Global Gaming and Casinos Industry Specialist, Casino Business Review LLC

Howard J Klein

I am a 25+ year c-level executive of the casino industry in operations, marketing, international development and strategic planning. Currently, a consultant specializing in the casino space. Industry expert contributor and publisher of a subscription letter called "The House Edge". Extensive experience in marketing and development in the Asian gaming market while a senior executive at Caesars, Ballys Grand and Trump Taj Mahal.
Part of senior executive teams that valued acquisitions and mergers with companies in the casino, hotel, d entertainment rant  and restaurant space.

Global Gaming and Casinos Industry Specialist

Equity Bottom-Up

<ul>
<li>Compared to Macau peers, MGM China, with its smallest market share pre-Cotai, has a longer runway on which to gain revenue momentum.</li>
<li>Despite what consensus sees as slowing VIP growth, mass continues building and MGM will benefit disproportionately due to its location.</li>
<li>Beijing has scheduled grand opening of Hong Kong-Zhuhai Bridge on October 23rd. We expect traffic to commence by November 1st in a range of 23,500 persons per day. This will position MGM for strong mass floor table game growth.</li>
</ul>Investment theory: There is growing consensus that the juggernaut of Macau monthly revenue growth in double digits is slowing, fundamentally due to the slackening VIP segment. It our view this is more likely to be a pause than a longer term trend that reflects macro uncertainties in the China economy. The resilience of China to produce a continuing flow of VIPs minted out of changing entrepreneurial opportunities is proven. But mass segment revenue streams will continue to ride north due to expansion of total monthly tourist visitation, improving transportation infrastructure and building penetration of tourism from the shoulder provinces of Guangdong. Meanwhile, casino properties aimed at accommodating mass growth that are new and by that newness, stimulate "looks" visitation and increase total room counts for converting day trippers to overnight guests, will materially benefit. As the newest "kid on the block" MGM China Holdings Ltd. (2282HK) Cotai property opened last February should see an acceleration of market share due to its smallest base:Market shares of key operators  Sands China Ltd (1928HK) 22%. Its transformation of its Cotai Central properties to The Londoner won't open until 2020/SJM (880HK) 20% Its expansion likewise may hit around 2020 as well.Melco Resorts &amp; Entertainment (NASDAQ:MLC) 15%/  Proceeds from the company's recent IPO on Studio City are  believed to eventually be slated to finance a Phase 3 expansion. This too appears to be a 2020 to 2022 debut.Wynn Macau Ltd (1128HK) 12%. One of the VIP segment powerhouses of Macau, its Cotai property, Wynn Palace has been a magnetic draw for look see visitation as well as increasing dominance of VIP. Its proximity to the new MGM property will be a footfall donor in the intermediate term to mass drop in business to MGM.Galaxy Entertainment Group (0027HK) 23%. Its market share dominance is due to its capacity through multiple properties large and small.MGM China Holdings Ltd: (2282HK) 8%. With a starting point market share of under double digits due to its prior single property presence, it is now a two property operator with the opening of its US$3.4bn stacked jewel box innovative architectural presence at the Cotai. The property opened last February 15th. Its shares traded at HKD 22/45/ Since then, despite early, positive performance, the shares have drifted down to 12.360 at writing.The property has 177 tables, bringing its two property count to 552 and its 900 slots two property count to 2,170. We believe the two property base propelled by a strong opening performance of the Cotai property is not yet priced into the stock. We think MGM China is cheap with positive Q3 growth ahead we are calculating on the basis of a 7% Q/Q upside given the Cotai's initial performance.MGM China: Six months ended June 2018 (Note: All amounts in HKD unless otherwise specified)These results include MGM Cotai for half of February plus the four months through June.Total revenue: $9.1bn up 30% y/y/. Adjusted EBITDA $2.3bn up from $2.2bn fro 2017. Note: Pre-opening costs of the Cotai property included).Main floor table games win up 31% to $5/2bn and slot win up 65% to $1.1bn. VIP table games were up 11% to $4.5bn. Not: All junket rooms were not totally operative nor initially the 27 suite VIP Mansion Villas. They are now all open and operative.EBITDA marin: 30% on main floor business which accounts for 80% of the total revenue. So while MGM Cotai offers a premium luxury property, its strength will come from the mass segment, which continues to grow at a more robust pace than VIP as total Macau GGR passes through a pause in double digit growth.Cannibalization: MGM Macau experienced an 8% decline in main floor table games during the period when its sister property opened. However, much of this was attributable to lower hold of 17.9% vs. 20.8% for 2017. This is cross property visitation that historically always drains off look see business from the existing property to its new sister. Our internal metrics historically suggest this usually fades within 90 to 120 days. However the net result as we have pointed out in prior insight is best expressed by seeing it as two pockets in one pair of pants. The aggregate revenue however is accretive.Bottom line: The MGM Cotai property was largely responsible for the y/y 30% growth of net revenue that as yet has resulted in a strong