Our Revised Price Estimate of $118 For Wynn Resorts

Wynn Resorts’ (NASDAQ:WYNN) stock has plunged over 20% so far in August. This can primarily be attributed to a combination of its earnings release, uncertainties pertaining to Macau gaming and more recently to the concerns that decelerating Chinese economy may lead to slower global growth. Adding to the woes of the casino operators, the recent decline in Chinese Yuan currency has made bets more expensive in Macau casinos for Chinese gamblers, as they are placed in Hong Kong Dollars and not Yuan. Furthermore, August gaming data for the first two weeks points towards second worst fall in Macau gross gaming revenues since 2010. Given the recent developments, we have cut our near term revenue forecast for Wynn Resorts and revised the price estimate from $132 to $118. Below we explain the changes to our estimates.

See our complete analysis of Wynn Resorts’ stock here

Expect Macau Gaming To Decline In 2015 But Wynn Likely To See A Pickup In 2016 With Cotai Resort

We believe that the situation in Macau will remain fraught in the near term and it will continue to have an unfavorable impact on VIP gaming not only in 2015 but also in 2016. The decline started last summer with anti-graft measures from Beijing, which kept VIPs away from Macau. Further measures, such as a smoking ban and visa restrictions added to the woes of casino operators, and overall Macau gross gaming revenues plunged more than 35% consistently since February this year. Since Macau’s economy is heavily dependent on casinos, its GDP also dropped 25% in Q1 2015. A few weeks back there were some positive developments in Macau, such as the relaxation of visa restrictions and a likely delay in smoking ban, which suggested that uptick in gaming maybe around the corner. However, the recent meltdown in equity markets over concerns of the decelerating Chinese economy has once again sparked fears among investors that the much-awaited recovery in Macau casino market maybe delayed. The recent devaluation of the Yuan has further added to the woes, as it has made betting expensive for the casino players. This is likely to weigh over the mass-market gaming as well as VIP gaming in the near term. August gaming data for the first two weeks also points towards the second worst fall since 2010, with a likely gross revenue decline of anywhere between 36% to 39% for the full month. ^[1]

Accordingly, we have revised our revenue forecast in the near term. We now expect Wynn Resorts’ VIP gaming turnover (Rolling Chip Volume) to decline from $108 billion in 2014 to under $65 billion by the end of 2015. Similarly, we expect mass market gaming drop (Non-rolling Chip Volume) to decline from $2.65 billion in 2014 to less than $2 billion in 2015. However, looking at 2016, we estimate a slight pickup. The Macau market has seen consistent 30%-plus declines since February and monthly gaming revenues have been stable in the range of $17 billion to $20 billion for most of 2015. If this stability persists in the coming months, the comparison will be favorable starting in 2016. Also, Wynn will open its new resort in Cotai, which will enhance its capacity in the region and aid overall revenue growth.

We continue to believe that ongoing  growth in Mainland China visitors and income levels, along with Wynn’s enhanced capacity in Cotai, will drive its casino operations in the long run and estimate the VIP turnover to be north of $100 billion and mass-market gaming turnover to be north of $4 billion by the end of our forecast period. With a consistent 2.8% hold percentage, VIP revenues will be around $2 billion. With the over 45% hold percentage for mass-market gaming, segment revenues will be north of $1.8 billion by the end of our forecast period. An estimated EBITDA margin of 30% for overall Wynn Resorts’ Macau casino operations will translate into EBITDA of around $600 million for VIP and $550 million for mass-market, together representing around 40% of the company-wide EBITDA.

For 2015, we now forecast Wynn Resorts’ overall revenues to be around $4.6 billion with EPS of 3.91, as compared to $3.31, according to Reuters.

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1. Macau gambling revenue slide continues, Gaming Data, Aug 20, 2015 [↩]