Will positive signals from Macau’s casino industry impact MGM and Wynn Resorts?

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Casino and gaming companies MGM Resorts International (NYSE: MGM) and Wynn Resorts (NASDAQ: WYNN) were very severely impacted in 2015 because of the decline in Macau’s GGR (gross gaming revenue). The region accounts for >23% of revenue for MGM & >48% of revenue for Wynn resorts, and saw its gaming revenue fall nearly 65% in 2015. The figure continued to decline in 2016 but the rate of decline has slowed down in the past few months. However, we believe that the improvement in the market, if any, will be short term and the weakness is likely to persist. We also believe that Macau operations for Wynn and MGM will not be able to bounce back back to 2013 levels for at least 2 years. We have priced in these expectations in our valuation for these companies. Our price estimate for MGM stands at $23.86, implying 3.4% discount to the market. Additionally, our price estimate for Wynn stands at $100, implying nearly 4.8% discount to the market.

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Why are Macau’s gaming revenue falling?

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The steep decline in Macau’s GGR resulted from the corruption crackdown of the Chinese government. Following this, Las Vegas Sands (NYSE: LVS) shifted its focus from VIP gaming to Mass Market gaming. The latter segment’s contribution to LVS Macau casino revenues increased from 52% in 2010 to 75% in 2015. Hence, the impact of falling GGR was lesser for Las Vegas Sands than Wynn and MGM Resorts. However, Wynn’s Cotai Resort is expected to open in next few months, which may revive Wynn’s business.

What does the outlook look like?

In June 2016, Macau’s GGR fell by 8.5%, less than analyst estimates, sending some positive signals to the investors. With Euro Cup 2016 having concluded in July, and summer vacations starting, we expect the GGR to surge in the coming months. However, it is still unlikely that these favourable conditions will stop the continued decline in monthly GGR, which was down for consecutive 25th month in June 2016. China has not recovered completely from the economic slowdown. Also, the Macau government banned phone betting in May 2016 and is planning to raise entry threshold for gaming promoters, and impose stricter rules for middlemen bringing in VIP players.

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Macau’s GGR continues to decline in 2016 reflecting the persisting weakness in Macau’s Casino Industry. Macau’s accumulated GGR has declined by over 11% in the first 6 months of 2016. MGM and Wynn Resorts will continue to feel topline pressure from Macau’s revenue decline in the near term.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively.

3) Revenue growth figures of companies are taken from their reported SEC Filings.

For precise figures, please refer to our complete analysis for MGM Resorts International and Wynn Resorts.

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