rebound of the stock to its high at pre-opening last February. We see this as an entry point despite the fact that slowing total gains in GGR have hit the sector in general. The key is that MGM Cotai appears to be performing very well in mass, ramping up in VIP at a starting point of market share considerably lower than its peers. That translates to us as more run room ahead.Catalysts going forward1. The footfall/critical mass exchange always benefits the newest property.During my tenure as a senior executive in the Atlantic City gaming industry, I had to deal with the reality that daily mass arrivals were predominantly dependent on  a vast network of bus routes originating from key feeder markets.To incentivize patrons to redeem promotional coin coupons at our property which would presumably give us first shot at the customer's bankroll, we like everyone else, distributed rolls of quarters as part of a package that included discounts on food or rooms. The problem facing us as Caesars and our competitors was what we came to call "coin walk". We quickly learned in the competitive melee that merely giving more coin did not necessarily result in that coin finding its way into our slot machines and table games.We knew that even when we raised the stakes by offering a fatter coin package to arrives, a certain percentage of those people would redeem at our casinos but cross the street to a competitor to play there for other reasons, among which were perception of luck, newer machines.etc. So in effect, we were paying for our competitor's increased footfall. They were getting free business off our coin package. So we reduced our coin to see if the opposite phenomenon occurred, namely, that we would receive free business from our competitor's raised coin giveaway. What actually happened we learned, was that many factors outside of coin giveaway alone determined the footfall traffic flows of patrons.To cure the core problem I tasked several of my teams to develop a regression analysis of all the factors that played into the decision by mass arrival patrons to play at given properties. The objective was to identify these factors and create a strategy to overcome the necessity to over reward arriving patrons. Out of that project emerged a Footfall Exchange Matrix, or FXM which resulted in an evaluation of our competitive set in terms of them being a Location Plus or Location Minus destination. Since that time I have refined and broadened that metric and use it in many projects for consulting clients who are in the process of evaluating realty locations for expanded or new markets. The FXM matrix is the intellectual property of my consulting business and as such I am limited as to detailing case histories or methodologies. But I can share some elements. Among the factors we include are walking/taxi/driving distance between competitors, newness to the market, distinctive show, shopping or dining outlets, average age of drop ins from competitors (this is related to walk time which of course becomes an ever larger factor as you move up the average age scale of walkers). Weather factors in, as does such issues as change of luck, invitations by competitive player development personnel, meeting of friends for shows or dinners,etc. Footfall exchange between neighboring casino properties our research showed naturally favored new properties and was more prevalent among mass segment players than VIPs who are usually invited to see a new property by aggressive player development executives they have come to know. From that my estimates indicate that MGM Cotai would be a Location Plus recipient of mass footfall during its initial year from its neighbors.Our archived FXM metric shows that short walking distance increases the prospect of footfall by 45%. Newness, increases prospects by 67%. and change of luck by 55%. We believe that this footfall exchange has benefitted MGM Cotai and was in part responsible for its strong early performance. We expect that to continue into Q3. Of course, as we have noted, footfall is an exchange. Wynn Palace will indeed see visitation from MGM and other neighbors. The key as always is this: Total critical mass of casino properties in confined geographic areas in robust markets like Macau rise and benefit all. So the conclusion is that when you are new and your starting point is the lowest market share among market leaders, you have the most to gain, the least to lose.Currently, Macau total tourist arrivals are at a run rate around 3 million per month. Overnight visitation due tot the increase in first class rooms and soon, the dramatically cut travel time from Hong Kong to Macau via the new bridge, will disproportionately benefit the new property at the Cotai. MGM bring around 1,400 rooms to the Cotai complex. City wide overnight visitors are up 16.3%, day trippers up 21.6%. Our analysis assumes a 2018 GGR total of US$38.5 to $39bn which we believe will bring MGM's total market share into double digits for the first time and by that fact, spur earnings.Average P/E (TTM) of MGM China over last 5 years:Minimum: 7.836   Maximum: 41.09  Average: 21.20. These ranges apply to a single property operator and we believe reflect MGM's single digit market share despite the strong recovery of total market GGR since the 2015 meltdown due the the junket and capital flight crises.On this basis we believe MGM is better positioned than it has ever been in Macau and its price is attractive for an entry point here despite the flattening ofo market GGR and the other macro factors in the China economy as well as unsettled externals as the as yet unresolved trade war headwinds.


