Revised forecasts for MGM are reflecting a drop as the gaming industry in Macau experiences a significant slowdown. This has prompted Deutsche Bank to revise its 2024 MGM China property EBITDA with a substantial 4 percent decrease from the previous estimate. The reasons behind tis revision are rooted in the anticipation of a slower recovery pace in the market. The result is that it is casting uncertainty over the industry’s performance in the coming year.
Macau steady in Quarter 2 2023
As MGM Resorts gears up to report its third-quarter 2023 earnings on 8 November, analysts are cautiously optimistic about the industry’s immediate future. In particular, a ‘steady share’ and ‘modest margin improvement’ in Macau is expected for the third quarter of this year.
MGM Resorts has experienced significant growth, with a Quarter 2 23 market share of 14.6 percent, marking a 560 basis point increase from Quarter 2 2019 levels.
The ability to maintain this market share has been a central focus for MGM, and early indicators for the third quarter suggest that the share has held firm during this period.
Bigger and better
MGM Resorts’ management has articulated four key priorities to maintain the company’s market share gains. These priorities include activating an additional 200 tables, remodelling the casino floor to maximize yield, introducing more mass and premium mass-focused tables and employing direct marketing strategies to attract global customers.
Increased mass revenue expected to boost margins
Deutsche Bank research highlights that MGM China’s margins are expected to expand modestly in a quarter-to-quarter manner, primarily due to the increasing mix of mass revenue on a market-wide basis. In the second quarter of 2023, MGM China benefited from an EBITDA boost of $3-4 million, largely attributed to higher-than-normal VIP hold rates. Consequently, while the current estimate for 3Q23 sits at a 28.5 percent property margin, up 20 basis points quarter-to-quarter, it is anticipated that the hold-adjusted improvement will be even more significant.
Cybersecurity issues impact group metrics
Beyond Macau, the report addresses the impact of cybersecurity issues on MGM Resorts’ group-wide metrics. Analysts have adjusted their forecasts for the third quarter of 2023 to account for the stated impact of US$ 100 million in adjusted EBITDAR, as noted by MGM Resorts’ management. The lion’s share of this impact, US$ 80 million, is attributed to Las Vegas operations.
Simultaneously, the report mentions that the impact from one-time expenses associated with the breach is expected to be less than US$10 million in Quarter 3 2023. Importantly, these expenses are not expected to be reflected in adjusted EBITDAR, as the company anticipates that insurance will cover these costs.
MGM Resorts is confident that its cybersecurity insurance will prove sufficient to cover both operational and one-time expenses related to the incident. Deutsche Bank acknowledges that there will be room for interpretation in the upcoming results but has revised its forecasts to account for the impact as detailed by the management.
In conclusion, the gaming industry’s outlook in Macau, while maintaining a ‘steady share’ and ‘modest margin improvement’ in Quarter 3 2023, is experiencing headwinds that have led Deutsche Bank to lower its 2024 MGM China property EBITDAR forecast.
MGM Resorts’ strategies to sustain its market gains and the impact of cybersecurity issues on the company’s financial metrics are key factors shaping the industry’s trajectory in the coming months. Investors and analysts will be watching MGM Resorts’ Quarter 3 earnings report closely for insights into the path forward for this leading gaming company.
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