Macau casino concessionaire Melco Resorts & Entertainment could face delisting from the NASDAQ due to new regulations governing some foreign companies that were adopted by the US Securities and Exchange Commission (SEC) in January.
The issue was outlined in a report from brokerage Bernstein on Monday, which noted that a number of Chinese American depositary receipts (ADRs) “took a beating” on Friday as investors dumped ADRs that could be subject to delisting in the future.
Among the primary worries for Melco are stipulations contained within the Holding Foreign Companies Accountable Act (HFCAA), which requires among other things that audits of listed companies must be conducted by firms subject to inspection by the US Public Company Accounting Standards Board (PCAOB). Melco’s auditor, Ernst & Young Hong Kong, has been deemed by the US Public Company Accounting Standards Board (PCAOB) to be unable to inspect in the Hong Kong jurisdiction, Bernstein said.
While there is no immediate risk of delisting, the HFCAA will result in a three-year countdown starting this year unless a solution can be found, with authorities in the US and China reportedly in discussions over the issue. If no solution is forthcoming, any companies not in compliance by 2024 will likely need to delist.
While such a scenario would be complex, Melco is not without options.
“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 200.HK (parent company Melco International Development Ltd),” Bernstein said.
The brokerage suggests this could take place either by introduction of Melco stock directly on the HKSE, which is seen as faster and easier than a public stock issuance, or by a direct equity raise.
“This path takes longer and has more scrutiny,” it explained, although it “may jumpstart liquidity of the new trading shares on the HKSE.
“Melco does not necessarily need cash proceeds from a HKSE listing, however Macau Studio City also faces the same auditor issue faced by Melco. Melco could use the HKSE listing process to finally acquire the minority interest of Macau Studio City.”
Regarding the possibility of Melco merging with its HKSE-listed parent, Bernstein said, “This path has complexity around arm’s length valuation in the context of a merger and residual ownership by Lawrence Ho. However, there is a scenario where such a transaction makes perfect sense and should definitely be value creating for shareholders.”
Bernstein analyst Vitaly Umansky noted that there is “no pressing timetable” for the issue to be resolved and that its recent impact on Melco’s share price is unwarranted.
Melco shares fell 9.5% on Monday to US$6.09, having opened last Friday at US$7.96.
