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Morningstar | Slower Ramp-Up of MGM Cotai; Cutting MGM China’s FVE to HKD 22.50; Shares Undervalued

We reduce narrow-moat MGM China’s fair value estimate to HKD 22.50 from HKD 24 to account for a slightly slower ramp at the new Macau Cotai property. Nonetheless, we view the setback as temporary and think MGM China’s shares remain undervalued. We advocate that long-term investors take advantage of the recent pullback and accumulate shares at the current price level. Management’s strong track record and the introduction of new amenities in the second half make us confident that MGM Cotai’s ramp-up will accelerate.

MGM China reported adjusted property EBITDA of USD 120 million in the second quarter, up 1% year over year but down 21% sequentially due to bad luck factor experienced in MGM Macau (VIP win rate at 2.26% versus 2.94% a year ago and mass hold rate at 16.2% versus 19.3% a year ago). Adjusted for luck (about USD 40 million), EBITDA would have increased by about 5% quarter over quarter. While VIP turnover remains steady, the 10% quarter-over-quarter fall in table drop in mass-market operations may indicate some cannibalization from MGM Cotai (mass drop up 101% quarter over quarter).

On the other hand, MGM Cotai (opened in February 2018), is ramping slightly slower than expected, with its first full quarter of operation annualizing sales at around USD 740 million, tracking below our full-year forecast. We are lowering our 2018 Cotai sales forecast by 9% while cutting our EBITDA margin forecast to 20% from mid-20% to take into account higher ramp-up costs in the near term.

That said, we remain positive on MGM China’s future growth. Management mentioned that MGM Macau’s gross gaming revenue in July was up nearly 20% year over year and over 40% month over month after the World Cup, outperforming industry growth.

In addition, we anticipate that much stronger ramp-up in the VIP and premium mass business volume will increase MGM Cotai's profit, owing to several key events. MGM Cotai will open new VIP junket rooms in September, just ahead of China’s Golden Week in October. Meanwhile, the Mansions, a high-end room product, and the President’s Club, an exclusive gaming area for premium mass customers, should be ready in the fourth quarter. Furthermore, a resident theater show, Destiny, will also be launched by late 2018.