Wynn’s Macau Operations Will Continue To Prosper Amid High Gaming Demand And A Limited Room Supply

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Wynn Resorts

Wynn Resorts (NASDAQ:WYNN) continues to benefit from higher demand at its Macau hotel properties, and this has led to better pricing for the rooms over the past few years. Casino operators are motivated to sustain occupancy in order to generate demand for casinos and other ancillary facilities, thereby sometimes compromising the average daily rates (ADRs). Wynn has maintained the occupancy rate at over 90% over the past few years and now it should focus on growing ADR at a faster pace, in our view. Better-than-expected growth in the company’s Macau hotel operations could further add incremental revenues of around $200 million over our current forecast. This could trigger a 5% upside to the stock, in our estimation.

See our complete analysis of Wynn Resorts’ stock here

Given The Higher Occupancy, Wynn Should Focus On ADR Growth

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We estimate that the Macau hotel business contributes over 10% to Wynn’s value. The hotel operations are driven by ADR and occupancy levels. Wynn’s ADR has been trending well over the past few years and has increased at an average annual rate of 5% from $265 in 2009 to $333 in 2014. [1] ADR is largely dependent on the hotel’s occupancy levels as it is the demand that weighs on the pricing of the rooms. Apart from casino guests, the hotel sales team is focused on bringing in a defined number of room nights through various events and shows.

Wynn has been able to maintain occupancy levels of over 90% in the past few years. This can be attributed to multiple factors. Firstly, Wynn has currently only one property operational in Macau and has established a premium casino resort image. This is why its ADR of $333 is much higher than that of $232 for Las Vegas Sands (NYSE:LVS). Also, there has been significant growth in the number of visitors to Macau, increasing from less than 25 million in 2010 to over 31 million in 2014. [2] This has fueled demand for rooms in the region. In fact, Las Vegas Sands is currently considering building a non-casino hotel property in Macau to cater to the high room demand.

It must be noted that the current room supply is unable to meet the demand in the region, especially on weekends and holidays. Overall occupancy rates for Macau stood around 91% last year, according to the Macau Hotel Association. This is a high figure by international standards and suggests that the region can absorb a significant increase in room supply in the coming years. There were around 28,000 rooms in Macau by the end of last year, while there are another 26,000 under development or pending approval with the government. [3] Wynn will open its new casino resort in Cotai next year, which will increase its capacity by 1,700 rooms in the region.  We believe this will be fully absorbed given the demand for rooms in Macau.

However, the Macau gaming market has been going through a downturn over past 13 months amid an anti-corruption crackdown. As a result, most of the VIPs are staying away from Macau and rolling chip volumes have seen a massive decline. Having said that, there has not been any significant impact of lower gaming on occupancy levels in the recent past and the figure stood above 97% for Wynn in the previous quarter, despite massive declines on gaming volume. [1] Moreover, there have been a few positive developments for the casino industry recently, such as the relaxation of visitation rules to Macau and an uptick in gaming in the last week of June. Given these developments and the supportive measures from Beijing, we believe gaming in Macau maybe at a cusp of a rebound and visitor arrivals from Mainland China will continue to grow. This will ensure high demand for rooms in the region. We currently estimate that ADR growth will continue in the coming years and be around $410 by the end of our forecast period. This will translate into revenues of $450 million and EBITDA of $390 million, representing more than 10% of the company-wide EBITDA. However, if the Macau market sees a stronger recovery led by Beijing’s supportive measures, Wynn may be able to increase its ADR at a higher pace and add incremental revenues of $200 million over our current forecast. This could trigger a 5% upside to the stock, in our opinion. Here, we estimate the ADR to be $550 by the end of our forecast period.

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Notes:
  1. Wynn Resorts’ SEC Filings [] []
  2. Visitor Arrivals, Macau Government Tourist Office []
  3. Macau hotel room supply to double, GGR Asia, Mar 2, 2015 []