Wynn Resorts (NASDAQ:WYNN) released subdued Q2 results last week with about 8% decline in revenues. The decline was caused by increasing competition in Macau and a slowdown in recovery in the Las Vegas region. Both Macau and Las Vegas operations witnessed a fall of 7% and 11.6%, respectively, in revenues.
We have revised our price estimate for Wynn Resorts to $118, implying a near 28% premium to the current market price. We made adjustments to the balance sheet numbers and average daily rate and occupancy rates for the Las Vegas region, in accordance with the latest released numbers.
Factors responsible for dismal top-line growth
Increasing competition in Macau
Wynn’s arch rival, Las Vegas Sands (NYSE:LVS), launched two new hotels in the second quarter. These hotels further intensified the competition by adding more games to the marketplace. In addition, competitors have significantly increased promotional allowances in order to lure slot and VIP players. In the coming years, this will lead to greater than expected operating expenses and promotional allowances, thereby affecting the margins of the gaming companies.
Macau VIP Table Games Turnover
Wynn, which derives approximately 60% of its revenues from the Macau region, depends on VIP tables games for much of its future growth. According to our valuation, VIP table games contribute approximately 48% to Wynn’s current valuation.
For the second quarter, the VIP table games turnover witnessed a decline of about 7% over the same period last year. In the past, the increasing population of Chinese high net worth individuals (HNIs) was the major driving factor behind the robust growth of VIP gaming in Macau. However, recent reports of a slowdown in the Chinese economy has started affecting the gaming industry in Macau.
We believe the growth in Macau region is very crucial for Wynn’s future operations as Wynn is investing heavily in the region. It has allocated a budget of $4 billion for its third resort in Macau.