Macau Slowdown Weighs Over MGM Resorts’ Q1 Performance

MGM Resorts (NYSE:MGM) recently posted its Q1 2015 earnings, which came in at $169.9 million, or $0.33 per share, as compared to $102.7 million or $0.20 per share in the prior year period. It must be noted that the earnings included a tax benefit of $56.3 million. MGM China faced headwinds from a decline in VIP and mass-market gaming and saw a 33% drop in revenues while EBITDA plunged 38% during the first quarter. Looking at the company’s domestic operations, revenues grew 0.5% while EBITDA was down 3%. ^[1] Overall, the company’s results were largely on expected lines considering the massive decline in Macau gaming during the first quarter. However, RevPAR (revenue per available room) growth at its Las Vegas properties was lower than expected due to weak March. The company’s management has given a guidance of 5% RevPAR growth in the second quarter. ^[2]

Note that all casino companies posted massive declines in Macau business in the first quarter. Las Vegas Sands‘ (NYSE:LVS) consolidated revenue decreased 25% to $3.01 billion and earnings were down 30% to $0.66 per share (see – Macau Slowdown Weighs Over Las Vegas Sands’ Q1 Earnings). Wynn Resorts (NASDAQ:WYNN) swung to loss amid a slowdown in Macau (see – Wynn Posts Loss In Q1 Amid A Continued Decline In Macau Gaming).

It is difficult to ascertain when this slowdown will end in Macau; however, given the growth of high net-worth individuals (HNIs) in China and growing Mainland China visitors to Macau, it appears that the casinos will do well in the long run.

We estimate gross revenues of about $10.45 billion for MGM Resorts in 2015, with EPS of $0.33 which is in line with the market consensus of $0.10-$1.01 , compiled by Thomson Reuters. We currently have a $27 price estimate for MGM Resorts, which we will soon update to incorporate the recent quarterly earnings.

See our complete analysis for MGM Resorts International

Anti Graft Headwinds Weigh Over Macau Operations

Table games turnover in the VIP segment was down 51% but hold percentage increased slightly to 3.03% as compared to 3% in the prior year period. As a result, Macau revenues declined 33% to $630 million while EBITDA was down 38% to $148 million. ^[1] The performance on VIP front was largely on expected lines given that the market saw a 37% decline in gaming revenues during the first quarter.

The company’s poor performance in Macau can be attributed to an overall decline in the region’s gaming market. 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 of casino operators in the region. MGM still managed to maintain its market share of 10% in the first quarter.

While MGM saw a sharp decline in VIP gaming, its mass-market gaming revenues were slightly better with a 13% decline in revenues. We expect mass-market gaming to grow strongly and drive growth for the company in the coming years. Key drivers here are the burgeoning middle class in China and growth in high net worth individuals (HNIs). China is seeing growth in the number of HNIs, but only a small portion 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.

We currently estimate Macau casino revenues to be around $2.9 billion for 2015 and an estimated EBITDA margin of 26% for MGM’s Macau operations will translate into EBITDA of around $750 million, representing over 30% of the company wide EBITDA.

Las Vegas Operations Remain Muted In Q1

Revenues at MGM’s domestic resorts grew 0.5% with a 1% RevPAR growth for the quarter. While casino revenues grew 1%, due to a 9% increase in slot volumes, table games hold percentage was slightly lower at 20.1% as compared to 20.8% in the prior year quarter and this led to a 3% drop in EBITDA to $390 million. ^[1] Looking at the second quarter, the company will surely benefit from the recent Mayweather-Pacquiao fight it hosted in first week of May. The company saw higher RevPAR in May driven by the boxing event, and it expects RevPAR to grow around 5% during the June quarter. ^[2] We expect the hotel business in particular to do well in the near term as well as in the long run. A better macroeconomic environment will lead to increased business travel and demand for convention facilities. Also, higher disposable personal income will lead to higher demand for luxuries, travel and entertainment. MGM should benefit from this overall growth in the coming years. Accordingly, we estimate RevPAR to be around $147 for 2015 and over $200 by the end of our forecast period. This will translate into hotel revenues of over $2.60 billion and an estimated EBITDA margin of 47% will translate into $1.20 billion EBITDA, representing over 25% of the company wide EBITDA by the end our forecast period.

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1. MGM Resorts’ SEC Filings [↩] [↩] [↩]
2. MGM Resorts International’s (MGM) CEO Jim Murren on Q1 2015 Results – Earnings Call Transcript, Seeking Alpha, May 4, 2015 [↩] [↩]