MGM Resorts (MGM) recently reported its Q1 2013 earnings and took the market by surprise on strong growth in its domestic operations. The company reported a profit of $6.5 million compared to $217 million loss in the same period last year. This growth was primarily driven by the improvement in its domestic operations. Its Macau business continued to show strong growth as the region’s gambling revenue surged in the first quarter. While MGM is positioned to benefit from its vast portfolio of assets in the U.S. due to increasing consumer spending, Macau will lead the growth as the company expands in the region.
Las Vegas Leads The Growth
MGM reported an unexpected growth in its domestic operations led by a 32% increase in CityCenter’s revenues. Overall revenues from Las Vegas Strip increased 3%. CityCenter’s growth was driven by Aria, where table game hold percentage jumped to 28%, compared to 16% a year ago. In addition to this, RevPAR (revenue per available room) at Aria increased by 5% due to 2% increase in occupancy and an increase in the number of rooms available. During the first three quarters of 2012, MGM had approximately 20,000 room nights offline because of room remodel program. This isn’t the case anymore.
The company’s management stated that although in the Las Vegas strip business was hit hardest by the recession, it is recovering well and its performance will likely outstrip the existing regional markets for the foreseeable future. Overall, the U.S. casino market has been slow to recover from the economic downturn, and casino operators have looked at other growth avenues such as Macau. The improvement in the domestic operations is great news for MGM, as it still has much of its business tied to the Las Vegas Strip, unlike its major rivals Las Vegas Sands (LVS) and Wynn Resorts (WYNN). As the U.S. economy recovers and consumer spending increases, MGM will benefit from its vast portfolio of assets in the Las Vegas strip.
Strength in Macau Continues
MGM’s Macau revenue climbed 6% led by strong growth in the region’s gambling revenues, which surged 14% during the first quarter of 2013. The growth in MGM’s Macau operations can be attributed to a 26% increase in the main floor table games and 19% increase in slots wins. Gambling in Macau is mainly driven by the VIP table games, but recently mass-market table games have picked up. While the VIP table games turnover increased by 15% for MGM in Macau, the hold percentage was slightly lower at 2.8%, compared to 3.2% in Q1 2012.
Since 2006, Macau has been the primary gambling hub in the world and the only place in China where gambling is legal. The gaming turnover in Macau has increased as the number of HNIs (high net-worth individuals) continues to grow in China. Going forward, we expect the MGM’s Macau operations to continue to fuel its growth as it opens its grand resort in the popular Cotai region in 2015.
We are currently in the process of updating our model for MGM Resorts in the light of recent earnings. Our price estimate for MGM Resorts International stands at around $11, implying a discount of over 20% to the market price.
Disclosure: No positions.