the IPO price
The offering price for the 760 million shares in the offering was HK$15.34, at the absolute high end of the range of HK$12.36 -HK$15.34 determined by the Hong Kong Stock Exchange..
a secondary offering
As I’ve written in more detail in other posts, this IPO is unusual in that it does not involve the sale of primary shares (ones newly issued by the company). Rather, it’s a secondary offering. That is, all the shares being sold to the public come from the already-existing holdings of company equity holders. In this case, the sole seller is Pansy Ho, who owned 50% of MGM China before the sale.
According to the offering documents, MGM China lost money in 2008 and 2009. It earned HK$1.566 billion last year. It projects that at a minimum it will have a profit of HK$1.4501 billion for the six months ending June 30, 2011. This would equate to eps of $.38 per share.
Let’s assume MGM China earns $.80 a share for the full year of 2011. The offering price would then represent a multiple of 19x current year earnings per share. When the offer’s pricing range was being set in mid-May, a 19x multiple represented parity with, or perhaps a slight premium to, the multiple investors were awarding to Wynn Macau (HK: 1128), the company I regard as the market leader–and the highest multiple casino stock on the Hong Kong exchange.
early price action
After trading briefly above the offering price, 2282 ended its first day trading at HK$15.16, on volume of a tad below 77 million shares. It closed overnight in Hong Kong at HK$13.12, or about 14% below the IPO level.
I don’t regard this decline as particularly surprising, since the entire casino sector in Hong Kong has under gone a sharp correction that began in early May (Wynn Macau, for instance, is now trading at about 15x earnings). What’s more noteworthy is the investment bankers’ ability to get the MGM China issue off at an unusually high price.
my take on the stock
I haven’t seen any sell-side research on MGM China. The offering documents suggest, however, that the sales pitch for the company is that it represents a blending of the best of East and West–the local market knowledge and connections of Ms. Ho and the technical know-how about glitzy upmarket gaming of MGM Resorts International, which now has a controlling 51% interest in MGM China. There’s a whole laundry list of related-party transactions between Ms. Ho and 2282 in support of this idea. The documents do refer to the regulatory problems Ms. Ho has encountered in the US. But they point out that she has never formally been declared to be “unsuitable” to hold a casino license in the US–although MGM appears to have ceased operating in Atlantic City to avoid this result.
I’m not sure the synergies the market seems to expect will work out. It’s not 100% clear to me how Ms. Ho will balance her obligations to MGM China with those to the much larger Ho family-controlled rival, SJM. I’m also not convinced that many talented Las Vegas executives will want to link their fortunes to the Ho family.
Whatever qualms I may have about the Ho family connection, however, MGM and the Hong Kong market–where the price of MGM China shares will ultimately be decided–appear to have none. In addition, the Macau gaming market appears to me to be still in the rapid growth phase where the rising tide lifts all boats. So I suspect that despite the fact I won’t be a shareholder the stock will be an above average performer in the Hong Kong market from this point on.