MGM China looks like worthwhile bet among Macau gaming stocks

The casino operator’s interim results showed that both its revenue and profits rebounded to above pre-pandemic levels

Key Takeaways:

• MGM China posted a profit of nearly HK$2.7 billion in the first half of this year, tripling from a year earlier
• The company has been approved to boost its number of gambling tables the most among Macau’s six major casino operators

By Lau Chi Hang

Macau’s gaming industry continues its post-pandemic recovery, registering nearly 18.6 billion patacas ($2.3 billion) in gaming revenue in July, up 11.6% year-on-year. Despite that, revenue for the month was still more than 20% below the same period of 2019, as other factors play into the industry’s recovery. But among the city’s six casino operators, MGM China Holdings Ltd. (2282.HK) has defied the odds by bouncing back quicker than its peers.

The company’s latest interim results, released earlier this month, show its revenue jumped an astonishing 52.3% year-on-year to HK$16.2 billion ($2.08 billion) for the six months through June. Its profit powered ahead to HK$2.69 billion for the period, nearly triple the HK$820 million a year earlier. Gaming was the company’s biggest revenue source, rising 47.5% to HK$14.2 billion. Its smaller food and beverage operation brought in HK$1 billion, up 1.3 times from a year earlier, while hotel room revenue rose nearly 90% to HK$910 million.

The strong results came as the company continued to ramp up its operations after the relaxation of Covid-related travel restrictions to Macau, MGM China said.

Big gaming table increase

As much of Macau struggles to return to pre-pandemic business levels, MGM China has stood out from the group by not only returning to but also exceeding those levels by a wide margin. Its latest revenue and profits for the first half of 2024 exceeded levels from 2019 by 43% and 163%, respectively. MGM China’s shiny record owes to its own successful bidding in 2022 to significantly expand its licensed gaming tables. As a result, MGM China was allowed to boost its table count by up to 36%, adding 198 tables to bring its total permitted count to 750 tables.

While MGM was winning big with the Macau government, rival Wynn (1128.HK) came out a loser with its table count slashed by 10.7% to 570. Melco Resorts (MLCO.US) also had its total cut by 17.8% to 750 tables, and the biggest loser, SJM (0880.HK), got cut by 29.2% to 1,250 tables. Meantime, the city’s other two gaming giants Sands China (1928.HK) and Galaxy Entertainment(0027.HK), saw their totals left relatively intact. 

Casino operators today now live and die based on their number of gaming tables that cater to the mass market. It wasn’t always that way, as VIP gaming rooms were once a major cash cow for the operators. But newer gaming regulations de-motivated third-party agents from finding and bringing high rollers to casinos, leading to a big drop-off in that part of the business. Major gaming companies are therefore now focused on their main gaming floors where the number of customers matters most. That means the more gambling tables, the more advantage an operator has and the more room for revenue growth.

Investment bank Credit Suisse emphasized the ongoing sea change sweeping through Macau’s gaming ecosystem as it transitions from reliance on big spenders to mass market customers who play mainly for leisure. That’s why a casino operator’s number of licensed tables is becoming more crucial than ever before, it said.

Growing market share

MGM China currently operates two casinos in Macau, the MGM Macau Casino on the Macau peninsula with 341 gaming tables and 982 slot machines, and MGM Cotai with 409 tables and 984 slot machines.

As business rebounds post-pandemic, MGM China’s higher gaming table count is helping it rake in more profits. As that happens, its market share has grown from 9.5% at the end of 2019 to 15.2% at the end of last year, and 16.5% at the end of June.

Despite the rebound, there’s little chance that Macau’s gaming revenue will return to its 2013 peak of $361.9 billion patacas anytime soon, partly due to the rule change affecting the VIP business, and also due to China’s economic slowdown. But the business is clearly still rebounding, rising 36.7% year-on-year to 132.3 billion patacas this year through July. Visitor arrivals to Macau also jumped nearly 44% to nearly 16.72 million in the first half of the year, approaching levels from 2019. Many believe continued visitor growth will create bigger room for gaming revenue growth as well.

Bullish analysts

Many analysts are quite bullish on MGM China among the city’s gaming stocks. Morgan Stanley pointed out that MGM China’s second-quarter EBITDA not only beat its own and market expectations, but also pointed out the company had sound cost management. It gave the company an “accumulate” rating with a target price of HK$17. UBS maintained its “buy” rating with a target price of HK$16.20, saying the company’s second-quarter adjusted property EBITDA far exceeded the level of the same period in 2019 thanks to the higher-than-expected revenue from its main gaming floor.

CICC upgraded its adjusted EBITDA forecast for the company this year and next by 3% and 2% to HK$9.4 billion and HK$10.8 billion, respectively, and maintained its “outperform” rating with a higher target price of HK$18.80.

Despite its apparent advantages, MGM China is still valued relatively low compared to its peers. Excluding Melco and SJM, which both were still losing money last year, Wynn has the highest price-to-earnings (P/E) ratio of 24 times, followed by Sands at 21 times and Galaxy Entertainment at 19 times. MGM China lags all of those at just 17 times. MGM China’s fast-rising profits should cause its P/E to drop further still if its stock price remains the same, making it a good bet for investors if Macau’s gambling rebound continues.

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