MGM Resorts (NYSE: MGM) just opened arguably its most important resort since completing CityCenter in 2009. MGM Cotai will greatly expand the company's presence in Macau with 1,400 hotel rooms, a 2,000-seat theater, and over 300 pieces of contemporary art. And at a cost of $3.4 billion, it's a big bet on the region.
Most importantly, MGM Cotai gives MGM Resorts a presence in the lucrative Cotai region of Macau, where the most profitable resorts in Macau are located. Here's a look at both the opportunity and the risks of the project.
MGM Cotai opens its doors
The opening of MGM Cotai came ahead of the all-important lunar new year, which began Friday, Feb. 16. The week following the new year is typically one of the highest-grossing weeks for gaming revenue, so the company pushed hard to be open in time.
MGM Cotai's location in the center of Cotai is ideal for a company making its first push into Macau. It's across the street from Wynn Resorts' (NASDAQ: WYNN) recently opened Wynn Palace, and adjacent to Melco Resorts' (NASDAQ: MLCO) City of Dreams and Las Vegas Sands'(NYSE: LVS) Sands Cotai Central. It's also near the first light rail stop after the airport, making it an easy stop for tourists.
CEO Jim Murren highlighted the non-gaming aspects of the resort, but make no mistake: Gaming is what will drive MGM Cotai's profitability.
Why MGM Resorts needs a presence in Cotai
You don't have to look further than MGM's own results to see why MGM Cotai is so important. MGM's resort on the Macau Peninsula reported a decline in operating income in the third quarter from $84 million to $35 million, while adjusted EBITDA dropped 21% to $118 million. Both are still big numbers, but the Macau Peninsula is losing ground to Cotai.
The growth in Macau has been concentrated on Cotai the last few years, so MGM needed a piece of the action. For example, Wynn Palace's adjusted EBITDA jumped 145% last quarter to $190.1 million and Las Vegas Sands generated $324 million (up 23.7%) in adjusted EBITDA at Venetian Macau, while Sands Cotai Central generated $202 million (up 53%).
I would be surprised if MGM Cotai generates as much EBITDA as Wynn Palace or Venetian Macau, but an annual run rate of $600 million of adjusted EBITDA or more would be a big win for MGM Resorts and a very strong return on its $3.4 billion investment.
With opportunity comes risk
It seems that every discussion about Macau's gaming companies today has to mention the concern that gaming licenses in the region are running out soon. MGM is taking a leap of faith spending $3.4 billion to build a resort when its license is up in two years and Macau's government has been opaque about what renewals will look like. But management is confident the license will be renewed.
For now, it should be seen as a positive that MGM Resorts finally has its presence in Cotai. But management and investors need to keep an eye on the gaming license renewal process in Macau after making such a big bet on the region.
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