Even at the high end of the stated range, MGM China looks like a good deal for investors.
We think MGM China is worth at least HK$16 per share. This is higher than the HK$12.36-15.34 stated range in the prospectus. Our valuation is based on 10x 2012 EV/EBITDA plus approximately HK$1 for a future Cotai property. The all-in valuation at HK$16 would still put MGM China at more than a 25% discount to Wynn Macau and Sands China and a 12% discount to the average of the comp group. The discount is predicated on the following:
- A conflicted joint venture structure that while MGM is in control, is reliant on a 29% partner Pansy Ho who serves on the STDM board, the largest shareholder of competitor SJM in the Macau market.
- MGM is not a primary concessionaire
- While we think it is likely that MGM ultimately develops a Cotai property, Sands China with Lots 5/6 and Wynn Macau with Wynn Cotai are further along
- The majority shareholder MGM Resorts International is in significantly worse financial shape than LVS and especially WYNN
MGM China is likely to price at a valuation higher than MPEL which is more of a reflection of investors underpricing MPEL rather than an overvaluation of MGM China. At the high end of the range, MGM China would price at 10.2x our 2012 EBITDA estimate of HK$5.2 billion which looks very reasonable to us given the growth profile of the Macau market and the income tax advantages in that market. Remember that casinos pay no income taxes on gambling profits so the tax adjusted EV/EBITDA multiple is even more attractive relative to the US and even Singapore EBITDA.
Since we think MGM China is worth at least the top end of the stated range, we’ve priced out the following comp table assuming MGM China at HK$15.34:
Again, MGM China looks very cheap next to Wynn and Sands. To be fair to Sands, since their new properties won’t be fully open in 2012, we should also look out to 2013. Even on this basis, MGM China still would trade at an 11% discount to the comp group, a 22% discount to Sands and an even bigger discount to Wynn. Only SJM (slightly) and MPEL would be cheaper.
On a free cash flow yield basis, the comparisons are certainly tighter. MPEL remains the clear standout under this metric while MGM China looks reasonable, but not necessarily cheap. However, we think as long as Macau remains as growthy as it appears, investors probably will not pay much attention to yield.