RECENT RESEARCH

MGM MIRAGE (MGM): Updated liquidity analysis

Updated liquidity analysis Investors remain concerned about MGM's liquidity profile following its recent credit facility restructuring. This is a function of debt maturity demands on its capital and the risk of incremental operating weakness in Las Vegas in the event of a "double dip." Concerns relate to an equity offering or convert at current levels to fill any gaps in capital beyond an anticipated secured bond deal.

We've revisited MGM's liquidity profile taking into account its amended credit picture, potential Borgata sale proceeds, potential Macau IPO proceeds, pending income tax refund, etc. Ultimately MGM will have significant cushion in 2010 (defined as: sources of cash less uses), $1.9b by our estimate, while that narrows to a still material $700m by 4Q11 even without the benefit of a Vegas recovery.

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Las Vegas Strip income statement analysis and takeaways for FY09

The Nevada Gaming Control Board (NGCB) recently published detailed financials for the Las Vegas Strip for the fiscal year ending June 2009. We have compiled this information and other historical data into an aggregated snapshot of the combined income statements and balance sheets for 40 properties on the Strip, breaking out key takeaways such as: gaming and non-gaming revenue growth, gaming vs. non-gaming revenue mix shift, EBITDA margin and EBITDA ROIC.

We estimate that total Strip adjusted EBITDA has grown from $819m in FY90, to $2.4bn in FY09, or a CAGR of 6% (Figure 5). However, FY09 EBITDA declined 36% from FY08 and is down 42% from the FY07 peak. We note that the impact of 9/11 resulted in an EBITDA decline of 33% in FY02, but the recovery was quick and FY03 climbed back to near FY01 levels.

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MGM MIRAGE (MGM): Our Best Idea; 4Q preview, 2010 outlook; CityCenter and more

MGM reports 4Q09 results tomorrow morning pre-market. We believe that street consensus remains too high for this “throw away” quarter, with an EBITDA estimate of $301m. Our estimate is $273m, which includes a drag from CityCenter due to negative operating margin. During 4Q, gaming revenues on the Las Vegas Strip were up 1.1% following the increases posted in November and December. However, it is important to note that ex-baccarat, gaming revenues actually declined nearly 12% during 4Q.

Despite what we think will be a lackluster 4Q, we remain bullish on MGM’s 2010 outlook for a variety of reasons, culminating in our higher-than-consensus EBITDA expectations for 2010 and 2011.

• Las Vegas Strip: 1) Detailed below, we see RevPAR actually growing in 2010, a function of increased visitation and a slight return to increased lodging spend per visit. 3) We think increased visitor volumes and a lower-than-thought weighted average room supply number will help mitigate cannibalization of wholly owned assets. 4) Remember that operating leverage swings both ways – even a slight recovery on the Strip should result in outsized revenue flow through given a much more reasonable expense structure.

• 1Q10: 1) Chinese New Year should be big this year as we’ve heard that high-end properties on the Strip will raise per hand betting limits on baccarat to $300,000 (all-time record) from $225,000 last year. Recall that baccarat revenues on the Strip were up 100% y/y in 4Q09. 2) January got off to a strong start with CES attendance up 6% to 120,000 (vs. peak 130,000 in 2008). 3) We anticipate a strong February above and beyond Chinese New Year, with Superbowl, Magic convention and NASCAR. 4) The Nevada Taxicab Authority temporarily increased the number of cab medallions by 256 cabs during certain periods in February to accommodate expected demand.

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Las Vegas High-Rise Blues II: From bad to worse

This analysis focuses on 26 residential towers in Las Vegas (up from 16 in our previous report "High-rise blues; outlook on CityCenter" from August 31, 2009) with a current inventory of nearly 8,700 units (pre CityCenter), which includes all relevant projects in the resort corridor, downtown, the south Strip and the suburbs. Of the residential towers, 20 are condos (pure residential) while the remaining six are condo-hotel.

Of the current inventory (excluding CityCenter as closings have just began at only one of the three residential towers), the number of “available” units that need to clear the market is alarming. This does not include currently owned units that are actively listed on the MLS system or what we believe could be a large number of owners who would prefer to sell but simply won’t given current market dynamics. In our analysis, we have assumed that all units in default will ultimately become available.

Of the 4,819 condo units we looked at, 49% are available or soon-to-be available. This includes unsold inventory (38% still held by the developer), units in default (10%) and bank-owned (2%).

Of the 3,863 condo-hotel units, 44% are available: unsold (33%), in default (10%), bank-owned (1%).

On a combined basis, 36% are unsold, 10% are in default and 1% are bank-owned.

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Honeymoon ending in Macau? A look at recent PBOC actions

China’s central bank, The People’s Bank of China (PBOC) unexpectedly tightened monetary policy earlier this week using a favored tool of raising the reserve requirement ratio (RRR). The increase was the first since June 2008 which then capped a cycle of 20 increases totaling 1,050 bps beginning in mid-2006. During the central bank’s late December 2009 quarterly meeting Monetary Policy Committee members noted that despite the upturn in China the economy lacks internal forces to sustain the recovery.

Members communicated plans for 2010 to maintain a proper balance between support for economic development, and managing inflation, highlighting the importance of continuing relatively easy monetary policy. However, the market immediately interpreted the move as a change in posture by China to more of a tightening stance (and stocks with Macau gaming exposure felt it disproportionately) in order to cool credit and asset growth which has been driven by looser monetary policy (underscored by RRR easing from September 2008 onward).

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