Macau Operations Will Drag Wynn Resorts’ Q1 Earnings Lower

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Wynn Resorts (NASDAQ:WYNN) will report its Q1 2015 earnings on April 28th. We expect the casino giant to continue to face headwinds from the ongoing decline in Macau gaming. Macau gross gaming revenue fell by 37% in the first quarter amid the government’s crackdown on corruption, leading to the tenth straight month of decline. [1] Its not just VIP gaming that is facing headwinds, mass-market gaming revenues also declined around 27% in the first quarter. [2] Accordingly, we expect Wynn to post lower revenues and EBITDA as compared to the prior year period and the shift of VIP gaming tables to mass-market gaming to continue. Las Vegas Sands (NYSE:LVS) recently reported its Q1 earnings, which declined over 30% amid Macau slowdown (see – Macau Slowdown Weighs Over Las Vegas Sands’ Q1 Earnings). One of the important factors to watch out for will be the table games win percentage. The win percentage of 39.3% in the previous quarter was the lowest hold rate since the third quarter of 2013. Looking at Q1 2014, the figure stood at 43.4%.

We currently estimate revenues of over $5.65 billion for Wynn Resorts in 2015, with EPS of $6.93, which is in line with the market consensus of $4.58-$7.37, compiled by Thomson Reuters. We currently have a $159 price estimate for Wynn Resorts, which we will update after the first quarter earnings announcement.

See our complete analysis of Wynn Resorts’ stock here

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Top Line And Bottom Line Will Shrink In Q1 Due To Macau Slowdown

Macau casinos continued to face headwinds from declining volumes. 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 and a smoking ban added to the woes for casino operators in the region. Also, Beijing wants Macau to diversify its economy, largely dependent on gambling, which accounts for 80% of the local government revenues.

Off late there were reports of Macau government proposing to limit the number of Mainland China visitors. It must be noted that Mainland Chinese visitors have fueled the mass-market gaming growth and any restriction there could further hit the gaming industry. Chinese visitors currently account for 68% of the total visitation in Macau while international visitors make up the rest. Macau has a capacity of receiving around 90,000 visitors per day but that number peaked at 147,000 during Chinese New Year. This is much more than the city’s capacity and can affect the quality of life of residents, according to Institute for Tourism Studies. [3] However, Las Vegas Sands’ CEO, Sheldon Adelson, stated that the visitor cap was not a decision by the government but a suggestion by one of the ministers and it is not doable. [4]

We estimate that VIP gaming contributes close to 25% to Wynn’s value. However, the company has been expanding its base in the mass-market segment for quite some time now. The segment revenues have grown from less than $500 million in 2009 to over $1 billion in 2014. This is positive for the company in the long run as mass-market gaming offers much higher margins. Since there are no junket operators involved in mass-market gaming, the margins are much higher than in VIP gaming. However, we currently estimate EBITDA margins for overall Macau operations and continue to believe that Macau mass-market gaming operations will drive growth for Wynn Resorts in the long run. The company will benefit from its premium brand image and new property that it is currently developing in Cotai.

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Notes:
  1. Macau Casino Bonds Slump as Xi Preaches to Wynn on Diversifying, Bloomberg, Apr 9, 2015 []
  2. Mass-market Macau GGR falls 27 pct in 1Q 2015: govt, GGR Asia, Apr 17, 2015 []
  3. Macau Aims To Cap Visitors From China, April Gaming Revenue Could Fall 40%, Barrons, Apr 14, 2015 []
  4. Las Vegas Sands (LVS) Earnings Report: Q1 2015 Conference Call Transcript, The Street, Apr 23, 2015 []