Compared to Macau peers, MGM China, with its smallest market share pre-Cotai, has a longer runway on which to gain revenue momentum.
Despite what consensus sees as slowing VIP growth, mass continues building and MGM will benefit disproportionately due to its location.
Beijing has scheduled grand opening of Hong Kong-Zhuhai Bridge on October 23rd. We expect traffic to commence by November 1st in a range of 23,500 persons per day. This will position MGM for strong mass floor table game growth.
Investment theory: There is growing consensus that the juggernaut of Macau monthly revenue growth in double digits is slowing, fundamentally due to the slackening VIP segment. It our view this is more likely to be a pause than a longer term trend that reflects macro uncertainties in the China economy. The resilience of China to produce a continuing flow of VIPs minted out of changing entrepreneurial opportunities is proven. But mass segment revenue streams will continue to ride north due to expansion of total monthly tourist visitation, improving transportation infrastructure and building penetration of tourism from the shoulder provinces of Guangdong. Meanwhile, casino properties aimed at accommodating mass growth that are new and by that newness, stimulate "looks" visitation and increase total room counts for converting day trippers to overnight guests, will materially benefit. As the newest "kid on the block" MGM China Holdings Ltd. (2282HK) Cotai property opened last February should see an acceleration of market share due to its smallest base:Market shares of key operators  Sands China Ltd (1928HK) 22%. Its transformation of its Cotai Central properties to The Londoner won't open until 2020/SJM (880HK) 20% Its expansion likewise may hit around 2020 as well.Melco Resorts &amp; Entertainment (NASDAQ:MLC) 15%/  Proceeds from the company's recent IPO on Studio City are  believed to eventually be slated to finance a Phase 3 expansion. This too appears to be a 2020 to 2022 debut.Wynn Macau Ltd (1128HK) 12%. One of the VIP segment powerhouses of Macau, its Cotai property, Wynn Palace has been a magnetic draw for look see visitation as well as increasing dominance of VIP. Its proximity to the new MGM property will be a footfall donor in the intermediate term to mass drop in business to MGM.Galaxy Entertainment Group (0027HK) 23%. Its market share dominance is due to its capacity through multiple properties large and small.MGM China Holdings Ltd: (2282HK) 8%. With a starting point market share of under double digits due to its prior single property presence, it is now a two property operator with the opening of its US$3.4bn stacked jewel box innovative architectural presence at the Cotai. The property opened last February 15th. Its shares traded at HKD 22/45/ Since then, despite early, positive performance, the shares have drifted down to 12.360 at writing.The property has 177 tables, bringing its two property count to 552 and its 900 slots two property count to 2,170. We believe the two property base propelled by a strong opening performance of the Cotai property is not yet priced into the stock. We think MGM China is cheap with positive Q3 growth ahead we are calculating on the basis of a 7% Q/Q upside given the Cotai's initial performance.MGM China: Six months ended June 2018 (Note: All amounts in HKD unless otherwise specified)These results include MGM Cotai for half of February plus the four months through June.Total revenue: $9.1bn up 30% y/y/. Adjusted EBITDA $2.3bn up from $2.2bn fro 2017. Note: Pre-opening costs of the Cotai property included).Main floor table games win up 31% to $5/2bn and slot win up 65% to $1.1bn. VIP table games were up 11% to $4.5bn. Not: All junket rooms were not totally operative nor initially the 27 suite VIP Mansion Villas. They are now all open and operative.EBITDA marin: 30% on main floor business which accounts for 80% of the total revenue. So while MGM Cotai offers a premium luxury property, its strength will come from the mass segment, which continues to grow at a more robust pace than VIP as total Macau GGR passes through a pause in double digit growth.Cannibalization: MGM Macau experienced an 8% decline in main floor table games during the period when its sister property opened. However, much of this was attributable to lower hold of 17.9% vs. 20.8% for 2017. This is cross property visitation that historically always drains off look see business from the existing property to its new sister. Our internal metrics historically suggest this usually fades within 90 to 120 days. However the net result as we have pointed out in prior insight is best expressed by seeing it as two pockets in one pair of pants. The aggregate revenue however is accretive.Bottom line: The MGM Cotai property was largely responsible for the y/y 30% growth of net revenue that as yet has resulted in a strong rebound of the stock to its high at pre-opening last February. We see this as an entry point despite the fact that slowing total gains in GGR have hit the sector in general. The key is that MGM Cotai appears to be performing very well in mass, ramping up in VIP at a starting point of market share considerably lower than its peers. That translates to us as more run room ahead.Catalysts going forward1. The footfall/critical mass