China Write-Down Weighs Over MGM’s Q4 Earnings

MGM Resorts (NYSE:MGM) recently reported its Q4 and full year 2015 earnings, which came in below the street estimates and the Q4 loss widened due to a big write-down in China. While MGM Macau continued to face the headwinds amid lower gaming volume, a double-digit RevPAR (revenue per available room) growth boosted the domestic revenues. The company was able to expand its company-wide EBITDA margins by 300 basis points amid cost efficiencies. Macau continues to remain fragile and the overall market saw a 27% drop in gross gaming revenues during Q4, as VIP gaming players continued to stay away from the world’s largest gambling hub. This can be attributed to two-year-old anti-corruption campaign and slowing growth in China’s economy. Given the market conditions, MGM has postponed its opening of new casino resort in Cotai from Q4 2016 to the end of Q1 2017. ^[1] The company took a $1.5 billion write-down in Q4 related to the 2011 acquisition of a controlling interest in MGM China Holdings Ltd.

MGM China posted a 31% drop in revenues and a 29% drop in EBITDA due to continued headwinds in the region. The VIP gaming revenues plunged 49% while main floor table games revenue declined only 14%. ^[2] These figures points towards continued weakness on the VIP front while mass-market is comparatively trending better. Also, the company’s performance in China has improved sequentially. We continue to remain bullish on the long-term Macau story, primarily led by the growing middle class of China, which will fuel the Mainland China visitation to Macau. The Mainland China visitors to Macau are also on the rise and have grown from around 13 million in 2010 to over 20 million in 2015. ^[3] These factors will primarily boost the mass-market gaming in the region and MGM could benefit from the same, especially with its new Cotai resort, which will significantly enhance its capacity in the region.

Looking at MGM’s domestic operations, revenue were up 2% while adjusted EBITDA grew 15% led by a 330 basis points margins improvement. ^[1] While revenue growth was driven by a 12% RevPAR growth, cost-efficiencies and better business mix boosted the EBITDA. However, the casino revenues were down 5% due to lower baccarat volume. It should be noted that baccarat is more popular with Asian players and the slowdown in Macau has also impacted the gaming scene in the U.S. Looking forward, the company is seeing non-gaming operations in good shape in Q1 and it expects a 6% RevPAR growth for the March quarter. We continue to believe that MGM’s hotel operations will drive domestic growth in the coming years. In fact, we estimate that the segment accounts for more than 35% of MGM’s stock value. MGM has a massive room supply at the Las Vegas Strip, while it is expanding its casino resort properties in other states as well. Now despite a high room supply for a casino operator (approximately 36,000 rooms), MGM is able to post occupancy levels of close to 90%. This is significant and it is more important consideration for any casino operator, as higher occupancy levels will aid the demand for casino and other ancillary facilities. With such high occupancy levels, we believe MGM can now focus on growing its ADR at a faster pace. We expect the ADR to be around $200 by 2020. This will result in room revenues of around $2.5 billion and an estimated EBITDA margin of 47% for MGM’s hotel operations will translate into EBITDA of over $1 billion, representing 30% of the company-wide EBITDA.

See our complete analysis of MGM Resorts’ stock here

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More Trefis Research

1. MGM Resorts International (MGM) James Joseph Murren on Q4 2015 Results – Earnings Call Transcript, Seeking Alpha, Feb 18, 2016 [↩] [↩]
2. MGM Resorts’ SEC Filings [↩]
3. Visitor Arrivals for December 2015, Macau Statistics & Census Service, Jan 22, 2016 [↩]