Hong Kong-listed MGM China Holdings Ltd recorded operating profit of HKD770.3 million (US$99.4 million) for the third quarter of 2015, the firm announced on Thursday. That represented a decrease of 47.1 percent from a year earlier, in accordance with International Financial Reporting Standards, the norm for companies listed in the Hong Kong Stock Exchange.
Between July and September, MGM China’s revenue declined by one third in year-on-year terms, to HKD4.1 billion. The firm reported adjusted earnings before interest, taxation, depreciation and amortisation (EBITDA) of HKD1.1 billion, down by 38.5 percent from the prior-year period.
The gaming operator however recorded a sequential increase in EBITDA margin for the second consecutive quarter. Property EBITDA margin at its only casino hotel in operation – MGM Macau – was 27.05 percent for the third quarter, a 43 basis point improvement from the second quarter, “driven by a disciplined approach to efficiency management”, the firm said in a press release.
Sanford C. Bernstein Ltd said MGM China’s third quarter overall results were “weaker than expected”. The brokerage highlighted the risk for a potential cut in dividend payouts in 2016.
“Third quarter results were below our expectations, with poor mass performance being a key negative driver,” analysts Vitaly Umansky, Simon Zhang and Bo Wen wrote in a note on Thursday. “Despite the strong growth in VIP (partly driven by high hold), we are concerned about the sequential weakness in mass,” they noted.
The Sanford Bernstein team stated that, “with business migrating to Cotai as new properties open, MGM China’s market share is at risk prior to the opening of MGM Cotai.”
MGM China confirmed in its Thursday release that casino resort MGM Cotai remains on target for a fourth quarter 2016 opening. The firm said it had already topped off its hotel towers and would celebrate the event in the coming week.
VIP table games revenue for MGM China decreased 39.5 percent year-on-year during the third quarter due to a decrease in VIP table games turnover of 55.0 percent compared to the prior-year quarter. That was partially offset by an increase in hold percentage to 3.7 percent in the current year quarter compared to 2.7 percent in the prior-year quarter.
During the period, MGM drastically reduced the number of gaming tables dedicated to the VIP segment to 161 from 210 a year earlier, according to the latest filing.
Third quarter VIP gross gaming revenue (GGR) market-wide in Macau fell by 38.0 percent year-on-year, according to official Macau government data.
Main floor table games revenue at MGM China decreased 30.4 percent compared to the prior-year quarter. The segment also posted a 10-percent quarter-on-quarter decline.
Market-wide mass GGR in Macau, including slots and electronic table games, fell by 29.7 percent in the three months to September 30 to MOP25.38 billion from MOP36.08 billion in the year earlier period.
“Despite continued top line pressures, MGM China has essentially stabilised EBITDA (with margins growing sequentially for the last two quarters) and we expect this to continue,” commented analyst Grant Govertsen from Union Gaming Securities Asia Ltd in a Friday note.
He added: “Looking further ahead, we remain positive on MGM China as we believe the company will be an outsized share-taker upon the opening of its Cotai project. In fact, no company is as leveraged to the upside as MGM China is as it relates to increasing its share of hotel rooms and gaming positions.”
MGM China’s announcement was made in tandem with the disclosure by parent company MGM Resorts International of it financial results for the third quarter. The firm reported a profit of US$66.4 million versus a loss of US$20.3 million a year earlier. But the main highlight was the announcement by MGM Resorts that it will create a publicly traded real estate investment trust – also know as REIT – to be named MGM Growth Properties LLC.
The gaming operator plans to contribute 10 real estate assets to the trust, all located in the United States. That includes some of its most iconic properties in Las Vegas, such as Mandalay Bay and The Mirage.
MGM Resorts said that it had already submitted a draft registration statement to the U.S. Securities and Exchange Commission relating to the proposed initial public offering of MGM Growth Properties. The firm additionally stated the number of shares to be sold and the price range have not yet been determined although it “intends to maintain control of the subsidiary post offering”.
“This transaction provides MGM Resorts’ shareholders numerous strategic and financial benefits, including deleveraging our balance sheet and enhancing long-term shareholder value,” said Jim Murren, chairman and chief executive of MGM Resorts.
Earlier this year, U.S.-based hedge fund Land and Buildings Investment Management LLC had called on MGM Resorts to split into a separate REIT and hotel-management company. MGM Resorts – which initially said it was opposed to such a move as not representing the best interests of shareholders – subsequently said it was hiring financial advisors to evaluate such possibility.
“At this time, we are reserving judgement on the prudence of the REIT given the many unknown moving parts,” Deutsche Bank Securities Inc wrote in a report following the announcement by MGM Resorts.
“That being said, we are confident the REIT is accretive to equity value, but how accretive is something we struggle with as we see both the puts and takes of the pro-forma structure and the equity value sensitivity to the assumptions around trading multiples,” analysts Carlo Santarelli and Danny Valoy added.
(Corrected at 11.58am, Oct 30 – the previous version erroneously stated that MGM China’s operating profit had declined 69.3 percent year-on-year)
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