Wynn Resorts (NASDAQ:WYNN) has seen strong growth in Macau driven by increased VIP and mass-market gaming activities. In addition, the company is developing a $3.5 billion resort on the Cotai strip, which will significantly enhance its capacity in the region. Gambling revenues in Macau rose by 15% in the first half of 2013 despite slower GDP growth in China. 
We expect this trend to continue due to the growing number of high net worth individuals (HNIs) in the region as well as gaming becoming a bigger part of the country’s culture. The company witnessed robust growth in Q1 2013 due to rising income from the mass-market segment.  Wynn has been able to maintain its brand image as a premium casino and attract a growing number of VIPs to its resort. Nevertheless, we believe that mass-market table games will be an important driver for casino operators and that Wynn has the opportunity to capture greater mass market share.
Wynn Is Growing Steadily On Macau
Macau, the only legal gambling hub in China, continues to grow at a strong rate and saw a 15% surge in gaming revenues for the first quarter of 2013.  Macau’s gaming revenues are largely dependent on VIP gaming. In the first quarter of 2013, Macau’s VIP baccarat revenue rose 9.8% to $7.2 billion from a year earlier.  China’s economic data shows the economy is growing at a slower than expected pace; however, Macau has largely remained immune to growth concerns.
China’s purchaser manager’s index (PMI), an economic indicator derived from monthly surveys of private sector companies, dropped to 50.6 in April from 50.9 in March and rose to 50.8 in May this year.  Despite the Chinese economy’s struggles, gamblers continue to flock to Macau. Gaming revenue in Macau rose 21% in June alone.  Wynn’s adjusted earnings (before taxes, depreciation and amortization) are largely derived from its Macau operations, which in Q1 2013 increased 14% to 331 million, against a 4% increase in revenue.  The higher income was driven by strong winnings from mass-market table games and slot machines. While the betting on table games in the VIP segment of Macau fell 15% in the first quarter of this year, revenue in the mass-market category increased by 14%. 
The Cotai Project
Wynn is building a new resort spread across 51 acres of land in the popular region of Cotai in Macau. Steve Wynn, Chairman and CEO of Wynn resorts, stated this project to be the single most important project in the history of Wynn Resorts. The new resort will feature 2,000 hotel rooms and 400 gaming tables, significantly enhancing the company’s current Macao capacity. The resort is estimated to cost around $3.5 billion and shall be operational by 2016. 
While Las Vegas is recovering from the slowdown in the U.S. economy, Macau continues to grow at a healthy rate and will continue to drive growth for Wynn. We estimate Wynn’s VIP table games turnover to cross $200 billion mark by 2016 when the Cotai resort becomes operational. In light of the first quarter earnings, growth in Macau’s gaming and increasing capacity due to the development of the Cotai resort, we have raised our price estimate for Wynn to $132.
Risks To Our Estimate
For now Macau has been growing strongly despite slower GDP growth in China.  However, the risk of slower growth in Macau’s gaming revenues could prevail, and if Macau’s gaming revenues slowed, Wynn’s growth will be significantly hurt as most of its assets are based in China unlike MGM Resorts (NYSE:MGM), which has a vast pool of assets in the U.S. and Las Vegas Sands (NYSE:LVS), which is well diversified between China, Singapore and the U.S.
Moreover, the demand from VIP gamblers is volatile and more vulnerable to changes in China’s tightening credit policies and the country’s periodic crackdowns on corruption. Earlier this year, a news report suggested that China’s government will start taking action to clamp down on junket operators that bring gamblers from the mainland to Macau.  The junket operators act as middlemen and moneylenders that drive VIP segment, which accounts for two-thirds of Macau’s gaming revenues.
Our price estimate for Wynn Resorts stands at $132, roughly in line with the current market price.Notes:
- Macau Gambling Revenue up 21% on Year in June at MOP28.27 Bln, The Wall Street Journal, Jul 1, 2013 [↩] [↩]
- Wynn Resorts’ SEC Filings [↩] [↩] [↩] [↩] [↩]
- Macau Sees Record Gaming Revenues in March, Pokerati, Apr 10, 2013 [↩]
- China May official PMI stronger than expected, Reuters, May 31, 2013 [↩]
- China’s GDP Slows to 7.5%, CNN, Jul 15, 2013 [↩]
- Macau Casinos Decline After Report on Junket Crackdown, Bloomberg, Feb 6, 2013 [↩]