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Lion and Mouse: MGM, Disney Look For Boost From China

July 25, 2016
Hotel sector and movie market earnings data for MGM Resorts and Disney

High-end customers are spending more of their money on experiences rather than luxury goods, analysts say, and that could be good news for the hotel sector.

But companies catering to these wealthy individuals and families need to be in the right place at the right time. As earnings approach for The Walt Disney Company (DIS) and MGM Resorts International (MGM), questions center on whether the firms are putting their energy behind the right projects, and in the right places. For both companies, the Chinese market remains key, but also somewhat risky. 

And each of the two faces challenges with some of their older ventures. In the case of MGM, it’s slowing traffic at its Macau casinos, which was one reason Q1 earnings fell 61%. For DIS, it’s continued revenue issues with its television business, notably the ESPN sports network. Disney’s revenue and earnings missed Street expectations in its fiscal Q2 reported in May, hurt by weakness in cable TV and consumer products.

China Opportunities for DIS, But ESPN Challenge Remains

Disney recently opened Shanghai Disney Resort, a $5.5 billion project. More than 10 million visitors are expected at the park in the first year, where annual operating income is expected to hit $500 million by 2021, according to analysts at MoffettNathanson. It’s unclear, however, how well this theme park, described by analysts as the centerpiece of Disney’s growth strategy in China, might ultimately impact the company’s bottom line.

“We’re bullish on Shanghai Disneyland, but it’s still too early,” Wells Fargo wrote in a recent note to investors. “At the end of the day, we don’t view Shanghai Disneyland as a significant financial catalyst on a standalone basis. The real benefit to Disney will likely be the opportunities that this park brings over time; i.e. movies, consumer products, etc. Unfortunately, we don’t know when this will be or how to quantify the upside -- which means the driving force of this stock’s performance will continue to be ESPN for the foreseeable future.”

And it’s ESPN where the worries still seem to center. Disney’s television business, like that of its competitors, is challenged by rapid technological change and disintegration of the traditional high-cost cable bundle of hundreds of channels, The Wall Street Journal recently reported. Going into Disney’s fiscal Q3 earnings on Aug. 9, investors will likely want to know what the company has done to address these challenges. Television revenue was flat in the most recent quarter, and Disney took an unexpected $147 million write-down as it decided to cancel its costly videogame-and-toy franchise “Infinity” and lay off close to 300 people who worked on it. Will DIS use its Q3 call to give investors an update on potential plans to buy Hulu, which DIS jointly owns with two other companies, and launch a package of Internet channels? During last quarter’s call, DIS executives told analysts they were in discussions with other distributors as well. All this remains to be seen.

It’s also important to focus on anything the company may say in the Q3 call about leadership succession plans. Disney CEO Robert Iger plans to retire in less than two years, but the recent departure of the company’s chief operating officer, who some analysts saw as a natural successor to Iger, raised questions about who would head the company going forward.

DIS will likely focus on is its continued string of success in the movie market. Disney’s most recent blockbuster, “Finding Dory,” has dominated the U.S. box office for weeks, and analysts expect it to take in around $370 million domestically. Earlier this year, DIS scored with “Zootopia,” “The Jungle Book,” and “Captain America: Civil War.” All told, film unit sales rose 22% in fiscal Q2 and topped the Street’s revenue expectations. The Q3 earnings could give investors a better sense of how this box office bonanza is pulling through to the bottom line as the fiscal year advances.

Aside from the Shanghai opening, there haven’t been a lot of fireworks from Disney’s theme park business so far this year. The company recently reported that domestic resort reservations for fiscal Q3 were up 5% from a year earlier. Revenue from the Parks and Resorts unit missed expectations in fiscal Q2.

How's MGM Doing? Depends on the Continent 

Domestic business seems to be booming for MGM, especially in Las Vegas, but the Asia Pacific market continues to pose risks, judging from recent travel trends and the company’s Q1 results.

Opposite sides of the Pacific tell different stories for MGM, which operates a number of casino resorts around the world. In Las Vegas, the bright lights have been burning, with total visits to the city up 1.2% from a year ago in the January-May period, according to the Las Vegas Convention and Visitors Authority. That’s not a huge jump, but more importantly for resorts like MGM, average Las Vegas daily room rates were up 3.1% year over year, and revenues per available rooms were up 4.4%. That may be partly due to a 12.1% rise in convention attendance the city reported so far in 2016. 

Somewhat curiously, however, total Vegas Strip gaming revenue fell year over year for three months in a row ending in May, according to the Nevada Gaming Control Board. But remember that Las Vegas derives almost two-thirds of its casino revenues from entertainment other than gambling, the Nevada Gaming Control Board says.

MGM has a leading market position in Las Vegas, where it’s headquartered, company officials said at a recent investor day presentation. 

MGM also has a big presence in Macau, where it plans to open a shiny new mega-resort called Cotai early next year. The opening of MGM Cotai could provide upside, as it more than doubles MGM's Macau presence and might benefit from a clustering effect created by its close proximity to other resorts there, according to a recent Barron’s article.

But some analysts express concern about recent tourism trends in Macao, noting that the number of visitors from Mainland China, who tend to be the island’s biggest source of revenue, has been falling as Chinese look for other places to go and as China cracks down on corruption. Tourist visits to Macao fell nearly 3% year-over-year through May, with visitors from mainland China down 3.5% during the period, according to Macao’s Statistics and Census Service.

The sliding number of visitors from China hurt MGM in Q1, and some analysts say it may have remained a drag in Q2. 

In the three-month period ended in March, MGM China’s revenue decreased 26% to $469 million, as VIP table games revenue slumped 41% and main floor table games revenue dropped 8%, the company said when it reported Q1 earnings. Did those downward trends in Macao continue in Q2? And can the company’s Las Vegas business make up for slumping revenue in Macao? Investors will find out on Aug. 4, when the company is scheduled to report results.

Hotel Stocks


Neither DIS nor MGM have had much traction so far this year, as this combined chart shows. Performance of the two has recently lagged well behind the S&P 500 Index (also seen in the chart as the straight purple line). Data source: S&P. Image source: the TD Ameritrade thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

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