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MGM Resorts Doubles Down With Increased Stake in MGM China

By Bradley Seth McNew – Oct 19, 2016 at 5:16AM

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MGM now owns a larger stake of its local Chinese subsidiary. Here's why this could be an important bet.

Image source: MGM Resorts.

MGM Resorts International (MGM 1.51%) is raising the stakes on its investment in China by announcing recently that it would buy an increased stake in MGM China Holdings. As of the transaction closing in early September, MGM now owns a controlling 56% of the company, up from 51%. This may seem like a minor increase, but it's important in multiple ways.

Betting on Macau's regrowth

Macau's sudden and devastating drop since the summer of 2014 left many investors with a bad taste for the Chinese gambling mecca. Pulling in more than seven times the annual gaming revenue of Las Vegas as of 2013, Macau suddenly switched to 26 months in a row of year-over-year declines. 

However, things could be stabilizing, and this could be great timing for MGM, which is preparing to open a new resort in Macau in 2017. Gambling revenue turned positive over the prior year in August and September, breaking the 26-month decline streak. While the increases were paltry compared with the declines in the recent past, Macau will still generate about three times as much gambling revenue in 2016 as Las Vegas. There are plenty of reasons to believe there is potential for increased total revenue going forward, such as easier access for tourists and more non-gambling entertainment appeal. 

MGM is finishing up its $3 billion-plus resort in Macau that it's calling the "jewelry box" of Cotai. It should open in Q2 2017 and will feature 1,500 hotel rooms and suites, meeting space, a high-end spa, and much more. 

Rendered view of what MGM Cotai will look like. Image source: MGM Resorts

MGM's presence in Macau is relatively small compared with Las Vegas Sands (LVS -0.17%) and Wynn Resorts (WYNN -0.23%), each with their own new resorts opened this year. Still, it could have major upside there, as its Macau presence will more than double with this new resort. 

MGM's Mainland China potential

The island of Macau, which is just off the coast of Mainland China's Zhuhai region, is the only place in China that allows gambling as of now. However, that doesn't mean there isn't a major opportunity for MGM in mainland China to use its same resort-style appeal without the gambling. 

MGM opened the MGM Grand Sanya on the tropical Hainan Island in the south of China in 2013. Initially, there was hope that gambling would be allowed there, but the Chinese government eventually declined it. Still, the resort could be a model for how MGM could build out its hotels and resorts elsewhere in Mainland China.  

MGM Grand Sanya. Image source: MGM Resorts

Hotels are increasingly becoming an important business in China, with companies such as Marriott International and others fighting to win share of this market. That's because Chinese nationals, who are moving into the middle class by the millions each year, have an increasing appetite for domestic travel. According to The China Business Review, Chinese domestic tourism spend is expected to grow 16% annually through 2020 to around $615 billion. 

Why MGM's bet looks solid

MGM forecasts total 2017 year-end adjusted EBITDA of $3.1 billion, up about 40% from the $2.2 billion logged in 2015. This will be helped in multiple ways, such as a new resort in Maryland and continued growth in Las Vegas, but China is clearly an important part of that growth strategy. 

MGM China has struggled recently, along with most casino companies with a focus on Macau. Its EPS for the first half of 2016 dropped 23% year over year. Still, with good news coming out of Macau ahead of MGM's new resort opening there, and such a large opportunity for hotels and resorts in Mainland China without the casinos, MGM Resorts' increased stake in MGM China looks like a solid bet not only for the potential to take home a larger share of its earnings, but also a show of investment in China itself.

Seth McNew owns shares of Las Vegas Sands and Marriott International. The Motley Fool owns shares of and recommends Marriott International. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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