Wynn Resorts’ Stock Price Hits 52-Week Low; Macau Set To Post First Ever Annual Gaming Revenue Decline

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Wynn Resorts (NASDAQ:WYNN) stock price hit 52-week low of $144.85 yesterday amid a continued decline in Macau gaming. Other casino operators such as Las Vegas Sands (NYSE:LVS) and MGM Resorts’ (NYSE:MGM) stock prices are also trading close to their 52-week lows. Wynn’s stock price has corrected by more than 20% since the company last reported its earnings in October. The gaming revenues in the world’s largest gambling hub dropped by 20% for the month of November, reflecting the sixth consecutive monthly decline in Macau gaming. [1] With the November decline, casino revenues are now flat as compared to the prior year and are poised to post the first ever yearly decline. The first two weeks data for December gaming revenues has come in much lower at 753 million Macau pataca, down from the average daily run rate of 809 million pataca in November. [2] The decline in December could be far worse around 30% and this has led to a wave of selling in casino stocks.

The decline can be attributed to the government’s crackdown on corruption, which has led high rollers to stay away from the gaming tables. Moreover, tighter visa policies for Chinese travelling to Macau and new smoking restrictions at the casinos are adding to the woes. Macau VIP gaming contributes around 35% to Wynn’s stock value, according to our estimates. We are eager to see how VIP gaming trends in the coming months. Sheldon Adelson, CEO of Las Vegas Sands stated that the rebound in gaming might come after February of 2015. [3] Our current estimate for Wynn’s Macau VIP gaming gross revenues stands at $3.52 billion for 2014, representing a 5% decline over the previous year.

We currently have a $186 price estimate for Wynn Resorts, which is more than 25% ahead of the current market price. We project the company’s 2014 gross revenues at around $7 billion, with an adjusted EPS of $8.54. This compares to a consensus EPS estimate of around $8.20 according to Reuters.

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See our complete analysis of Wynn Resorts’ stock here

Macau Poised To Post First Ever Yearly Gaming Decline

Wynn Resorts has seen solid growth in VIP gaming over the past few years, with revenues growing 3 times between 2007 and 2013. An estimated EBITDA margin of 22% for Macau operations (not specific to VIP gaming) translated into EBITDA of around $816 million in 2013. While the surge in Macau gaming has been solid over the past few years, 2014 has been tough for all the casino players operating in Macau. Casino revenues in Macau declined by 23% in October, marking the largest decline in Macau gaming on record. The November decline of 20% erased all the gains made in the first half of the year. Wynn Resorts, like other casino operators, is facing the heat from this decline and its VIP gaming volume fell 17% in the September quarter. [4]

The primary reason for this drop is the government’s anti corruption crackdown. 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. A new smoking ban in casinos is also hurting the casino operators, as it has reduced the playing time. While it is difficult to assess how long VIPs will stay away from Macau, the casino operators believe that it is a temporary phase and will eventually change as gambling in China is an accepted practice in the home as well as in social circles.  Old traditions cannot be changed in few months and people will return on gaming tables after any signs of slowing crackdown.

For now, December may turn out to be the worst month in history of Macau gaming with gross revenue decline of as high as 30%. This can partly be attributed to China’s President Xi Jinping’s visit to Macau between December 19th and 20th for the 15th anniversary of Macau’s return to China. Earlier, China’s president visited Macau in December 2009 and this led to a 7% drop in gaming revenues over the previous month as VIPs stayed away from Macau during the President’s visit. [2]

Our Forecasts And Estimates

While the gaming situation in Macau may be fragile in the near term, we expect casinos to do well in the long run.  It must be noted that Macau is the only place in China where gambling is legal. China is seeing growth in the number of HNIs (high net worth individuals), but only a small portion of them visits Macau for gambling. China currently has about 1.3 million HNIs with a combined wealth of $4.3 trillion. [5] As China continues to grow, more people will likely visit Macau for gaming activities and Wynn should thus continue to benefit from the rising demand as it did in the past. Moreover, the company’s new project, Wynn Palace, will further enhance its capacity in the region. Accordingly, we estimate casino revenues from the VIP segment to be north of $5.50 billion by the end of our forecast period. An estimated EBITDA margin of 26% will translate into EBITDA of close to $1.50 billion, representing close to 35% of the company’s overall EBITDA by 2021.

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Notes:
  1. Macau November gambling revenue falls 20 pct, sixth drop in row, Reuters, Dec 1, 2014 []
  2. Macau: Analysts Now Talk About 30% Decline In December, Barrons, Dec 15, 2014 [] []
  3. Las Vegas Sands’ (LVS) CEO Sheldon Adelson on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, Oct 16, 2014 []
  4. Wynn Resorts’ SEC Filings []
  5. Understanding the High Net Worth Market in China, Accenture []