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

As one of six casino licence holders in Macau, MGM China benefits from the Chinese people’s strong demand for gaming, underpinned by our forecast of a more than 10% rise in per capita disposable income in China from 2015 to 2020. Macau has a penetration rate of less than 2%, compared with Las Vegas’ 12%. Excluding the neighboring Guangdong province, where only 7.5% of China’s 1.39 billion population resides, the penetration rate is merely 1%. The new hotel rooms by major operators in the next few years should accommodate increased and extended visits from bigger spenders from these provinces and drive the top line for integrated resort operators like MGM China. Given this, coupled with the completion of the Hong Kong-Zhuhai-Macau bridge and light railway transit in 2018 and 2019, Macau’s carrying capacity for tourists will rise. The neighboring Hengqin Island, 3 times the size of Macau, is rapidly developing to complement Macau’s growth.Previously, MGM China only had one casino resort with 427 gaming tables and 600 rooms in the Macau Peninsula. Its new casino complex MGM Cotai opened in February 2018 in Cotai, where a critical mass of casino resorts is taking market share from casinos in the peninsula. Despite weaker-than-expected ramp up in 2018, we expect MGM Cotai to drive above-market adjusted EBITDA growth in 2019 for the group as its high-end hotel rooms open and more junkets bring in more customers. The new resort includes over 1,300 rooms, more than twice the current room count, giving MGM China greater flexibility to offer complimentary rooms to mass customers, who are 4 times more profitable. Their overnight stay will increase gambling and nongaming expenses in MGM China’s property. We expect higher growth in the high-margin mass and nongaming segments to lift adjusted EBITDA margin in the next 10 years. Given MGM China’s strong track record in maintaining market share in the peninsula despite the opening of Galaxy Macau and Sands Cotai Central in Cotai, we believe a footing in Cotai will give MGM China a stronger market position.