MGM Clears Govt Hurdle for Cotai

MGM Resorts International (MGM - Analyst Report) has finally received a long-awaited approval from the Macau Government for development of a resort and casino in Cotai, Macau – the only Chinese city where gambling is legal.

Per the land concession contract, the company will construct a five-star resort with gaming areas and 85% gross floor area of non-gaming offerings including retail and other amenities on 17.8 acres of land in the Cotai area.

MGM Grand Paradise, a wholly-owned subsidiary of MGM China, accepted the land concession contract on October 18 last year. The total land premium payable for the build-up is $161.4 million, including a down payment and eight additional semi-annual payments.

Additionally, MGM Grand Paradise will pay the Macau government a rent of approximately $269,000 annually at the time of development and around $681,000 annually once development is complete. The annual rent is subject to review by the Macau government every five years. The Cotai Land will be leased from the Macau government for an initial term of 25 years with a right to renew the contract for additional periods.

The company has already finalized a design for its proposed Cotai resort with a completion time frame of approximately 3 years. The property will have 1,600 rooms and suites, a gaming area featuring up to 500 tables and 2,500 slots, food and beverage and retail and entertainment options. The property is expected to cost around $2.5 billion.

Although this much-awaited approval brought a sigh of relief to MGM, the intense competition in the marketplace cannot be overlooked. Macau is one of the largest gaming destinations in the world and thus contributes immensely to earnings of the domestic as well as western casino operators. One of MGM’s peers, Las Vegas Sands Corp. (LVS - Analyst Report) is already operating in that region.

In last September, another peer Wynn Resorts Limited (WYNN - Analyst Report) got a nod from the Macau Government to set up a casino at Cotai Land. Wynn targets to open Cotai Resorts in 2015.

Apart from these western players, Chinese players are also eager to tap Cotai. One such company is SJM Holdings Ltd that won a land grant in October last year to build its first hotel-casino in the Cotai Strip. MGM currently carries a Zacks Rank #2 (Buy). However, we remain Neutral on MGM Resorts over the long term.