Wynn Posts Loss In Q1 Amid A Continued Decline In Macau Gaming

Wynn Resorts (NASDAQ:WYNN) recently reported its Q1 2015 earnings, which came out lower than expected, given a 37% decline in Macau gross gaming revenues during the first quarter. Wynn’s Macau revenues declined 38% to $705 million while the EBITDA was down 45% to $212 million. The overall revenues were down 28% to $1.09 billion and the company reported a net loss of $0.44 per share, compared to net profit of $2.22 per share in the prior year period. Adjusted earnings were $0.70 per share as compared to $2.32 earnings per share seen in the prior year quarter. ^[1]

Wynn posted lower than expected earnings and a massive decline in VIP gaming in Macau. Wynn Macau’s stock price fell over 7% in trading after the earnings were released. The company’s poor performance can be attributed to an overall decline in Macau market. 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. Wynn was far more exposed to the recent decline in Macau due to its higher reliance on VIP gaming, which accounts for around 25% of Wynn’s stock value, according to our estimates.

Las Vegas Sands (NYSE:LVS) also posted its earnings recently, which were slightly better as compared to Wynn. Las Vegas Sands’ consolidated revenue decreased 25% to $3.01 billion and earnings were down 30% to $0.66 per share (see – Macau Slowdown Weighs Over Las Vegas Sands’ Q1 Earnings). It is difficult to ascertain when this slowdown will end in Macau but given the growth of high net-worth individuals (HNIs) in China and growing Mainland China visitors to Macau, it appears that the casinos will do well in the long run.

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 soon update to incorporate the first quarter earnings.

See our complete analysis of Wynn Resorts’ stock here

Macau Slowdown Weighs Heavy On Wynn Resorts

Wynn saw massive revenue declines in both VIP as well as mass-market gaming operations. Table games turnover in the VIP segment plunged 52% to $17 billion during the March quarter. VIP table games win percentage for the quarter was stable at 2.80% seen in the prior year period as well as in the previous quarter. While Wynn with its premium casino image was able to attract more VIP gaming, it has seen a significant growth in its mass-market gaming operations in the recent past. However, in this segment, the company posted only a 7% revenue decline to $280 million. Also, the win percentage of 47.2% was much better hold rate and much higher than 43.4% seen in the prior year quarter. ^[1] It must be noted that the overall mass-market declined by 27% and thus Wynn was able to outperform the market in this segment. ^[2]

Currently, the company’s table mix stands at 215 mass-market and 252 VIP in Macau. ^[3] 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 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 as there are no junket operators involved.

Our current revenue estimate for mass-market gaming stands at over $2.5 billion by the end of our forecast period. An estimated EBITDA margin of 33% for Wynn’s Macau operations will translate into EBITDA of over $800 million, representing around 25% of the company-wide EBITDA by the end of our forecast period. This revenue boost will also come from its new Cotai property, Wynn Palace, which is a $4 billion integrated resort and will offer 1,700 hotel rooms, gaming tables and slots. The resort is scheduled to open by the end of March 2016.

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1. Wynn Resorts’ SEC Filings [↩] [↩]
2. Mass-market Macau GGR falls 27 pct in 1Q 2015: govt, GGR Asia, Apr 17, 2015 [↩]
3. Wynn Resort’s (WYNN) CEO Steve Wynn on Q1 2015 Results – Earnings Call Transcript, Seeking Alpha, Apr 28, 2015 [↩]