Investment positives
　　We initiate coverage of Melco International Development （MelcoGroup） with a BUY rating and HK$35.10 target, offering 32.7% upside.
　　Why a BUY rating?
We believe Melco Group （200.HK）， trading at an NAV discount ofapproximately 34%, represents the cheapest exposure toMacau’s growth profile as a proxy of Melco Resorts &Entertainment （Melco Resorts; MLCO.US, BUY, TP US$38.00）。
We expect the Macau gaming sector to outperform on sustainedmass-segment momentum and macroeconomic strength. Weexpect the sector’s GGR and EBITDA to increase at 2017–2019CAGRs of 12% and 18%, respectively.
We expect Melco Resorts to outperform its peers with theopening of Morpheus Hotel by late 2Q18, which will increaseCity of Dreams Macau （CoD） hotel rooms by 56% （or 780 rooms）and should help the firm gain market share.
Consolidation of Melco Resorts and other businesses shouldreduce conglomerate discount factors related to management,liquidity and transparency risks.
　　How do we differ from the market?We believe new management atCoD could help reverse its mass-segment market share losses.
　　Potential catalysts: We expect Melco Resorts to report strong resultsfor 1Q18 （in early May） on improved mass-segment performance.
　　Financials and valuation
　　We expect Melco Group to post EPS of HK$0.80 for 2018 andHK$0.98 for 2019, a 79% CAGR. Our HK$35.10 target price is basedon a SOTP valuation that reflects the firm’s equity in Melco Resorts（which accounts for around 99% of the group’s NAV） and a 36%holding company discount.
　　Risks
　　Gaming concession expiry in 2022; smoking ban in VIP areas fromJanuary 1, 2019; tighter junket regulations and capital flight