MGM’s Approval For Sands Cotai Casino Could Add Upside

by Trefis Team
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Trefis
MGM
MGM Resorts International
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MGM Resorts International (NYSE:MGM) recently received approval to build its second casino in Macau, which is the biggest casino market in the world. [1] Although Las Vegas hasn’t done too well for MGM Resorts International (NYSE:MGM) in the recent past, China has been a different story. MGM’s revenue growth in China stood at 7% in Q3 2012, much higher than its overall revenue growth of 1%. [2] As the Las Vegas market becomes saturated, gaming companies are looking to expand internationally, especially in Macau, China. China is the second largest economy in the world and the growing incomes have prompted the wealthy as well as middle class Chinese citizens to get into casino gambling.

See our complete analysis for MGM Resorts International


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. The 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. [2] According to 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. [3] 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. [4]

How Much Revenue Can The New Resort Add?

In the long run, the prospects of China look strong and MGM is betting on it with its new resort on the Cotai Strip, for which it will spend close to $2.5 billion. [1] The new resort will have about 1,600 hotel rooms, 500 gambling tables and 2,500 slot machines. The overall average daily rate for MGM’s hotels is close to $135 as per our estimates, and the occupancy is somewhere around 90%.

Using these two figures, we estimate that the new establishment in Macau will bring in close to $70 million in annual revenues just from its hotel. Similarly, 2,500 slot machines could bring in close to $200 million in annual revenues assuming steady state operations and average of $215 per slot machine per day (MGM’s overall figure). A lot more than this can come from gaming tables. MGM operates more than 1,700 gaming tables and earns more than $3 billion in annual revenues from them, implying close to $2 million per table per year.

Using these figures, we estimate that the new Macau casino could earn close to $1 billion from its 500 gaming tables, and overall this new casino has the potential to add close to $1.3-1.5 billion in additional revenues once it is operational.

Our price estimate for MGM Resorts International stands at $10.64, roughly in-line with the market price.

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Notes:
  1. Macau Gives MGM China Green Light on Cotai Casino, The Wall Street Journal, Jan 9 2013 [] []
  2. MGM’s SEC filings [] []
  3. Wynn’s Q3 2012 Earnings Transcript []
  4. Macau Oct gambling revenue up 3.2 pct at strongest level this year, The Indian Express, Nov 1 []
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