Why Macau Will Drive MGM’s Future Growth?

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Macau saw a 19% jump in its gaming revenues to $45.2 billion in 2013. [1] The region’s gaming activities can primarily be divided into two segments: VIP gaming and mass–market gaming. While Macau’s VIP gaming revenue grew by 13% to $29.9 billion, mass-market revenues surged 35% to $13.5 billion last year. [2] MGM Resorts (NYSE:MGM) has benefited from its presence in Macau, and the company reported record results for 2013 with net revenues of $3.3 billion and EBITDA (earnings before interest, taxes, depreciation and amortization) of $814 million in China. [3]

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MGM’s Cotai Operations Will Significantly Enhance Its Capacity In Macau

Mass-market gaming has been on a rise and offers better margins for casino operators. Normal win for VIP gaming operations at MGM Macau is in the range of 2.7% to 3.0% of turnover, while the hold percentage of normal table games is in the range of 20% to 30% of table games drop. [3] MGM derives a majority of its revenues from VIP gaming. MGM China’s chief executive Grant Bowie stated that double-digit growth from VIP customers is sustainable for the industry and the business from high-stake gamblers is solid. [4]

We believe that MGM’s Macau casino operations will continue to see double-digit growth rates, primarily due to strong growth in Macau driven by a growing number of high net-worth individuals. Moreover, MGM is developing a new resort in Cotai, which will significantly enhance its capacity in the region. We estimate MGM’s casino revenues to be close to $9 billion in the region by the end of our forecast period.

MGM is developing an integrated resort in the popular Cotai region of Macau, which will host 500 gaming tables, 2,500 slot machines and over 1,500 rooms. As of now, MGM’s presence in the region is much lower than its key competitors Wynn Resorts (NASDAQ:WYNN) and Las Vegas Sands (NYSE:LVS). MGM currently operates through MGM Grand Macau which hosts 582 rooms, 1,272 slot machines and 427 gaming tables. However, post 2015, as the new resort becomes fully operational, MGM will see a surge in Macau revenues.  Interestingly, the Macau government has set a cap on the number of table games in the city, which will restrict new entrants and expansion of existing casino operators.

What Is The Risk To MGM?

For the time being, Macau has been growing strongly despite headwinds in China’s growth story. China’s GDP in 2013 went up by 7.7%. While this was above the government’s official target of 7.5%, China’s economy is stagnating after recording revised 7.7% GDP growth in 2012 and 9.3% in 2011. Looking forward for 2014, the GDP growth rate may slow to 7.4%. [5] A slowdown in China may impact Macau gaming ( though it hasn’t yet). If there is a slowdown in growth in Macau’s gaming revenues, MGM’s growth will also be hurt.

Moreover, demand from VIP gamblers is also seen as volatile and vulnerable to the tightening of credit in China and the country’s periodic crackdowns on corruption. Over the past year, there were new regulations introduced in Macau that require junkets and casinos to report suspicious transactions and player lists each month. They should also report details of when the players played and how much they won or lost. In addition to this, Macau is set to implement a new money laundering law next year, which may allow authorities to freeze and seize assets. [6] The junket operators act as middlemen and moneylenders that drive VIP segment, which accounts for two-thirds of Macau gaming revenues, and any disruption there can adversely affect VIP gaming in Macau.

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Notes:
  1. Macau Casino Revenue Jumps 19 Percent to $45.2 Billion, Bloomberg, Jan 2, 2014 []
  2. VIPS, MASS MARKET, SLOTS AND ELECTRONIC TABLE GAMES: EVERYTHING’S UP IN MACAU, Calvin Ayre, Jan 19, 2014 []
  3. MGM Resorts’ SEC Filings [] []
  4. MGM China Sees Macau’s VIP Gaming Business Continuing to Pick Up, Bloomberg, May 16, 2013 []
  5. China’s 7.7% GDP growth beats official target, CNN, Jan 20, 2014 []
  6. China’s Corruption Crackdown Is Forcing Macau To Overhaul Its Business Model, Business Insider, Nov 3, 2013 []
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