MGM China’s IPO gamble

, Hong Kong, Macau

HONG KONG (Dow Jones Investment Banker) – MGM China Holdings Ltd. is looking to raise US$1 billion to US$1.5 billion in a Hong Kong IPO, set to price May 27. Gains in market share, as well as a buoyant market for gaming stocks, should support the flotation, provided it’s priced sensibly. That said, the deal has seen its fair share of controversy, and MGM China has to battle larger and more established players in the former Portuguese colony.

MGM China is the last among the six holders of a gambling license in Macau to come to market. The IPO, for which Bank of AmericaMerrill Lynch, JPMorgan and Morgan Stanley are acting as joint global coordinators and, together with BNP Paribas, CLSA, Deutsche Bank and The Royal Bank of Scotland, as joint bookrunners, has been increased from a previously expected US$800 million.

The company indirectly owns and operates one of the largest casinos in Macau, with a floor area of 28,976 square meters, 1,006 slot machines, 427 gaming tables and a 35-story hotel with 1,154 rooms and suites and 20 luxury villas. Macau received just below 30 million visitors in 2010, and its gross gaming revenues, which totaled about US$23.6 billion that year, have enjoyed a compound annual growth rate of 32.1% since 2005.

(Click HERE for statistics on Macau casino stocks)

MGM China’s business is now profitable, with net profits in excess of US$200 million out of casino revenues of US$1.6 billion in 2010, following two years of losses. While it’s enjoyed increases in market share for gross casino revenues from 8.1% to 8.9% since 2008, it’s also heavily geared, with net borrowings of more than US$500 million balanced by shareholders’ funds of only US$190 million – which the IPO should remedy.


A key risk is that MGM China currently only operates a single property, as does Wynn Macau Ltd., which, despite the premium and integrated nature of these resorts, pales in comparison with SJM Holdings Ltd.’s 20 casinos, Galaxy Entertainment Group Ltd.’s five properties, or Melco Crown Entertainment Ltd. and Sands China Ltd., which each operate three. MGM China’s concession runs until 2020. A possible expansion on a site totaling 17.8 acres in Cotai should therefore be well received.

And then there is the issue of the tie-up with tycoon Stanley Ho’s daughter, Pansy Ho, which in 2009 triggered a special report by the New Jersey Division of Gaming Enforcement, which, at the time, found her to be “an unsuitable person … based on grounds including her alleged dependence on her father … and her alleged association with certain individuals,” although this didn’t lead to findings by the New Jersey Casino Control Commission itself. Gaming authorities in other US states are also reviewing the links between MGM China’s parent, MGM Resorts International, and Pansy Ho, which, following the IPO, should see them own 51% and 29% of the listed company respectively.

A dispute between Stanley Ho and members of his family earlier this year threatened to derail the IPO too, while Pansy Ho and MGM Resorts International have also entered into non-competition agreements with respect to their activities in the PRC, Hong Kong, Macau and Taiwan.

But Macau casinos stocks have enjoyed a significant bull run over the last 12 months, with share price gains of between 95% and 283%. Provided the authorities in the Mainland continue to issue visas to VIP high rollers, who account for almost 72% of all gaming revenue in Macau, and MGM China’s IPO is priced sensibly, the chips should continue to pile up.

(Philippe Espinasse worked as an investment banker in the U.S., Europe and Asia for more than 19 years and now writes and works as an independent consultant in Hong Kong. Visit his website at Readers should be aware that Philippe may own securities related to companies he writes about, may act as a consultant to companies he mentions and may know individuals cited in his articles. To comment on this column, please email [email protected]).

[This article was originally published on Dow Jones Investment Banker on 10 May 2011 and is reproduced with permission].

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