Shares of Melco Resorts (MLCO 0.49%) are 76% off their all-time high despite a massive bounce the last few weeks. Few companies have been affected by the pandemic more than Melco Resorts, which relies on the Chinese administrative region of Macao for the majority of its revenue. 

But the tides may be turning for Melco as China's economy slowly opens up and travel begins to pick up around what was recently the world's largest gambling market. In five years, this could be a very different company than it is today. 

Looking back

In 2019, Melco Resorts generated $1.7 billion in adjusted EBITDA, a proxy for cash flow from a resort or casino. But early in 2020, the company's properties shut down because of COVID-19, and even when they opened again they weren't the same. 

Restrictions in China have extended to Macao both on a policy level and from dramatically reduced travel out of China. As a result, the company generated only $7.3 million in EBITDA in the first nine months of 2022. Yes, it's gotten that bad in Macao. But there's a light at the end of the tunnel

China ending COVID restrictions could lead to boom times

In the last few weeks, China has started easing COVID-19 restrictions. Speculation is that by mid-2023, the country will be back to "normal" levels of activity and travel. That would be great news for Melco Resorts, especially given what we've seen lately in Las Vegas. 

Macao's gambling revenue fell from $36.4 billion in 2019 to $5.8 billion over the 12 months ended November 2022, showing how bad conditions are. Contrast that with the Las Vegas Strip, where gambling revenue was $6.6 billion in 2019 and an all-time record $8.2 billion in the 12 months ended October 2022.

Not only did Las Vegas recover after the pandemic, people are spending more than they ever have. If that happens in Macao, results could be incredible, especially when you consider that people in China have been dealing with COVID restrictions for three years. 

Macao's skyline at night.

Image source: Getty Images.

The leveraged play on Macao

I mentioned above that Melco Resorts generated $1.7 billion in adjusted EBITDA in 2019, and I think there's a case that it could generate even more by 2024 if Macao fully reopens, based on the experience in Las Vegas. Now, consider that the company has $6.2 billion in net debt and a market cap of just $5.4 billion, or an enterprise value of $11.5 billion. 

If Melco returns to pre-pandemic cash flow levels, it would have an enterprise value to EBITDA multiple of just 6.8. There's a case to be made that it will be even better than that. 

In five years' time

Five years from now, I think Melco Resorts will be fully recovered from the pandemic and Macao will be booming again. The region has little ability to add capacity, so any growth will flow to the properties already built, which will benefit Melco Resorts. And with a new 10-year gaming concession from the government in hand, this is a stock that I think could do very well.