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Investment Overview for Wynn Resorts (NASDAQ:WYNN)
Below are key drivers of Wynn's value that present opportunities for upside or downside to the current Trefis price estimate for Wynn Resorts:
Macau VIP Table Games
- Wynn Macau's VIP Table Games Turnover: Wynn's VIP Table Games Turnover has increased significantly since 2007. It increased from $37.6 billion in 2007 to $108 billion in 2014. However, the same fell to $58 billion in 2015 amid government's anti-graft measures. We expect the gaming to pick up from 2016 with increased visitation and supply. We currently estimate VIP gaming turnover to increase to over $100 billion by the end of our forecast period in 2022. In case Wynn's VIP Table Games Turnover reaches $150 billion at the end of the forecast period led by a resumption of VIP gaming growth, there could be an upside potential of around 15% to our estimate for Wynn's stock. In a slightly bearish scenario, if VIP gaming is unable to regain momentum and the turnover remains rangebound around $70 billion at the end of the forecast period, there could be a 15% downside to our estimate for Wynn's stock. We believe that the increasing population of Chinese high net worth individuals (HNIs) and expected completion of the Cotai project in 2016, are likely to be the stimulating factors for future growth.
- Wynn Macau Casino EBITDA Margin: Wynn's Macau casinos EBITDA margin has increased from 15% to 26% between 2006 and 2014. However, the same fell to 21% in 2015 due to challenging gaming environment. We expect margins to rebound towards 25% by the end of our forecast period. In case these margins cross 30% mark driven by a strong growth in mass-market gaming, which offers higher margins, there could be an upside potential of more than 10% to our estimate for Wynn's stock. In a slightly bearish scenario, considering Macau market continues to remain weak in the coming years and the margins stay around 20% by the end of the forecast period, there could be a 10% downside to our estimate for Wynn's stock.
For additional details, select a driver above or select a division from the interactive Trefis split for Wynn Resorts at the top of the page.
Wynn Resorts is a leading developer, owner and operator of destination casino resorts. It currently owns and operates the Wynn Las Vegas and Encore at Las Vegas as well as the Wynn Macau and Encore at Macau. Wynn reports its results in two segments: Wynn Las Vegas, (which includes Encore at Wynn Las Vegas) and Wynn Macau.
Wynn in Las Vegas hosts 4,748 hotel rooms and suites, 186,000 square foot casino space has 232 gaming tables, baccarat salons, private VIP gaming rooms, poker rooms, approximately 1,866 slot machines and a race and sports book.
Wynn Macau features 1,008 hotel rooms and suites. It has 284,000 square feet of gaming casino space. The casino has 458 gaming tables, 708 slot machines and poker rooms. The main competitors include prominent firms in the gaming and casino industry such as Las Vegas Sands, MGM Resorts, Boyd Gaming, Harrah's Entertainment, SJM and Galaxy among others.
The Macau region contributed approximately 60% to the gross revenues in 2015, whereas the rest was contributed by the Las Vegas region. Wynn conducts its gaming activities on credit as well as a cash basis.
We believe that Macau VIP gaming operations are the primary source of value for Wynn Resorts because:
Significantly Higher Volume Than Las Vegas Casinos
Macau offers significantly high gaming revenues as compared to the Las Vegas Strip. Macau gaming revenues are approximately 4 times higher than that of Las Vegas Strip. In 2015, gaming revenues at Las vegas Strip were $6.5 billion as opposed to $29 billion in Macau. This significant difference is due to very high demand for gambling in Macau, which is also the only place in China where gambling is legal. A lot of tourists from nearby countries visit Macau for gambling. In fact, 2014 figure was much higher at $44 billion, 7 times the size of the Las Vegas Strip. Casino business is primarily divided into two categories in Macau, VIP gaming and mass market gaming. VIP gaming offers high volume but lower casino hold percentage while mass market gaming offers high hold percentage. Wynn has established a premium casino image in the region and it is helping the casino attract more and more VIP players. Wynn is further developing a new casino resort in the Cotai region. The new resort will further enhance Wynn's capacity in Macau and drive growth in the coming years.
