MGM Resorts Outperforms The Macau Market But Loss Widens Amid Higher Tax Provision

-0.06%
Downside
47.21
Market
47.18
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MGM Resorts

MGM Resorts (NYSE:MGM) recently posted its Q4 2014 earnings and reported a loss of $0.70 per share as compared to a loss of $0.12 per share in the prior year quarter. This can be attributed to a hefty income tax provision of $328 million as compared to $4 million provision in the prior year period. MGM China faced the headwinds from a decline in VIP gaming and saw a 22% drop in revenues and EBITDA during the quarter. However, the company posted a growth in mass-market gaming revenues despite an overall slowdown in this segment during the December quarter. Looking at the company’s domestic operations, revenues and EBITDA grew 5%. [1] Overall, the company’s results were largely on expected lines considering the massive decline in Macau gaming during the fourth quarter. We continue to believe that mass-market gaming will drive the growth for casino operators in China in the foreseeable future. MGM like other casino operators in the region has shifted more tables from VIP to mass-market gaming. More than half of the company’s gaming tables in Macau are now allocated to mass-market gaming. [2] While the situation in Macau may continue to be fragile over the next few months, we expect the casinos to do well in the medium to long run. As China continues to grow, more people are likely to visit Macau for gaming activities. Even in 2014, visitation from Mainland China to Macau was up 14% to 21 million. [3]

We estimate a $0.68 EPS for MGM Resorts in 2015, which is in line with the market consensus of $0.31-$1.01, compiled by Thomson Reuters. We currently have a $24 price estimate for MGM Resorts, which we will soon update to incorporate the recent quarterly earnings.

See our complete analysis for MGM Resorts International

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MGM Macau Revenues Drop Amid Lower VIP Gaming Turnover

Table games turnover in the VIP segment was down 32% and hold percentage was 2.6% as compared to 2.8% seen in the prior year period. As a result, Macau revenues and EBITDA declined 22% to $719 million and $185 million respectively. [1] The performance on VIP front was largely on expected lines given that the casinos operators in Macau witnessed a 25% decline in gross revenues during the fourth quarter. The primary reason for this drop is the government’s anti corruption crackdown. A wave of high-profile arrests of senior Chinese officials has hurt the VIP business of Macau casinos. Visa transit restrictions, a smoking ban and the weakening economy added to the woes for casino operators in the region. While MGM saw a sharp decline in VIP gaming, its mass-market gaming revenues were up 19% despite a 9% drop in the overall market. [2] MGM’s mass gaming volume was down 5% but a higher hold percentage of 27.2%, as compared to 22.2% in the prior year period, drove the segment revenue growth. [1]

Mass-market gaming accounted for 75% of MGM’s overall profits in China during the fourth quarter. This is much higher than 60% contribution seen in the prior year quarter. [2] We expect mass-market gaming to continue to grow strongly and drive growth for the company in the coming years. Key drivers here are the burgeoning middle class in China, as well as growth in high net worth individuals (HNIs). China is seeing growth in the number of HNIs, but only a small portion of them visits Macau for gambling. China currently has about 1.3 million HNIs with a combined wealth of $4.3 trillion. As China continues to grow, more people will likely visit Macau for gaming activities and MGM as well as other casino operators should thus continue to benefit from the rising demand as they did in the past.

Las Vegas Operations Benefit From A Higher Convention Mix

Revenues at MGM’s domestic resorts grew 5% led by a steady growth in casino as well as non-casino operations. While the casino revenues grew 5%, due to a higher volume and hold percentage, the hotel operations were up 6% due to a 7% growth in RevPAR (Revenue per available room) to $121. Hotel occupancy also increased to 88% as compared to 85% seen in the prior year period. The company saw a record 17% convention mix for the year. This higher convention mix also boosted food & beverage revenue, which grew 6% for the fourth quarter. The company has given a guidance of 2% to 3% growth in hotel RevPAR for the current quarter. [2] We expect the hotel business in particular to do well in the near term, as well as in the long run. A recovery in the economy and higher disposable income will boost the RevPAR. The U.S. economy grew at 2.7% pace in 2014, the fastest in the past four years. Better macroeconomic conditions will boost travel and convention demand. Accordingly, we estimate RevPAR to be north of $190 towards end of the decade as compared to $121 currently. This will translate into hotel revenues of $2.5 billion and an estimated EBITDA margin of 47% will translate into $1.2 billion EBITDA, representing close to 25% of the company wide EBITDA for 2020 (See – What Will Drive The Growth For MGM’s U.S. Hotel Operations In The Coming Years?).

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Notes:
  1. MGM Resorts’ SEC Filings [] [] []
  2. MGM Resorts International (MGM) Earnings Report: Q4 2014 Conference Call Transcript, The Street, Feb 17, 2015 [] [] [] []
  3. Las Vegas Sands’ (LVS) CEO Sheldon Adelson Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, Jan 29, 2015 []