Las Vegas didn’t do too well for MGM Resorts International (NYSE:MGM) in Q3 2012 as the company experienced growth of just about 1% in overall revenues despite 7% growth in China.  While casino revenues in the U.S. did show mild growth, revenues from hotels were down by 3% due to a decrease in revenue per available room.  This in turn was driven by lower occupancy due to a less number of conventions booked. Unlike its competitors such as Wynn Resorts (NASDAQ:WYNN) and Las Vegas Sands (NYSE:LVS), MGM depends on its hotels business to a significant extent. The direct contribution of hotel rent to MGM’s value is close to 30%, but its indirect contribution comes from additional sales of food and beverages.
While domestic operations were soft, MGM registered healthy growth in China. As the Las Vegas market becomes saturated, the gaming companies are looking to expand internationally, especially in Macau, China. China is the second largest economy in the world and the growing incomes has prompted the wealthy as well as middle class Chinese citizens to get into casino gambling. Despite the softness in VIP market in China, MGM was able to grow its revenues due to a growing middle market segment.
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- How Has Macau Revenue & EBITDA Contribution Changed For The U.S. Casino Companies In The Last 5 Years?
Situation In The U.S. Slow but Improving
Revenues decreased slightly for MGM’s domestic (U.S.) resorts in Q3 2012 compared to the same quarter last year. While MGM Grand and Mirage did well in terms of profit growth, Bellagio and Mandalay Bay were down.  Bellagio is the company’s biggest resort in the U.S. The primary reason was a 2% decline in overall revenue per available room for the U.S. business due to a decrease in hotel occupancy. The decreased hotel occupancy resulted from a slowdown in convention bookings, which play a significant role in MGM’s hotels business.
However, management stated that September showed an improvement as far as domestic business is concerned and the improvement has carried into October as well. This bodes well for Q4 and the company expects flat to low growth in revenue per available room, a notable improvement over Q3. The convention bookings for 2013 look promising not just from the point of view of number and size, but also rate. Additionally, MGM is focusing on expanding its facilities in several other parts of North America to diversify its operations. These include Massachusetts, Maryland and Toronto.
China – The Growth Engine
Macau (China) is one place where every major casino & resorts company is looking to expand. In fact, for Wynn and Las Vegas Sands, Macau is already a much larger business than the U.S. Growth in casino gaming in Macau can be attributed to China’s economic growth. The VIP market (wealthy high-rollers) still dominates the Macau casino gaming market, but the middle class is increasingly being attracted as well.
For MGM, China contributes close to 30% to its revenues and there is still significant potential to expand.  As per Wynn’s management, the VIP market in China is still not substantially penetrated while the middle class segment provides a steady source of revenue growth.  The recent slowdown in the VIP market due to slower economic growth in China has affected most of the gaming companies, including MGM. However, October was a better month aided by a week-long holiday in China.  In the long run, the prospects of China look strong and MGM is betting on that as it plans to build a new resort on the Cotai Strip, for which it will spend close to $2.5 billion.
We are in the process of updating our valuation model for MGM Resorts International in light of the recent earnings and will have an update ready soon.
Our price estimate for MGM Resorts International stands at $10.64, roughly in-line with the market price.Notes: