MGM Resorts International Is Planning for the Worst on Cotai

If MGM Resorts doesn't get a sufficient table game allocation, the casino operator may be forced to shift tables from its existing MGM Macau (above) to its new MGM Cotai that's scheduled to open in the second quarter of 2017. Image source:Yun Huang Yongvia Flickr.

Plan for the worst, hope for the best. MGM Resorts (NYSE: MGM) says it can't do anything but work within the narrow confines laid out by Macau's gaming regulators, so it's expecting to open its new MGM Cotai resort with just mass-market table games installed, regardless of how many it's ultimately assigned.

Stripping down the barriers

After years of catering to VIP gamblers, Macau is changing its image to one that is more family-friendly, with entertainment and gaming opportunities that have more mass appeal -- like you'd find in Las Vegas. Not that the casino operators are necessarily embracing the directives that have been handed down, but there's little choice in the matter. Beijing cracked down on the island oasis, the only place it's legal to gamble in China, and Macau has a short timetable to become a top tourist attraction for the mainland's burgeoning middle class.

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Data source: MacauGaming Inspection and Coordination Bureau.

Macau imposed a 3% annual growth rate on the number of table games it will allow each year, and though the number is not a line in the sand -- for example, the number of table games grew 4% in 2015 to 5,957 -- the authorities are tightening up the process.

Wynn Resorts (NASDAQ: WYNN) new Palace resort opens next week and though it was built with the capability to handle 500 table games, it was long expected it would be granted 250 tables based on the allotment given last year to Melco Crown Entertainment (NASDAQ: MPEL) for its Studio City resort and the second phase of development at Galaxy Entertainment Group's Galaxy Macau. Instead, Wynn got 100 table games, with 50 more to be granted over the next two years.

Although Wynn says it's satisfied with the number it was given, it's also forcing the casino operator to shuffle in more tables from its existing Wynn Macau location to ensure the $4.2 billion investment it made can still earn a sufficient return. The new live tables are only for the mass market; it can't use them to lure in VIPs. Wynn says it will bring in 250 tables from the other casino, giving the Palace 350 tables and Wynn Macau 270.

With Las Vegas Sands (NYSE: LVS) opening its Parisian resort that meets the mass market criteria the government is looking for, all eyes are on it to see what it will get.

A limit on opportunity

Since the 3% annual cap was announced in 2012, there are about 1,900 table games available before the government adjusts the number in 2022. Melco and Galaxy received 500 tables between them and Wynn is getting 150 more. That leaves a little more than 600 tables or so for Las Vegas Sands, MGM, and SJM Holdings, which is expected to open its new Grand Lisboa Palace in 2018.

But equally troublesome is the harder line being taken by the government that all the new tables Wynn was awarded be used only for mass market games and MGM's subsequent announcement it was going all-in on gaming with mass appeal. Melco Crown Entertainment tried going that route at Studio City and the results brought it up sharp.

In its just reported second-quarter earnings, Studio City generated just $184 million in net revenue, its second straight quarter of poor performance since opening last October. The resort operator, which has four casinos in Macau, has since decided to add VIP tables to its operations to bolster performance.

MGM Resorts may not have the same luxury since, like Wynn, it has but one other resort in operation on the island. Shuffling tables about or adding VIP tables later on at the expense of its existing operations may not be as viable for MGM as it has been for Melco and Wynn.

A roll of the dice

While mass market entertainment is seen as more profitable than simply catering to high rollers, it's only true if they show up and spend money. China's economy is stalling, which could impact the ability of sufficient numbers of guests materializing. A critical mass may be developed as more forms of entertainment open, and MGM Macau will be something of a state of the art venue when it is unveiled, but right now that market doesn't seem to be present, suggesting the casino operator may need a back-up plan in case the worst-case scenario plays out.

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