Drilling down, MGM’s quarter was not as good as advertised. Macau commentary flashed some warning signs.
THE CALL TO ACTION
We remain negative on most of the Macau operators – Galaxy (0027.HK) is the exception – and MGM’s Q2 earnings and call did not provide any relief. MGM maintains the lowest exposure to Macau of the major gaming operators but the company disappointed us in the US as well. Going forward, lower flow through, tough comparisons, and new supply could temper sentiment for the Strip. However, our real concern remains Macau and MGM management’s tone and commentary seemed to provide some backing for our Mass decelerating thesis.
Here are two takeaways from MGM’s Q2 earnings release.
- MGM reported wholly owned adjusted EBITDA of $414 million, up 10% over last year. However, if you normalize hold in both periods, EBITDA was roughly flat. That seems disappointing to us given the excitement about a surging Las Vegas recovery and the solid RevPAR gain of 6% generated in the quarter.
- MGM Macau disappointed with net revenues in line with our projection but EBITDA fell $14 million below our estimate and $18 million below the Street. From our estimate, it looks like yet another Macau property missing on margins. The below normal VIP win % of 2.7% was already reflected in our model. We estimate margins should’ve been over 100bps higher than the actual EBITDA margin of 25.4%, given the higher Mass mix of revenues in Q2 2014 versus Q2 2013.
MASS WARNING SIGNS FOR MACAU?
MGM’s earnings call probably provided the most important takeaways. MGM China CEO Grant Bowie seemed to hint that there could be a Mass slowdown this summer. While not discussed by the Street because it conflicts with their "Mass Is Great" thesis, June Mass growth decelerated to +27% from 30-40% in recent months. Bowie’s comment about Macau seasonality emerging similar to other mature markets suggests that Mass growth in July and August could continue to decelerate. Mass deceleration has been our thesis as articulated in our 06/13/14 note, MACAU: HANDICAPPING MASS DECELERATION.
Second, Mr. Bowie also seemed to suggest that conditions in the Mass market are very competitive. We believe these market conditions may have contributed to the across the board softer margins for the Macau operators in Q2. Meanwhile, while probably stable, it doesn’t look like there is any meaningful uptick in VIP trends. This is in line with our view that VIP seems to have bottomed but growth remains elusive.
Our primary concern remains intact: Mass is decelerating and operators may face increasing pressure to grow this business. While VIP continues to struggle, the decelerating Mass would be the biggest delta from investor expectations. The sell side seems focused on a 30% Mass growth rate for 2H 2014 but the math and anecdotal evidence (some of it from the MGM call) seems to suggest a rate 5-10% lower. We see Mass growth decelerating to the high teens by the end of the year. While we remain positive on Macau long term, Mass deceleration would likely pressure the stocks further.