MGM’s Cotai Resort Has A Potential To Generate More Than $1 Billion In Annual EBITDA

Like other casino operators, MGM Resorts (NYSE:MGM) is going through tough time in Macau amid a slowdown in gaming, triggered by a combination of Beijing’s anti-graft measures, visa restrictions, a smoking ban and slower growth in China. Most of the casino operators are focused on developing new properties in the region to drive future growth. MGM is developing its new resort in Cotai, which we believe will provide a significant boost to its top line as well as bottom line in the coming years. In fact, it has a potential to generate $1 billion in annual EBITDA and this could trigger further 10% upside to our price estimate for MGM Resorts.

See our complete analysis of MGM Resorts’ stock here

New Cotai Resort Will Enhance MGM’s Capacity In The Region

MGM currently has only one property in Macau with around 1,270 slot machines, 425 gaming tables and a hotel with 580 rooms. This property generated $3.5 billion in annual revenues for 2013 and 2014 and an estimated EBITDA of around $750 million. ^[1] The company will see a significant cut in its top line as well as bottom line in 2015, due to lower gaming volume in Macau. We currently estimate Macau revenues to be around $2.3 billion and EBITDA of $550 million in 2015. Having said that, we continue to believe that Macau casinos will do well in the long run. For MGM, most of its growth will come from its new Cotai resort.

The Cotai resort will offer 2,500 slot machines, around 500 gaming tables and 1,600 hotel rooms, more than double of MGM’s current capacity in Macau. ^[2] MGM is not alone developing new resort in Cotai. There are several other players such as Wynn, Las Vegas Sands and SJM coming up with new casino resorts in the region. While there were more than 5,800 gaming tables in operation at the end of Q2 2015, there are more than 2,500 tables (including Wynn Palace, Parisian Macao, MGM Cotai, Studio City and Lisboa Palace) that are likely to come up by 2017 (subject to allocation). ^[3] The question arises, will there be enough demand to absorb such supply? We believe the answer is yes and below we explain why.

Key Drivers For Macau Gaming Growth

Macau is the only place where gambling is legalized in China. People travel from different states in Mainland China and Hong Kong to Macau for gambling, which is unlikely to change. Mainland China visitors to Macau have doubled since 2005. China’s personal disposable income has also grown at an average annual rate of 12% during the same period. The growth in visitors and income levels is likely to continue, albeit at a slower pace. Furthermore, there are key infrastructure initiatives being taken by the government such as connecting Macau and Cotai to Hong Kong, thereby reducing the travel time and boosting visitation. These projects will be completed in late 2016. Macau is expected to receive additional 8 million visitors annually, once the development of 10 new resorts in Cotai is completed. ^[4] These factors will push the demand for gaming in the coming years and accordingly, we remain bullish on the long-term Macau story.

Potential Upside Scenario

We take a conservative view in our pricing model owing to the expected increase in competition, given the opening of other casinos in the region and uncertainties pertaining to Beijing’s anti-graft measures. We expect MGM’s gross Macau revenues to be around $5 billion by end of the decade. If however, MGM’s gross Macau revenues grow to $6.2 billion by 2020, then there could be a potential upside of 10% to our price estimate for MGM Resorts. This is possible if China’s personal disposable income and Mainland China visitors to Macau grow at an average annual rate of 6% in the coming years, along with supportive measures from Beijing. This will translate into Macau gross gaming revenues of around $56 billion by 2020, according to our estimates. With around 500 gaming tables to offer, MGM Cotai’s market share will be around 6%, thereby translating into gross gaming revenues of around $3.35 billion and an estimated EBITDA margin of 34% for MGM’s Macau operations will translate into EBITDA of over $1.15 billion by 2020. If we account for MGM’s overall Macau operations, its market share will be around 11% with $6.2 billion in gross revenues and EBITDA of $2 billion.

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More Trefis Research

1. MGM Resorts’ SEC Filings [↩]
2. MGM China Holdings’ Press Release, Feb 27, 2013 [↩]
3. Update On Macau’s Table Cap, Macau Gaming Watch, Aug 5, 2015 [↩]
4. Growth expected after Cotai completion, Intergame, March 11, 2015 [↩]