MGM China Earnings: Strong Recovery Leads Macao Peers, but Shares Overvalued

MGM China’s 02282 first-quarter EBITDA of USD 169 million, which represents 88% of 2019′s EBITDA in the same period, beat market expectations. The strong first-quarter recovery is also ahead of its Macao peers and the casino sees a record-high market share of 15%, with gross gaming revenue returning to 78% of the 2019 level and outpacing the industry gross gaming revenue, which only achieved 46% of the 2019 number. We expect MGM China to extend its strong growth momentum in coming quarters, benefiting from a recent increase in table allocation, successful remodeling, and renovation of gaming floors and suite products as well as efforts to utilize data analytics and efficient marketing strategies—all these will help it attract more quality customers and boost revenue. We raise our fair value estimate to HKD 8.80 per share from HKD 7.80 after taking into account stronger revenue growth and higher EBITDA margin assumption amid cost efficiencies and mix shift to higher-margin mass gaming and in-house VIP bets. We forecast adjusted EBITDA of HKD 3.6 billion in 2023, up from negative HKD 1.3 billion in 2022.

However, the shares are overvalued as of market closure on May 2 as we think limited room supplies may slow earnings growth and lead to a gradual fall in market share. MGM China has received an additional 200 tables for the new 10-year concession period, implying a 36% increase in its table capacity, while the sector as a whole is seeing an 11% reduction of the total number of tables compared with the 2019 level. Despite the favorable table allocation, we think MGM China may not maintain this record high market share over the midcycle, given the limitations of its hotel rooms—which we estimate to make up only 6% of Macao’s hotel room counts in 2024, the smallest among casinos. On the other hand, peers such as SJM, Galaxy, and Melco Resorts are adding a significant number of hotel rooms in the next two years. We expect MGM China’s market share to fall to 12%-13% in 2024.