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Investment Overview for MGM Resorts International (NYSE:MGM)

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Below are key drivers of MGM Resorts value that present opportunities for upside or downside to the current Trefis price estimate for MGM Resorts:

Macau Casinos

• MGM Macau Casino Revenues: MGM Macau casino revenues have increased considerably in the recent past. It grew from $1.5 billion in 2011 to $3.2 billion in 2014. However, revenues declined to $1.88 billion in 2016 due to the anti-graft measures from Beijing and improved slightly to $1.92 billion in 2017 as a result of improvement in main floor table games, partially offset by a decline in VIP revenue. Macau is the largest gambling hub in the world with annual gaming revenues of close to $33 billion in 2017. We expect MGM's Macau casino revenues to increase to over $3.6 billion by the end of our forecast period. This growth will be driven by MGM's new casino resort in Cotai region. The new resort will enhance MGM's capacity in Macau and increase its market share. MGM expects its Macau revenues to double after the opening of the Cotai resort. If Macau market rebounds and gaming volume grows at a higher than expected rate, it could result in an upside of over 10% to our price estimate for MGM. Here, we assume MGM Macau casino revenues to reach $5.2 billion by the end of the forecast period. In a bearish scenario, assuming that the Macau Casino industry starts witnessing slow growth and MGM's revenues remain under $2.3 billion by the end of the forecast period, there could be a downside of approximately 10% to our estimate for MGM' stock. We believe the increasing population of Chinese high net worth individuals (HNIs) and the expected completion of Cotai project are likely to be the stimulating factors for future growth.

Las Vegas Hotels

• Average Daily Rates for Las Vegas Hotels: Average Daily Rates for MGM Hotels in Las Vegas declined from $161 to $108 between 2007 and 2010. The decline was accentuated due to the economic recession and consequent decrease in consumer discretionary spending. Besides this, the growth in the Asian gaming industry also accentuated the decline in Average Daily Rates. The growth in the gaming industry of Macau and Singapore adversely affected the gaming industry in Las Vegas. However, since 2010, ADR started to recover and stood at $165 in 2017. In case, the U.S. economy grows faster than anticipated and the Las Vegas gaming industry gains momentum, we believe there could be a potential upside of around 10% to the Trefis price estimate. This is assuming that Average Daily Rates reach around $230 level by the end of the Trefis forecast period. However, a sluggish recovery in the U.S. and higher hotel vacancy rates could pressurize Average Daily Rates and pose more than 10% downside to the Trefis price estimate. This scenario would occur if Average Daily Rates remain range bound under $155 by the end of the forecast period.

For additional details, select a driver above or select a division from the interactive Trefis split for MGM Resorts at the top of the page.

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MGM Resorts International (MGM) is a holding company engaged in gaming, hospitality and entertainment. It primarily owns and operates casino resorts that include gaming, hotel, dining, entertainment, retail and other resort amenities. MGM owns and operates 15 properties located in Nevada, Mississippi and Michigan, and has 50% investments in four other properties in Nevada and Illinois. It also owns controlling stake in MGM China, which operates casino resorts in Macau.

Its Las Vegas strip operating properties include Bellagio, MGM Grand Las Vegas, Mandalay Bay, The Mirage, Luxor, Excalibur, New York-New York, Monte Carlo and Circus Circus Las Vegas. In other parts of Nevada, its operating properties include Circus Circus Reno, Gold Strike and Railroad Pass. These properties are located at Reno and Henderson. MGM also has operating properties in other US states: MGM Grand Detroit in Michigan and Beau Rivage and Gold Strike in Mississippi.

MGM Resorts also has four joint venture investments. It owns a 50% stake in CityCenter, Las Vegas, the Grand Victoria in Illinois and Silver Legacy in Nevada. It also holds a 51% stake in MGM China. MGM Resorts derives more than 40% of its revenue from non gaming activities, a higher percentage compared to its competitors. The main competitors include prominent firms in the gaming and casino industry such as Wynn Resorts, Las Vegas Sands, Boyd Gaming, Harrah's Entertainment and others.

