MGM MACAU PRE-IPO AGGRESSION

Feed the junkets is the plan and we think it will work – at least for market share gains. 

 

 

We’ve written a few posts on MGM’s strategy to boost its Macau market share ahead of the planned IPO.  It’s been our belief that if management can elevate market share and revenues, even at the expense of margins, they MAY be able to sell a future EBITDA level based on a higher revenue run rate.  Of course, while it’s easy to “buy” revenues, you can’t “buy” profits.  We’ll see if investors “buy” the future EBITDA story.

 

MGM Macau recently hired Mr. Kwong away from Altira to run the VIP operation as part of this strategy.  Mr. Kwong is known to be very aggressive in compensating the junkets to focus on the top line rather than the bottom.  The property recently brought the junket operator David Star to operate a VIP room.  David Star maintains a sizable operation at Wynn.

 

So how aggressive are they?  We are hearing that David Star is getting in excess of 55% revenue share, but they are also responsible for the costs of the room, including staff and property expenses.  This deal would be similar to the Golden Group room in Grand Lisboa which is based on the deals at the SJM 3rd party casinos.  We estimate this structure provides a margin of roughly 5% for the casino versus a mid-teens margin for the property’s standard VIP arrangements.  

 

MGM Macau is also being aggressive with regards to the advanced front money, essentially credit, with a number of HK$500m being mentioned around town, although it’s unclear if this is just for David Star or spread around the other rooms as well.  Many of the casinos will offer up to 50% of the expected revenue share/commission based on historical performance and we are hearing that MGM is pushing between 75% and 100%--so considerably more.  This should not be considered a long term strategy and we doubt MGM is planning to be this generous for more than necessary to boost their numbers ahead of the IPO.

 

So how is it working so far?  In terms of volume share, we think the September numbers will show gains.  Hold percentage has been subpar so far in September so revenue share may not have kept up.  However, look for a big jump in Q4.

 

While management seems set on a Q4 deal, we still think the most prudent strategy for MGM would be to wait until they have a few months of market share gains under their belt before they price the IPO.  That would be put the timing in Q1 of 2011.



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