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Morningstar | MGM China Outperformed the Market in 1Q; the Mansion Will Help MGM Cotai’s Ramp Up

MGM China’s first-quarter revenue and adjusted EBITDA are tracking in line with our estimates. We are leaving our estimates unchanged and raise our fair value estimate by HKD 1-HKD 21 per share due to time value of money. We continue to find MGM China undervalued. Thanks to new VIP junket rooms at MGM Cotai, MGM China’s VIP gaming revenue was up 3% in the quarter, outperforming a 13% decline for the wider Macau market, as reported by DICJ. The group’s VIP rolling chip volume was up 1% year over year. MGM China’s non-VIP gaming revenue was up strongly at 31% year over year in the quarter, stronger than DICJ’s reported 16%. Revenue and adjusted EBITDA at MGM China was up 7% and 15% respectively sequentially, helped by the ramp up at MGM China, the addition of 25 new tables to MGM Cotai in the quarter.

Management commented that the junket market will now contract after a big growth cycle, and is expected to decline for the rest of the year. This is in line with our expectation of high single digit decline this year. Management estimates the mass market will increase at high single digit this year, more bullish than our low single digit estimate, as we expect to see some weakness in the highest end of the premium mass segment.

Management commented the mass market and some of the in-house VIP business saw a positive uptick even before MGM Cotai opened the Mansion, which was designed to attract very high end customers. The opening of the Mansion and the Mansion One gaming area in the fourth quarter last year attracted new and previous customers to MGM Cotai. The demand for the Mansion and MGM Cotai during the Golden Week is looking strong. These comments are supportive to our 14% revenue growth estimate for MGM China in 2019.

Sequentially, adjusted EBITDA at the new property MGM Cotai was up 17%, helped by a favorable mass win rate of 24.4% versus 20.6% in the fourth quarter. We are pleased to see MGM Cotai adjusted EBITDA margin improved from 20.6% to 23.0% in the quarter, which is similar to the 22.9% we assumed for the year. VIP turnover was flattish sequentially while mass drop was down 4%. VIP turnover per table per day and mass drop per table per day at MGM Cotai was 32% and 38% lower compared with MGM Macau respectively. Adjusted EBITDA per table per day at MGM Cotai was 42% lower than MGM Macau. We continue to see potential for MGM Cotai to further ramp up. MGM Cotai will bring in more dining area after the Golden Week in the casino space. MGM China plans to open more suites at the top tier of the south tower in MGM Cotai at the end of next year.

Adjusted EBITDA at MGM Macau was up 13% sequentially, as mass hold and VIP win rate improved compared with the fourth quarter. VIP turnover and mass drop per table per day was flattish quarter-on-quarter, indicating flattish demand.