exchange always benefits the newest property.During my tenure as a senior executive in the Atlantic City gaming industry, I had to deal with the reality that daily mass arrivals were predominantly dependent on  a vast network of bus routes originating from key feeder markets.To incentivize patrons to redeem promotional coin coupons at our property which would presumably give us first shot at the customer's bankroll, we like everyone else, distributed rolls of quarters as part of a package that included discounts on food or rooms. The problem facing us as Caesars and our competitors was what we came to call "coin walk". We quickly learned in the competitive melee that merely giving more coin did not necessarily result in that coin finding its way into our slot machines and table games.We knew that even when we raised the stakes by offering a fatter coin package to arrives, a certain percentage of those people would redeem at our casinos but cross the street to a competitor to play there for other reasons, among which were perception of luck, newer machines.etc. So in effect, we were paying for our competitor's increased footfall. They were getting free business off our coin package. So we reduced our coin to see if the opposite phenomenon occurred, namely, that we would receive free business from our competitor's raised coin giveaway. What actually happened we learned, was that many factors outside of coin giveaway alone determined the footfall traffic flows of patrons.To cure the core problem I tasked several of my teams to develop a regression analysis of all the factors that played into the decision by mass arrival patrons to play at given properties. The objective was to identify these factors and create a strategy to overcome the necessity to over reward arriving patrons. Out of that project emerged a Footfall Exchange Matrix, or FXM which resulted in an evaluation of our competitive set in terms of them being a Location Plus or Location Minus destination. Since that time I have refined and broadened that metric and use it in many projects for consulting clients who are in the process of evaluating realty locations for expanded or new markets. The FXM matrix is the intellectual property of my consulting business and as such I am limited as to detailing case histories or methodologies. But I can share some elements. Among the factors we include are walking/taxi/driving distance between competitors, newness to the market, distinctive show, shopping or dining outlets, average age of drop ins from competitors (this is related to walk time which of course becomes an ever larger factor as you move up the average age scale of walkers). Weather factors in, as does such issues as change of luck, invitations by competitive player development personnel, meeting of friends for shows or dinners,etc. Footfall exchange between neighboring casino properties our research showed naturally favored new properties and was more prevalent among mass segment players than VIPs who are usually invited to see a new property by aggressive player development executives they have come to know. From that my estimates indicate that MGM Cotai would be a Location Plus recipient of mass footfall during its initial year from its neighbors.Our archived FXM metric shows that short walking distance increases the prospect of footfall by 45%. Newness, increases prospects by 67%. and change of luck by 55%. We believe that this footfall exchange has benefitted MGM Cotai and was in part responsible for its strong early performance. We expect that to continue into Q3. Of course, as we have noted, footfall is an exchange. Wynn Palace will indeed see visitation from MGM and other neighbors. The key as always is this: Total critical mass of casino properties in confined geographic areas in robust markets like Macau rise and benefit all. So the conclusion is that when you are new and your starting point is the lowest market share among market leaders, you have the most to gain, the least to lose.Currently, Macau total tourist arrivals are at a run rate around 3 million per month. Overnight visitation due tot the increase in first class rooms and soon, the dramatically cut travel time from Hong Kong to Macau via the new bridge, will disproportionately benefit the new property at the Cotai. MGM bring around 1,400 rooms to the Cotai complex. City wide overnight visitors are up 16.3%, day trippers up 21.6%. Our analysis assumes a 2018 GGR total of US$38.5 to $39bn which we believe will bring MGM's total market share into double digits for the first time and by that fact, spur earnings.Average P/E (TTM) of MGM China over last 5 years:Minimum: 7.836   Maximum: 41.09  Average: 21.20. These ranges apply to a single property operator and we believe reflect MGM's single digit market share despite the strong recovery of total market GGR since the 2015 meltdown due the the junket and capital flight crises.On this basis we believe MGM is better positioned than it has ever been in Macau and its price is attractive for an entry point here despite the flattening ofo market GGR and the other macro factors in the China economy as well as unsettled externals as the as yet unresolved trade war headwinds.

MGM China Holdings Ltd: Prospects Growing More Bullish: Is It a Crouching Tiger in Hiding?