Union Gaming Macau released the following note on Thursday, 18th October:
This evening MGM China announced that it had accepted the Macau government’s Land Concession Contract for its future Cotai development and has already paid the government its USD56mm premium. The next step in the process, before construction can begin in earnest, is for the contract to be published in the Official Gazette, which we believe is likely 5 to 6 months out (similar to the timeframe following Wynn Macau’s premium payment). This approval is also in line with government commentary that suggested two projects would be approved this year, although we believe many had discounted this possibility with respect to MGM.
Likely a 2H16 opening
In addition to the gazetting process, MGM will also need various other approvals, such as construction, design, and labor. With this in mind, we suspect that construction will likely begin in 2H13, and assuming a 36 month development timeframe would imply a 2H16 opening. As previously communicated, the project is anticipated to cost USD2.5bn, and contain up to 500 tables, 2,500 slots and 1,600 hotel rooms, in addition to various and as-of-yet undisclosed non-gaming amenities. Upon gazetting, we suspect the company will also unveil the brand name of the project, which could likely be a recognized brand that already exists within the company’s portfolio.
Thoughts on financing and valuation
The company is currently in the market and expects to enter into a credit facility of at least USD1.5bn (we suspect this will be finalized prior to year-end). Its Cotai project budget would imply cash equity needed of USD500mm to USD1.0bn, which we don’t anticipate will be an issue given that the existing Macau asset is generating in excess of 700mm in EBITDA annually (in 2013 and beyond based on our current forecasts). When using a conservative return profile, we think MGM’s Cotai project is worth more than HKD4 per share in today’s dollars, which isn’t reflected in current valuation and would represent 30% upside to today’s closing price of HKD13.66. We think for MGM Resorts International (MGM) the Cotai project could be worth between $2-3 per share in today’s dollars.
Long-term lease implies concession renewal
We would note that the 25 year lease term as per the Land Concession Contract would imply that the government has every intention of renewing MGM China’s concession agreement upon its expiration on 2020. While we believe the renewal risk has always been considered to be quite low, we think the lease agreement, which should extend to 2038, gives a good indication of where the government’s head is at with respect to concession renewal
