Wynn Resorts (NASDAQ:WYNN) posted strong results for Q1 2013, driven by lower expenses and growth in its Macau operations. The company posted an increase in its win percentage for VIP operations, which constitute 70% of gaming revenues in Macau. We expect the company to benefit from its presence in Macau as burgeoning middle class and increasing numbers of HNIs (high net worth individuals) continue to boost China’s gaming industry. While the company competes for a casino license in Philadelphia and Massachusetts, the focus remains on development of its new property in Cotai region, which will help boost its market share.
Casino Operations Drive Growth
After underperforming in the recent quarters, Wynn’s Macau casino operations saw an improvement in Q1 2013. The weak performance in the previous quarters was driven by the macro factors such as a slowing economy and political uncertainties in China. However, there are signs of improvement as Macau’s gambling revenues surged 14% in the first quarter of 2013, led by the expansion of various casino operators.  Wynn’s operating margins got a boost from a drop in general and administrative expenses as well as in entertainment and retail costs. 
We estimate that VIP table games and slot games, which drove the growth in Wynn’s Macau operations, constitute around 50% of the company’s value. Wynn reported an increase in its win percentage for VIP as well as mass market segments of table games in Macau. However, the company suggested disregarding ‘win percentage’ and focus on the total win amount for its mass market segment in Macau. The customers are buying the chips at the cage, which does not enter into the drop. This skews the numbers and makes it look like the company is holding an enormous amount of money. 
Further Expansion Plans
Wynn has only one casino in Macau, and it faces rising competition from larger rivals who have been expanding their resorts on the Cotai region. To stay competitive and take advantage of the growing market, Wynn is constructing an integrated resort in the Cotai region which it expects it to be operational by 2016. The project has a construction budget of around $4 billion and will help the company to take on the competition with other operators such as Las Vegas Sands (NYSE:LVS) and MGM Resorts International (NYSE:MGM). 
As Wynn adds more hotel rooms to attract tourists from China’s mainland, it will position itself as a premium brand resort with sophisticated style. This image will help the company to benefit from its presence in the world’s largest gambling hub.
In addition to this, Wynn is competing for a casino license in Philadelphia and Massachusetts. In the recent earnings conference call, management shared its thoughts on the ‘Urban Wynn’ – a concept of glamorous hotels in the big cities with separate gaming rooms. These hotels would otherwise not be profitable given the current average hotel rates and the cost of construction.  While it may be a good concept, when it comes to application, a lot will depend on the gaming licenses in such big cities.
We are currently in the process of updating our model for Wynn Resorts in the light of recent earnings.
Our price estimate for Wynn Resorts stands at $113, roughly 20% below the current market price.Notes: