Morgan Stanley bets on Colombo’s City of Dreams

• Says Melco project in Sri Lanka poised to capitalise on burgeoning Indian outbound tourism

The new Melco Resorts & Entertainment City of Dreams project in central Colombo, Sri Lanka, could benefit from burgeoning wealth and outbound tourism from India, with its casino possibly helping to generate around 50% of the property’s EBITDA, brokerage Morgan Stanley predicts.

This year, Melco Resorts announced a joint venture with John Keells Holdings PLC, the largest conglomerate listed on the Colombo Stock Exchange, to include a casino in a $ 1 billion-plus integrated resort project located in Sri Lanka’s capital.

During the group’s first-quarter results conference call, Melco executives expressed confidence in the $ 125 million investment into the venture, considering it a “small wager” with the prospect of substantial returns.

After discussing the project with John Keells, Morgan Stanley analysts issued a dispatch with key takeaways, which describes the potential of the Indian tourism market and the property’s profitability.



Data cited by the dispatch show that tourism in Sri Lanka has seen a rollercoaster journey, with significant disruptions in recent years due to a terror attack in 2019 and the COVID-19 pandemic through to 2023.

However, the market is on a rebound, with tourist visitation peaking at 2.3 million in 2018, of which Indian nationals represented 18%. As of May 2024, visitation levels have recovered to 88% of the 2018 peak, indicating a robust recovery.

Possible considerable investment return

Melco’s City of Dreams will be the first integrated resort in South Asia and the development aims to capitalise on the growing interest and financial capability of Indian tourists. However, Morgan Stanley warns that this demographic has traditionally spent less on casinos compared to their Chinese counterparts, as observed in markets like Singapore.

The group’s investment is substantial, with a planned expenditure of $ 125 million for fitting out the gaming space, set to commence this year. The company has secured an independent 20-year gaming license, marking a long-term commitment to the Sri Lankan market.

According to Morgan Stanley, the partnership with John Keells, a veteran in the leisure and hospitality industry – with its Cinnamon brand operating around 2,500 rooms across Sri Lanka and the Maldives – is a cornerstone of this venture.

Under the agreement, Melco will operate the around-180,000 square feet casino and manage 113 Nuwa ‘ultra high-end’ hotel rooms.

“Financial arrangements dictate that Melco will receive EBITDA from the gaming operations after remitting 50-55% to John Keells and paying a subsequent 30-40% income tax on the remainder. Additionally, Melco will earn management fees for the Nuwa hotel operations,” Morgan Stanley analysts pointed out.

Projected timeline and financial expectations

The commercial space of the City of Dreams is already open, with the majority of hotel rooms scheduled to open in October this year. The casino is anticipated to commence operations by mid-2025.

John Keells has invested $ 900 million into the project, aiming for a return hurdle rate of 15% ROIC, with an expected cash flow generation of $ 100 million.

For Melco, the financial outlook is promising, with Morgan Stanley estimating that the property casino could generate 50% of the IR’s EBITDA, indicating that returns on the $ 125 million investment could be significant.

However, the brokerage projects that the gross gaming revenue (GGR) needs to surpass $ 300 million to achieve the desired EBITDA of $ 100 million, which translates to a cash flow of $ 30 million for Melco post-tax and profit sharing.

“The overall impact from Sri Lanka to Melco’s earnings will initially be small in our view, but it is an opportunity to capture rapidly growing wealth in India,” the brokerage noted.

(Source: https://agbrief.com/news/sri-lanka/10/07/2024/melco-project-in-sri-lanka-poised-to-capitalise-on-burgeoning-indian-outbound-tourism-morgan-stanley/)