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We believe that Macau operations are the primary source of value for MGM because:

Significantly Higher Volume Than Las Vegas Casinos

Macau offers significantly high gaming revenues as compared to the Las Vegas Strip. Macau gaming revenues are about 5 times higher than that of the Las Vegas Strip. In 2017, gaming revenues at Las Vegas Strip were $7.1 billion as opposed to $33 billion in Macau. This significant difference is due to very high demand for gambling in Macau, which is also the only place in China where gambling is legal. A lot of tourists from nearby countries visit Macau for gambling. Casino business is primarily divided into two categories in Macau, VIP gaming and mass market gaming. VIP gaming offers high volume but lower casino hold percentage while mass market gaming offers high hold percentage. The volume of mass market gaming is picking up in Macau and will benefit MGM. MGM itself is developing another casino resort in the region. The new resort will further enhance MGM's capacity in Macau and drive growth in the coming years.

Higher Proportion of Non-Gaming Revenues In Revenue Mix Compared To Competitors 

MGM Resorts offers a complete resort experience to its guests, including high quality non-gaming amenities such as food and beverages, entertainment, retail outlets, beauty salons, spas, and shows. The firms dependence on gaming revenues is comparatively lower compared to its competitors. Non-gaming revenues do get affected by the growth of gaming revenues as the majority of gaming customers utilize non gaming/ancillary services offered at resorts. However, we believe that the firms non gaming services do attract a large number of convention/show attendees and general tourists, apart from gaming tourists.

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Macau Gaming Rebound

Macau gaming industry started to rebound starting mid-2016 and grew by nearly 19% in 2017. However, before 2016, the region's gross gaming revenues were declining at a very high rate. The primary reason for this drop was the government’s anti-corruption crackdown. A wave of high-profile arrests of senior Chinese officials has hurt the VIP business of Macau casinos as they preferred to maintain a low profile. Furthermore, weakening economy added to the woes of casino operators in the region. Moreover, Beijing wanted Macau to diversify its economy, largely dependent on gambling, which accounts for a significant portion of the local government revenues.

The overall gaming market in Macau continues to improve in 2018. However, MGM may lose its market share to Las Vegas Sands and Wynn resorts as its Cotai project recently opened in Q1'18 and other casinos including Las Vegas Sands and Wynn Resorts opened their new casinos on Cotai strip in third quarter of 2016.

Las Vegas Gaming Market Growth Slowing Down

The economic recession of 2008-2009 slowed down the growth of the Las Vegas gaming industry. Other factors mentioned below also accentuated the slow down: 

Other US states like Pennsylvania and Delaware recently legalized table games. Similar actions by other states could affect the number of tourists visiting Las Vegas. More than 80% of the tourists visiting Las Vegas are domestic. The Las Vegas gaming market has reached a saturation state. Casino operators indulge in intense competition to sustain their margins. Intense competition is affecting the industry margins.

Excess room capacity hitting the markets is expected to pressurize the margins of the gaming industry by pushing average daily rates down. Furthermore, Asian tourists prefer Macau to Las Vegas as a result of two things: firstly it offers world class gaming infrastructure since the advent of foreign gaming companies in Macau in 2006, and secondly it is at a nearby location. The decline in the number of Asian tourists would also affect the Las Vegas gaming industry.

Increasing Share Of Asia Casino Revenues

MGM Resorts operations are not geographically diversified. It operates mainly in the US, particularly in Las Vegas. It does have a presence in Macau through its joint venture investment, MGM Macau. However, its presence in Macau is on a smaller scale compared to its competitors. However, MGM's new Cotai resort will boost its market share in the Macau casino industry.

Wynn Resorts and Las Vegas Sands have been focusing their efforts on Asia for future growth. LVS had opened Marina Bay Sands at Singapore and has built Cotai Central in Cotai. It is further developing The Parisian casino resort in Cotai. The following factors strengthened the trend mentioned above: 

Macau surpassed the Las Vegas Strip as the world’s biggest gambling hub in 2006 after the government allowed the entry of overseas casino operators. Since then, the region has witnessed unprecedented growth. In 2016, the region collected $28 billion in gaming revenues, still far more than the gaming revenues collected on the Las Vegas Strip.

