Wynn’s Earnings Down Nearly 50% Amid A Slowdown In Macau

Wynn Resorts (NASDAQ:WYNN) recently reported its Q4 2014 earnings, which came out lower than expected, given a 25% decline in Macau gross gaming revenues during the fourth quarter. Wynn’s Macau revenues declined 32% to $761 million while the EBITDA was down 36% to $241 million. The overall revenues were down 25% to $1.14 billion and the company reported earnings of $1.20 per share as compared to $2.27 earnings per share seen in the prior year quarter. ^[1] Wynn posted lower than expected earnings and a massive decline in both VIP as well as mass-market gaming in Macau. The company’s stock price fell over 6% in trading after the earnings were released.

2014 was tough for all the casino operators in Macau and it marked as the first full year of gross gaming revenue decline. The primary reason for this drop is the government’s anti corruption crackdown. A wave of high-profile arrests of senior Chinese officials has hurt the VIP business of Macau casinos. Visa transit restrictions, a smoking ban and the weakening economy added to the woes for casino operators in the region. Moreover, Beijing wants Macau to diversify its economy, largely dependent on gambling, which accounted for 80% of the local government revenues in 2013. Wynn was far more exposed to the recent decline in Macau due to its higher reliance on VIP gaming, which accounts for more than 35% of Wynn’s stock value, according to our estimates.

Las Vegas Sands (NYSE:LVS) also posted its earnings recently, which were much better as compared to Wynn. Las Vegas Sands’ consolidated revenue decreased 7% to $3.42 billion, but earnings per share jumped 28% to $0.92 for the quarter .  Benefiting the company was both lower costs and a good quarter in Singapore (See – Las Vegas Sands’ China Operations Decline After A Slowdown In Macau; Earnings Jump 28% Over Lower Costs).

Nevertheless, Macau’s gaming decline peaked in December 2014 with a 30% drop in gross gaming revenues. ^[2] Things appear to be slightly better so far this year with January decline coming in at 17%. While the situation in Macau may continue to be fragile over the next few months, we expect the casinos to do well in the medium to long run. As China continues to grow, more people are likely to visit Macau for gaming activities. Even in 2014 visitation from Mainland China to Macau was up 14% to 21 million. ^[3]

See our complete analysis of Wynn Resorts’ stock here

Wynn Faces The Headwinds From A Macau Slowdown

Wynn saw massive revenue declines in both VIP as well as mass-market gaming operations. Table games turnover in the VIP segment plunged 40% to $21 billion during the December quarter. VIP table games win percentage for the quarter also fell to 2.80% as compared to 2.92% seen in the prior year period. Wynn, with its premium casino image, attracts more VIP and premium mass market players and this is why it was hit harder by the recent decline in Macau. Wynn has seen a significant growth in its mass-market gaming operations in the recent past. However, even in this segment, the company posted a 15% revenue decline to $249 million. Also, the win percentage of 39% was the lowest hold rate since September 2013. ^[1]

It is of key importance for Wynn to aggressively expand in the mass-market gaming segment, which we believe will drive the growth for casino operators in the coming years. Key drivers here are the burgeoning middle class in China, as well as growth in high net worth individuals (HNIs). China is seeing growth in the number of HNIs, 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. As China continues to grow, more people will likely visit Macau for gaming activities and Wynn as well as other casino operators should thus continue to benefit from the rising demand as they did in the past. Also, mass-market gaming offers much higher margins as compared to VIP gaming. Our current revenue estimate for mass-market gaming stands at over $3 billion by the end of our forecast period. This revenue boost will also come from its new Cotai property, Wynn Palace, which is a $2.5 billion integrated resort and will offer more than 2,000 hotel rooms, gaming tables and slots. The resort is scheduled to open in 2016 but will probably miss the Chinese New Year deadline, according to the company’s management. ^[4]

Overall, the company struggled with its Macau operations during the December quarter and it largely reflects on the earnings as well as the stock price. Our current price estimate of $186 for Wynn Resorts will soon be revised to incorporate the recent quarterly earnings.

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1. Wynn Resorts’ SEC Filings [↩] [↩]
2. Macau Faces Losses in Mass Market Gaming Revenue, Casino News Daily, January 3, 2015 [↩]
3. Las Vegas Sands’ (LVS) CEO Sheldon Adelson Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, Jan 29, 2015 [↩]
4. Wynn Resorts’ (WYNN) CEO Steve Wynn on Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, Feb 3, 2015 [↩]