Melco Resorts and Entertainment is making a significant investment in Colombo with its new $1 billion project, ‘City of Dreams Sri Lanka,’ aiming to tap into the burgeoning Indian tourism market. According to brokerage firm Morgan Stanley, the integrated resort, featuring a casino, could generate around 50% of its EBITDA from gaming operations.
The venture, announced this year, is a joint effort with John Keells Holdings PLC, Sri Lanka’s largest listed conglomerate. Melco executives have expressed confidence in the $125 million investment for the casino component, viewing it as a strategic gamble with potentially high returns.
Morgan Stanley analysts, following a detailed assessment of the project, highlighted the growing potential of the Indian tourism sector. Despite past disruptions, including a terror attack in 2019 and the Covid-19 pandemic, tourism in Sri Lanka is rebounding. By May 2024, visitor numbers had reached 88% of the peak levels seen in 2018, when Indian tourists made up 18% of arrivals.
City of Dreams Sri Lanka, set to be the first integrated resort in South Asia, aims to capitalize on the increasing affluence and travel interest of Indian tourists. However, Morgan Stanley notes that Indian tourists typically spend less on casinos compared to their Chinese counterparts.
Melco’s investment includes a $125 million outlay for casino fit-out and the acquisition of a 20-year gaming license, indicating a long-term commitment to the Sri Lankan market. The company will operate a 180,000 square-foot casino and manage 113 ultra-high-end hotel rooms under the ‘Nuwa’ brand.
According to Morgan Stanley, Melco will receive EBITDA from gaming operations after sharing 50-55% with John Keells and paying 30-40% in income tax. Additionally, Melco will earn management fees for operating the Nuwa hotel.
The commercial spaces of the City of Dreams are already open, with the majority of hotel rooms set to open in October and the casino expected to launch by mid-2025. John Keells has invested $900 million into the project, targeting a 15% return on invested capital and a cash flow of $100 million.
Morgan Stanley projects that while the immediate financial impact on Melco may be modest, the venture represents a valuable opportunity to leverage the growing wealth in India. To meet its financial goals, Melco will need the casino’s gross gaming revenue to exceed $300 million, with the potential to generate significant post-tax profits.