Other upcoming regions within Asia like Japan and Singapore also offer immense growth potential for the casino industry. Japan is currently considering the legalization of casinos. A strong Chinese economy with a burgeoning middle class and an increased population of high net worth individuals is expected to strengthen Macau's gaming industry. Macau and Singapore offer world class gaming infrastructure. All major gaming companies like Melco Crown, Wynn Resorts, and Las Vegas Sands have their presence in Macau.

Key Infrastructural Initiatives Underway

The Macau government is reinforcing a series of initiatives in order to drive visitor growth in the region. The gaming industry is a key contributor to Macau's GDP. The government is investing in new transportation links to ease travel for Chinese visitors. It should be noted that most of the tourists visiting Macau are from Mainland China.

The Guangzhou-Zhuhai high-speed railway is expected to improve travel time from Guangzhou to Macau to 40 mins, down from the 2+ hours taken by bus. The Macau Light Rapid Transit will link ferry terminals and key locations. It will have 12 stops on the Macau peninsula, 11 stops on Cotai and Taipa, and will fully integrate different regions within Macau.

Also, the Hong Kong-Zhuhai-Macau bridge will connect Hong Kong to Macau, thereby, reducing car travel time from 4 hours to 40 minutes. It is expected to be completed by 2018. The Macau International Airport is presently undergoing capacity upgrades. Its capacity will be increased to handle 7.5 million people per year from the current capacity of 6 million people. It is expected to be completed by 2018.

Trefis Forecast Rationale for Macau Casino Revenues

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MGM Casino Revenues refers to revenues generated through gaming activities including VIP and mass market table games and slot machines in Macau.

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MGM's Macau casino revenues increased from $1.5 billion in 2011 to $3.2 billion in 2014. However, the revenues declined to $1.93 billion by 2017 amid anti-corruption crackdown in Macau.

We expect the MGM's Macau casino revenues to grow moderately in short term as LVS and Wynn will gain market share in Macau from their newly opened Cotai strip casinos. However, MGM is likely bouncing back mid 2018 led by its Cotai project, which has been operational since February 2018 and we expect it to provide a significant boost to MGM's casino revenues.

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Trefis considered the following factors in its forecast:

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1. Increasing Population Of Chinese High Net Worth Individuals (HNIs)
   • VIP gaming currently represents two-thirds of Macau gross gaming revenue. According to a recent Cap Gemini-Merrill Lynch Private Wealth report, China recently surpassed the UK to become the fourth largest population of HNIs. In the Asia-Pacific region, the report found that the rate of growth in the number of HNIs is expected to come in at a compound annual growth rate of 13%, compared to a global rate of 8%.

2. Expected Completion Of Cotai Project By 2017
   • The expected completion of an integrated resort in the popular Cotai region by late 2017, will lead to an increase in VIP as well as mass market table games turnover. However, its competitors Las Vegas Sands and Wynn resorts announced the opening of the new casinos on Cotai strip in third quarter of 2016 which will cause MGM's market share to decline in short term. According to a regulatory filing, MGM would feature 500 gaming tables in the new resort.

3. VIP Baccarat Volumes Are Expected To Increase
   • VIP Baccarat is gaining popularity in Asia particularly China. VIP baccarat accounts for close to 60% of the casino sector’s overall revenue.

4. Key Infrastructural Initiatives Underway
   • The Guangzhou-Zhuhai high-speed railway is expected to improve travel time from Guangzhou to Macau to 40 mins, down from 2+ hours taken by bus.
   • The Macau Light Rapid Transit will link ferry terminals and key locations. It will have 12 stops on the Macau peninsula, 11 stops on Cotai and Taipa and will fully integrate different regions within Macau.
   • The Hong Kong-Zhuhai-Macau bridge will connect Hong Kong to Macau, thereby, reducing car travel time from 4 hours to 40 minutes. It is expected to be completed by 2018.
   • The Macau International Airport is presently undergoing capacity upgrades. Its capacity will be increased to handle 7.5 million people per year from the current capacity of 6 million people. It is expected to be completed by 2018.

5. Governmental Intervention To Regulate The Gaming Industry
   • Macau government had fixed a cap on the number of table games allowed in Macau. We believe this is a positive for the existing players including MGM, as it stops the growth of new casinos from flooding the market with tables in the same facility. However, this could also impact the number of tables being allotted to MGM's own new casino in the region.

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1. We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
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