MGM Resorts International (NYSE:MGM) and local partner Orix revealed long-awaited plans for a $9.1 billion integrated resort in Osaka this week.
Perhaps to the delight of some investors, that price point is well below the minimum of $10 billion. That’s the figure analysts and industry executives previously estimated it would cost to build a single gaming property in the world’s third-largest economy. A positive for MGM and Orix is that their effort enjoys local support, which is a departure from the contentious wranglings to bring an integrated resort to Yokohama.
The governor of Osaka, Hirofumi Yoshimura, is supportive of the proposal and expects other local companies to become involved, harmonizing with our estimate that MGM will own around one-third of the economics,” writes Morningstar analyst Dan Wasiolek.
MGM executives have highlighted the advantages of being a minority partner in the Osaka project. They note that status minimizes upfront capital commitments and risk, while still providing the operator with ample upside potential. That’s in what could eventually be one of the world’s most vibrant casino gaming markets.
Osaka Could Take Awhile to Lift MGM Stock
MGM stock is lower by 5.56 percent over the past week. That decline is more the result of investor fears regarding the impact of the delta variant of the coronavirus on the reopening trade. But that performance also indicates Japan isn’t yet of material benefit to MGM shares.
It’s easy to understand why that’s the case. The timeline for making things in Japan is extremely long. Osaka is slated to submit its casino bid to the federal government in the middle of next year, meaning that if the city is selected, the earliest construction would start on the integrated resort would be sometime in 2023.
Based on that time frame, the earliest a gaming venue will open in Osaka is 2028. It’s expected the property will open in phases, indicating it may not be fully operational until 2030.
“Although the framework of a license might include around 30% gaming and corporate tax rates, the attractive supply/demand dynamics of the region will generate returns on invested capital in the teens, in our opinion, thereby supporting narrow-moat qualities,” adds Wasiolek.
Assessing Japan Impact for MGM Stock
MGM is the largest operator on the Las Vegas Strip and features a sizable portfolio of regional casinos. As such, gaming properties in the US account for a significant chunk of the company’s earnings before interest, taxes, depreciation and amortization (EBITDA).
Morningstar’s Wasiolek says the US will account for 70 percent of MGM’s 2028 EBTIDA, with the Osaka venue, assuming it’s operational, adding a mid-teens percentage of consolidated EBITDA. He adds the Osaka casino isn’t likely to cannibalize MGM China’s two Macau properties.
“We also don’t expect MGM’s Macau operations (about mid-teens of estimated 2028 EBITDA) to be materially affected by a resort in Japan, as the former market offers a hard-to-replicate conclave of resorts, while we forecast the latter region to have just two urban casinos in separate cities,” said the analyst.
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