MGM China, the Macau gaming business majority owned by MGM Resorts International (NYSE:MGM), has the financial resources to survive up to 15 months if scant visitation to the Special Administrative Region (SAR) lingers. But don’t bet on the parent company selling its stake in the business to shore up its own balance sheet, say analysts.
The operator of the MGM Cotai and MGM Macau has $387 million in cash on hand and access to a bank line of credit worth $580 million, giving it the liquidity to survive six to 15 months, according to Bernstein analysts.
That assumes a worst-case scenario of another shutdown of Macau casinos, a concept the government there is reluctant to embrace. Gross gaming revenue (GGR) and visits to the peninsula haven’t come anywhere close to recovering following a 15-day closure in February forced by the coronavirus outbreak.
Bernstein estimates that in a shutdown scenario, MGM China would burn $2.07 million per day, which is in line with what some comparable operators said they were blowing through during the February closure. Analysts are saying that this year, Macau concessionaires need daily revenue of almost $38.20 million to break even on an earnings before interest, taxes, depreciation and amortization (EBITDA) basis, a market that isn’t close to being achieved.
Don’t Bet on a Sale
Las Vegas-based MGM owns nearly 56 percent of the China unit, something the company hasn’t been shy about advertising when highlighting its financial strength in the wake of the COVID-19 pandemic. However, analysts believe it’s unlikely the parent company will look to reduce or liquidate that stake.
There are a whole host of issues with trying to divest MGM China, including finding a buyer that the Macau government would agree to (not a very easy foray) and also dealing with MGM’s partner, Pansy Ho, who would not necessarily look favorably at a new partner,” said Bernstein.
Ho is also a major MGM shareholder, though she dramatically reduced her stake in the Mirage operator in two sales announced last November and December. The stock is down nearly 58 percent year-to-date and resides 59.35 percent below its 52-week high.
MGM China has a net leverage ratio of 2.9x trailing 12-month earnings before interest, taxes, depreciation and amortization (EBITDA), which Bernstein views as palatable. Like some other Macau operators, the company recently was granted some breathing room by creditors, landing some covenant waiver extensions on bank loans.
“Liquidity concerns are not a near-term issue even in a near zero-revenue environment,” said Bernstein of MGM China.
Macau gaming venues are open. But visits remain scant because of strict travel controls imposed to stem the spread of the coronavirus. Mainland China and Hong Kong – two vital arteries for gamblers seeking entry into Macau – continue limiting travel to the gaming hub, punishing GGR in the process. Analysts are speculating that those restrictions will be lifted in June and that gaming revenue could rebound in the fourth quarter.