For Wynn Resorts Limited (NASDAQ:WYNN) and other gaming companies, Macau in China assumes great importance. In the absence of a strong show there, the companies with exposure to Macau are impacted. This was seen in the results of the past few quarters. In fact, it was because of Macau that most of the companies’ earnings fell shy of expectations in the last couple of quarters. As a result, some companies, including Wynn, resorted to slashing their dividend rate drastically. Now the question is whether it can turn back to better fortunes since the company is preparing to unveil Wynn Palace in March next year in China’s Macau. Is the company ready for a storm in China? Let’s see some of the factors before making a decision.
Macau And The Current Situation
Recent reports suggest that gambling revenue from Macau plummeted 35.5% year-over-year in August. This was the fifteenth straight monthly fall as slowing economic growth in China has worsened the slump. The primary reason for such a bad performance was the crackdown on conspicuous spending in a widespread manner. It is but natural that Wynn Resorts, Limited (NASDAQ:WYNN) would have also experienced a similar type of a trend. The region is important for the company since it gets more than 60% of its revenue from there. The company holds 55% of its assets in Macau. That gives an opinion as to why this region assumes so much importance to it.
According to data released by the government of Macau, revenue from the casino plunged to 18.6 billion patacas, or $2.3 billion, from last year. That matched with the 18.6 billion patacas recorded in June. Significantly, though the gaming revenue from the region witnessed a considerable drop, the fall was better than the analysts’ estimation of 36 – 38%. That might well be a starting point too for a rebound, though it is premature to come to a conclusion. It is because of Macau that shares of Wynn Resorts, Limited (NASDAQ:WYNN) has lost over 60% from its 52-week high price and more than 20% in August alone.
China Storm
Currently, China is facing a slowdown in its economy, thus forcing the policy makers to devalue its currency to boost its export value and restore some confidence in investors. While China is crucial for the global economy, there are other factors to be watched as the Fed rate hikes, besides the sharp drop in crude oil price from the last year level. However, China has not been soft towards gamers as they have cracked down on money laundering between the Macau Monetary Authority and The People’s Bank of China. That led to the arrest of seventeen people. Aside from these, the region faces visa restrictions and a planned ban on smoking. That means a big impact on VIP customers, as well as the government hold over the gaming tables.
Wynn Resorts, Limited (NASDAQ:WYNN) has already invested about $2.7 billion of the $4.1 billion expected spending in Wynn Palace in Macau. The company is hoping to attract a bigger crowd than a baseball field of Kevin Costner. Its property, plant and equipment grew $1.4 billion and as a percentage of trailing twelve-month average net operation assets by 25.5%, compared to 0.6% median growth for the industry. Its operating assets, as well as liabilities were less attractive, besides being an underperformer by the industry medians.
The construction, as well as the staffing of Wynn Resorts, Limited (NASDAQ:WYNN)’s Wynn Palace is on schedule. The company needs to have a clear picture of the total game to be allocated by the government. The gaming firm is in the process of completing the building. Table gaming has also been a question mark in Macau since there are at least six new resorts or expansions launching to take place in the next two-year period. The government is not keen on flooding the industry with new table games. There have already been doubts expressed by some circles about the table allocation and that the company has over-hired. As the opening of Wynn Palace moves closer, investors need to keep an eye on what the company will get from the government.
Macau May See Recovery
Though Macau has been witnessing a year-over-year drop of 30+% in the current year, there appears to be some stability in monthly revenue generation. The region generated $17 – $20 billion revenue in most of the eight completed months in the current year. That might be a good beginning for comparison purposes on a year-over-year basis next year. Most recently, Galaxy Entertainment Group Ltd (HK:0027) Chairman, Lui Che-Woo, said that the worst is over and that there should not be any issue in kick-starting the recovery anytime in the near term. For its part, the government also appears to be relenting on visa restrictions and smoking bans. While the government has relaxed visa restrictions, a ban on smoking might be delayed suggesting that a recovery is round the corner.
Wynn Resorts, Limited (NASDAQ:WYNN)’s plan to open its Palace will likely boost its market share in the Macau region. Though the current year might see mass-market table drop, to witness 20% fall in the current year, it will rebound next year and see the volume doubling by the year 2022. According to Forbes estimation, Wynn might generate $2.4 billion in revenue. Also, if the recovery is sooner than expected, the company might be able to deliver EBITDA margin of 30% for Macau casinos. That will translate into $730 million EBITDA, indicating nearly 25% of the company-wide EBITDA. On the other hand, if the recovery is stronger than estimated, then it might result in further 10% upside potential.
Conclusion
It seems that Wynn Resorts, Limited (NASDAQ:WYNN) shares have nearly bottomed out. Any further drop might be due to drop in monthly revenue generation from Macau. However, commencing from next year, the company’s fortune might turn for the better. The addition of Wynn Palace will boost its market share. Therefore, there appears to be low risk for the stock while upside rewards depend on further clarity on revenue generation. In any case, the worst is over for the stock and better days can be seen.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.
by Viraj Shah