Wynn Q3 Earnings Preview: Watchout For Macau Mass-Market Table Games Hold Percentage

Wynn Resorts (NASDAQ:WYNN) will report its Q3 2014 earnings on October 28th.  We expect management to report that the company  faced the headwinds from the recent decline in Macau gambling see across the sector. Macau casino revenues declined by more than 7% for the third quarter, primarily due to a decline in VIP gaming amid the ongoing crackdown on corruption in China. ^[1] It must be noted that Macau VIP gaming accounts for 45% of Wynn’s stock value, according to our estimates.

Recently, Las Vegas Sands (NYSE:LVS) posted a slight decline in Macau revenues but the strong growth in its mass-market gaming operations led to 3% jump in EBITDA (Read More – Las Vegas Sands Earnings Grow 2% While Revenues Decline Amid A Slowdown In Macau Gaming). We expect Wynn to also benefit from the mass-market gaming growth. In the previous quarter, Wynn posted 43% jump in mass-market table games win amount, which led to a 6% growth in EBITDA, despite a 12% decline in VIP gaming turnover. ^[2] We are eager to see if Wynn can repeat similar story in this quarter. One of the important factors in the company’s performance is the table games win percentage, which was 3.04% for VIP gaming and 38% for mass-market table games in the prior year quarter. However, Wynn has seen strong hold percentages in the past few quarters, especially for mass-market gaming, which saw 45.6% hold in the previous quarter. ^[2]

See our complete analysis of Wynn Resorts’ stock here

A Decline In Macau Gaming Will Weigh Over Wynn’s Earnings

In June 2014, Macau’s casino market witnessed a decline for the first time in five years. The world’s largest gambling hub extended the decline in the following months through September. While the revenues declined by around 3.7% in June and July, it was far worse in the following months with declines of 6.1% and 11.7% for August and September respectively. ^[3] This can be attributed to the Chinese government’s anti-corruption crackdown, which kept VIP players away from Macau. A wave of high-profile arrests of senior Chinese officials is hurting the VIP business of Macau casinos. Moreover, the government imposed visa transit restrictions, which has shortened the duration of visitors’ stay in Macau to five days, and imposed greater penalties for non-compliance. While it is difficult to assess how long the gaming will suffer in Macau, Sheldon Adelson, Chariman and CEO of Las Vegas Sands, said that gambling might recover in three to four months time. ^[4]

While VIP gaming has declined over the past few months, mass-market gaming continues to grow strongly. The VIP gaming declined by as much as 25% in September and mass-market gaming grew around 8% to 10%. While this is much lower than the 15% growth seen in July and August, it has managed to offset some of the declines in VIP gaming. ^[5] Wynn, with its premium brand image, attracts more VIP players. However, in the previous few quarters, it has shown significant growth on mass-market gaming. During the previous quarter, Wynn’s mass-market gaming win percentage of 45.6% was much higher than the 34.6% experienced in the prior year quarter. The higher win percentage led to 43% jump in mass-market table games wins to $311 million. ^[2] If Wynn manages to achieve higher win percentage in the third quarter, it will help it offset some of the declines in VIP gaming.

Expect Continued Growth In U.S. Operations

Las Vegas operations contribute more than 15% to Wynn’s value, according to our estimates. The region’s casino operations picked up in the previous quarter with a strong growth in table games win percentage. We expect the growth to continue in the third quarter driven by gaming growth at the Strip. Overall gaming revenues at the Las Vegas Strip jumped by 8% for the six months ending August. ^[6] This can be attributed to the growing popularity of Baccarat. Looking at the first eight months of 2014, baccarat wagering at the Strip is up 11%. We forecast 2014 EBITDA of $524 million from the Las Vegas operations, reflecting a growth of 7% over the prior year.

We estimate gross revenues of over $7 billion for Wynn Resorts in 2014, with EBITDA of over $1.97 billion. We currently have a $211 price estimate for Wynn Resorts, which is around 15% ahead of the current market price. The stock price has fallen by approximately 15% since the company last reported its earnings. Casino stocks corrected after the continued decline in Macau gaming in the following months.

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1. Macau Casino Stocks Rise as Monthly Sales Meet Estimate, Bloomberg, Oct 6, 2014 [↩]
2. Wynn Resorts’ SEC Filings [↩] [↩] [↩]
3. Monthly Gross Revenue from Games of Fortune, Gaming Inspection And Coordination Bureau Macau, As of Oct 2014 [↩]
4. Las Vegas Sands’ (LVS) CEO Sheldon Adelson on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, Oct 16, 2014 [↩]
5. Mass market growth to flatten in October, Macau Business Daily, Sep 23, 2014 [↩]
6. Nevada Gaming Statistics: The Last Six Months, UNLV Center for Gaming Research [↩]