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Is MGM's Growth in Peril?

Until last week, news surrounding any big gaming company was uncompromisingly positive. MGM Resorts International (NYSE: MGM  ) , which recently reported another round of double-digit sales growth and a tremendous gain on the bottom line, was hit particularly hard on the public markets upon the forecast of slowing growth in the world's gambling mecca, Macau. The peninsula has grown at an incredible pace for years -- with all of the biggest gambling businesses in a sprint to increase capacity and benefit from the surge in the Chinese middle class -- yet tightening regulations and shifting Chinese economic policy have some worried that Macau's growth could run into headwinds. The entirety of MGM Resorts' growth comes from Macau, so should investors be worried?

Though Las Vegas has recovered from the depths of its Great Recession-fueled downfall, it has yet to generate any meaningful growth across the industry. MGM saw its Vegas revenue climb slightly in the just-ended quarter, though the gains came from noncasino revenue. The segment's adjusted EBITDA grew an impressive 11.5% in the quarter, though Macau's EBITDA, by comparison, grew 33.4%. For a company that trades at growth-stock prices, a significant slowdown in Macau growth could spell problems for investors.

Whether that slowdown will occur is not a sure bet at this point. Up until the recent developments outlined below, Macau had looked to be on track for another stellar year.   

Macau's year-over-year revenue growth hit 10.7% in April, again exceeding estimates. So far this year, the region's growth is up nearly 20% over 2013. Still, some are calling for more difficult times ahead.

Changes on the way?
Chinese regulators recently initiated a crackdown on the use of UnionPay cards in Macau, which can be exploited to hide money used in gambling transactions. While it is currently unclear how much of Macau's historical revenue came from these shadowy practices, a Nomura analyst put the number for mass market revenue as high as one quarter of 2013's total.    With the new roadblock to sneaking in Chinese currency via pawn shop transactions (and coming out with Macau's own currency), we can't be sure of what the overall effects will be on Macau's growth.

Further concerning investors and analysts is data pointing to slowing credit growth in China. Recently reported April loans from Chinese banks were down year-over-year and missed analyst estimates  . Tightening credit policy often points to lower spending (the opposite of stimulus), and some believe this could encroach on leisure spending. For Macau, which is largely reliant on mainland tourism, this could hit the VIP sector hard, with ripple effects in the mass market segment, as well  .  

MGM Resorts, as mentioned above, is finding its growth from Macau. The company owns 50% of CityCenter in Las Vegas, a behemoth of a property that could generate meaningful growth if and when Vegas demand meets capacity. But for now, there isn't too much evidence of that happening.

Investors want to keep an eye on the monthly Macau numbers-- mainly VIP and mass market revenue, as well as hotel occupancy. This summer will be a good sign of where demand is headed on the peninsula. MGM's prospects remain in the positive, but keep in mind the substantial run-up in stock price already, and the valuation it implies.


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Michael Lewis

Michael is a value-oriented investment analyst with a specific interest in retail and media businesses. Before coming to the Fool, Michael worked with private investment funds focusing on deep value and special situations. Currently living in the media capital of the world--Los Angeles, California.

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9/4/2015 4:01 PM
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MGM Resorts Intern… CAPS Rating: ***