The Recent Junket Incident In Macau Does Not Warrant Any Caution For Investors

Wynn Resorts’ (NASDAQ:WYNN) troubles in Macau appear to be far from over. The stock has already seen massive decline of 55% so far this year due to a slowdown in Macau gaming. This past week there were concerns on liquidity crunch for casino players, due to a theft case with one of the junket operators. As a result, Wynn’s stock faced further selling pressure and is now down an additional 10% over the past 3 trading sessions. The recent theft incident could prompt investors to cutback lending to junket operators, thereby leaving less money for players. However, we believe that a cut in lending, if it were to happen, would not have a meaningful impact on Wynn’s price estimate and the recent correction in stock price is unwarranted. Below we explain why. Many will think that Wynn’s shares are currently oversold.  Our price estimate is much higher than the current market price, but it is in line with the street estimates, as compiled by the Wall Street Journal.

• Trefis has a $118 price estimate for Wynn Resorts’ shares, translating into a $12 billion market cap. This is much higher the market price of around $67 seen over the week.
• We estimate the company’s 2015 revenues to be around $4.60 billion and its earnings per share to be $3.91, as compared to $3.31, according to Reuters.

See our complete analysis of Wynn Resorts’ stock here

Negligible Impact Of The Junket Incident On Wynn’s EBITDA

Junket operator Dore Entertainment Corp., was the first junket operator to work with Wynn and it operates with around 25 gaming tables in Wynn Macau. In a recent incident, as much as $258 million was stolen from Dore Entertainment. Wynn has confirmed that it did not lose any money and Dore does not owe any money to Wynn. Dore has filed a police case for a fraud against one of its ex-cage managers. It must be noted that the junket operators, which are middlemen that bring VIP players to casinos, usually work independently. The casinos provide private rooms where the junket operators bring their clients but the money is handled by junket employees and not the casinos. ^[1]

The only way this incident could have any impact on Wynn is if investors cutback lending to Dore. We believe that it will have a negligible impact on Wynn and the recent stock price correction is unwarranted. Firstly, Dore has only 25 tables at Wynn Macau, which translates into 5% capacity. If Dore is unable to bring business due to funding issues, some other junket operator, such as Neptune Suncity or Tak Chun could jump in to fill in this small gap. Secondly, it is unlikely that this incident with Dore could prompt investors with other junket operators to cut lending. Finally, even if any other operator is unable to fill the gap for Dore, it will hardly have a 1% impact on Wynn’s EBITDA. We currently estimate $1.47 billion EBITDA for Wynn in 2015 and if we take out Dore’s contribution of 25 tables for rest of the year, EBITDA would be $1.46 billion, representing merely a 1% cut, in our view. Sooner or later there will be some junket operator for those 25 tables, in case Dore walks out. If not, Wynn could still move those tables from VIP to mass-market. In fact, it has been doing that for past few quarters given the decline in VIP gaming volume. There were 247 VIP gaming tables by the end of Q2 2015, as compared to 263 in the prior year period. ^[2]

Accordingly, the recent stock price correction in Wynn seems unwarranted. Many believe Wynn’s shares are currently oversold and have significant upside potential. Continued growth in Mainland China visitors and income levels, along with enhanced capacity in Cotai, will drive Wynn’s casino operations in the medium to long run (see – Our Revised Price Estimate of $118 For Wynn Resorts).

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1. Macau junket Dore confirms internal fraud case, GGR Asia, Sep 14, 2015 [↩]
2. Wynn Resorts’ SEC Filings [↩]