What Factors Can Drive Growth For MGM’s Macau Operations?

MGM Resorts’ (NYSE:MGM) Macau operations are important and account for around 30% of the company’s value, according to our estimates. MGM’s Macau revenues more than doubled between 2011 and 2014, amid a gaming boom in the region fueled by strong growth in the Chinese economy. However, Macau gaming operations have taken a massive hit in the past few quarters and MGM will likely post a more than 30% drop in Macau revenues for 2015. This can primarily be attributed to Beijing’s anti-graft measures and the government’s focus on making Macau a tourist destination rather than just a gambling hub. The impact of this changing trend in Macau is more visible on casino operators, such as Wynn Resorts, which derive a significant portion of revenues from Macau VIP gaming. On the other hand, MGM derives most of its value from the U.S. operations and it has helped the company post comparatively better results in the past few quarters. This has also reflected in the company’s stock performance. For instance, MGM is down less than 5% this past year, while Wynn’s stock has plunged a whopping 60% during the same period. While the situation in Macau remains fragile, we believe that there is now some upside for MGM’s stock. In this note, we discuss the factors that can drive growth for MGM’s Macau operations in the coming years.

See our complete analysis of MGM Resorts’ stock here

Enhanced Capacity And Mainland China Growth To Drive MGM’s Macau Operations

The Macau gaming market witnessed a 34% drop in gaming revenues last year, with VIP gaming falling 40% and mass-market gaming down 26% due to the factors discussed above. ^[1] This hasn’t boded well for any casino operator in the region. While MGM’s Macau revenues grew from $1.7 billion in 2011 to $3.5 billion in 2014, we estimate that the figure declined to $2.3 billion in 2015. Going forward, we expect MGM’s Macau revenues to grow in mid-teens to $5.7 billion by the end of our forecast period in 2022. Our bullish estimate can be attributed to a combination of MGM’s enhanced capacity, continued growth in Mainland China visitors and better connectivity of Macau.

MGM currently operates only one property in Macau with around 1,270 slot machines, 425 gaming tables and a hotel with 580 rooms, while the Cotai resort will offer 2,500 slot machines, around 500 gaming tables and 1,600 hotel rooms, thereby more than doubling MGM’s current capacity in Macau. The $3 billion casino resort will be opened in the fourth quarter of this year and will significantly aid MGM’s top-line as well as bottom-line in the coming years, in our view. However, the double capacity essentially will not translate into double revenues in the near term as the overall market is going through a tough time amid government’s unsupportive policies, and there are more new casinos coming up in the region, which will further increase the competition. Furthermore, it is difficult to predict when the much-awaited recovery in the gaming market will kick in. Considering these factors, we estimate MGM’s Macau revenues to grow from an estimated $2.3 billion in 2015 to over $4 billion only in 2019.

Now the question arises, why would Macau gaming revenues grow in the coming years? The answer is the massive Chinese economy that still continues to grow in mid-single-digits, continued growth of Mainland China visitors to Macau, and the likelihood of more supportive measures from Beijing. Around 70% of Macau visitors come from Mainland China, and so a better macroeconomic environment in China is a boon for the Macau gaming industry. Also, the gaming industry is more impacted by the government policies, which will likely turn in favor of gaming operators, primarily because of the massive taxes the industry generates. For instance, Macau generated around $10 billion in direct gaming taxes in the first 11 months of 2015, which accounted for 77% of total government revenue and were down 35% as compared to the prior year period. ^[2] Also, the government’s measures were aimed to curb corruption and put a check on junket operators, along with the objective to make Cotai a tourist destination. These measures have already been helpful and many VIP players have been away from Macau for past several months. In fact, VIP gaming used to account for 80% of gaming revenues till a few years back while it accounted for a mere 50% in 2015. ^[1] Macau is seeing growth in mass-market gaming, which will likely drive the future gaming growth in the region. Also, casino operators such as Las Vegas Sands are spending heavily on casino resorts with increased focus on non-gaming activities, in line with the government’s expectations of transforming Macau to a tourist hub. All these factors points towards supportive measures from Beijing for Macau, and this could revive gaming growth in the region.

The government is investing in new transportation links to ease travel for Chinese visitors in order to boost mass-market gaming and tourist arrivals in Macau. For instance, Hong Kong-Zhuhai-Macau bridge, expected to be completed this year, will connect Hong Kong to Macau, thereby reducing car travel time from 4 hours to 40 minutes. More visitors will translate into more spending on gaming and non-gaming activities in Macau, which will be fruitful for the overall industry. Given these factors, we estimate MGM’s Macau revenues will be around $5.7 billion in 2022 and an estimated EBITDA margin of 36% will translate into EBITDA of $2 billion, representing around 45% of the company-wide EBITDA.

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1. Casino revenue figures confirm terrible year for Macau’s biggest industry, South China Morning Post, Jan 20, 2016 [↩] [↩]
2. Macau govt casino tax revenue falls 35 pct in year to Nov, GGR Asia, Dec 29, 2015 [↩]