around two-thirds of Macau's revenue, so it's bad that the resort's performance was far worse than the 14.4% growth in VIP baccarat play overall in Macau.

Studio City also saw revenue fall 5.4% to $314.1 million, and property EBITDA was down 9.3% to $73.2 million. But bad luck played a role in the weak results: VIP play was actually up 30%, and mass market table game volume rose 23%. If Studio City had achieved a more typical win rate, the property would have likely been a highlight of the quarter for Melco Resorts. 

The nearby Altira resort performed better, with revenue rising 14.4%. However, it's much smaller than City of Dreams, with just $123.1 million of revenue. 

What we're seeing in Macau is new competition starting to eat away at revenue from Melco Resorts. Wynn Cotai and MGM Cotai are the two resorts showing the most notable impact given their close proximity to City of Dreams. Clearly, gamblers are excited to try out the new properties. 

The surprising bright spot

A surprising point of strength last quarter was Studio City Manila, which saw revenue fall $2.3 million to $173.9 million and property EBITDA jump 39% to $87.3 million. As good as the results were, it's worth noting that good luck played a big role in the quarter. 

VIP volume was down 8% versus a year ago to $3.0 billion, and the win rate in the segment was 3.7%, much higher than the 2.7% to 3% range the company expects long-term. Mass-market play did rise 16% in the quarter, but the segment is only about half the size of the VIP segment. As the win rate in the high roller room normalizes, we will likely see results fall back to earth. 

What to make of Melco Resorts today

Melco Resorts is still generating a lot of cash, with EBITDA of $1.38 billion over the past year. But the stock has to be looked at as a value investment rather than a growth stock, given the declines in revenue and EBITDA last quarter. Net debt on the balance sheet is $2.0 billion, and the company's market cap is $11.9 billion, resulting in a $13.9 billion enterprise value. An enterprise value to EBITDA ratio of 10 isn't a steal, but it's a good value -- and if Melco Resorts can reverse its market share losses, the stock could be a good long-term investment.