Premium Brand Image
Wynn is recognized worldwide as a premium brand resort. It has sophisticated style and offers exquisite luxuries to its customers. It mainly caters to high end gaming customers and the company does not intend to shift its focus from its existing global image. Its premium offerings include an array of amenities and indulgences including private lagoons and waterfalls, an exclusive shopping promenade featuring renowned designers, an 18-hole golf course designed by Tom Fazio and Steve Wynn as well as a tranquil spa and salon. The nightly entertainment includes the magical Lake of Dreams and the provocative water show 'Le Reve.' The company has been targeting the VIP gaming customers and has been successful in its business model so far. We estimate that Macau VIP gaming contributes more than 20% to Wynn Resorts' stock price.
Recent Decline In Macau Gaming
2015 was tough for all the casino operators in Macau and it marked a 34% decline in gross gaming revenues. The primary reason for this drop is the government’s anti corruption crackdown. A wave of high-profile arrests of senior Chinese officials has hurt the VIP business of Macau casinos as they preferred to maintain a low profile. Furthermore, weakening economy added to the woes for casino operators in the region. Moreover, Beijing wants Macau to diversify its economy, largely dependent on gambling, which accounts for a significant portion of the local government revenues.
Looking at 2016, the overall gaming market looks in a better shape than 2015. It appears that the mass-market has stabilized in Macau and the comparison will be favorable with already low figures of 2015. We currently expect a mid-single-digit growth in Wynn's Macau VIP gaming turnover for 2016.
Increasing Share Of Macau Casino Revenues
Wynn is looking at Macau, the Asian replica of Las Vegas, for future growth. Wynn currently operates the Encore at Macau and it is about to start the construction work of another major resort in the Cotai strip area. The new Cotai resort is expected to be completed by 2016. The following factors strengthen the trends mentioned:
Macau surpassed the Las Vegas Strip as the world’s biggest gambling hub in 2006 after the government allowed the entry of overseas casino operators. Since then, the region has witnessed unprecedented growth. In 2014, the region collected $44 billion in gaming revenues while the figure stood at $29 billion in 2015, still far more than the gaming revenues collected on the Las Vegas Strip.
A strong Chinese economy followed by a burgeoning middle class and increasing population of high net worth individuals is helping boost Macau's growing gaming industry. Macau offers a world class gaming infrastructure. All major gaming companies like Melco Crown, Las Vegas Sands, and MGM Resorts have a presence in Macau.
Las Vegas Gaming Market Growth Slowing Down
The economic recession of 2008-2009 slowed down the growth of the Las Vegas gaming industry. Other factors mentioned below also accentuated the slow down:
Other US states like Pennsylvania and Delaware have legalized table games. Similar actions by other states could affect the number of tourists visiting Las Vegas. More than 80% of the tourists visiting Las Vegas are domestic. The Las Vegas gaming market has reached a saturation state. Casino operators indulge in intense competition to sustain their margins. Intense competition is affecting the industry margins.
Excess room capacity hitting the markets is expected to pressurize the margins of the gaming industry by pushing average daily rates down. Furthermore, Asian tourists prefer Macau to Las Vegas as a result of two things: firstly it offers world class gaming infrastructure since the advent of foreign gaming companies in Macau in 2006, and secondly it is at a nearby location. The decline in the number of Asian tourists would also affect the Las Vegas gaming industry.
Key Infrastructural Initiatives Underway
The Macau government is reinforcing a series of initiatives in order to drive visitor growth in the region. The gaming industry is a key contributor to Macau's GDP. The government is investing in new transportation links to ease travel for Chinese visitors. It should be noted that most of the tourists visiting Macau are from Mainland China.
The Guangzhou-Zhuhai high-speed railway is expected to improve travel time from Guangzhou to Macau to 40 mins, down from the 2+ hours taken by bus. The Macau Light Rapid Transit will link ferry terminals and key locations. It will have 12 stops on the Macau peninsula, 11 stops on Cotai and Taipa, and will fully integrate different regions within Macau.
Also, the Hong Kong-Zhuhai-Macau bridge will connect Hong Kong to Macau, thereby, reducing car travel time from 4 hours to 40 minutes. It is expected to be completed by 2018. The Macau International Airport is presently undergoing capacity upgrades. Its capacity will be increased to handle 12 million people per year almost double from the current capacity of 6 million people. It is expected to be completed by 2017.
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