Wynn’s Stock Continues To Decline Amid Junket Concerns But Outlook Remains Positive

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Wynn Resorts

Wynn Resorts (NASDAQ:WYNN) has seen a steep fall in its stock price in the recent past amid renewed concerns over Macau junket operators. While the stock plunged over 30% in September, it is down over 70% in last 12 months due to a slowdown in Macau gaming. This past month there were concerns on liquidity crunch for casino players, amid junket issues. Earlier this month, there was a theft case with one of the junket operators and this past week it was Neptune Group, which warned it will cut back its Macau operations. Now if other junket operators also cut back, there will be less money for players, thereby impacting the Macau VIP business. Wynn’s reliance on VIP gaming is higher than its peers, such as Las Vegas Sands and MGM Resorts, and this has led to a steeper decline in Wynn’s stock price. While these concerns over junket operators are genuine, we believe that the stock offers appealing upside potential from current levels. We continue to believe that Wynn’s casinos will do well in the long run due to its increased push to capture more mass-market gaming, along with the benefits of its upcoming casino resort in Cotai. 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.

Earlier in September, one of the smaller junket operators — Dore Entertainment Corp. — lost $44 million in a theft case. Wynn shares fell sharply, despite management’s confirmation that it neither lost money from the theft nor had any receivables due from Dore. [1] Recently, another junket operator — Neptune Group — stated that it will cutback its business in Macau and this led to a fresh wave of selling in Wynn’s stock. Neptune Group posted a loss of $107 million for the year ended June 30, 2015, due to a slowdown in Macau gaming. [2] It must be noted that the junket operators are middlemen that bring VIP players to casinos and are thus important for casino operators.

For Wynn, VIP gaming accounts for 20% of its stock value, according to our estimates. Now the worrying part is not whether Neptune survives or not, but it is the closure of more junket operators that drive VIP scene in Macau. In fact, MGM and Wynn are the only Macau casino concessionaires not in partnership with Neptune for VIP operations. [2] But if more junket operators face similar issues like in the case of Neptune, it will lead to a liquidity crunch in the market and VIP gaming could see further decline. Now the question arises, is this priced in the current stock value of Wynn? We think so.

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Even if we assume a very unlikely situation where Wynn’s VIP gaming volume would decline by an average annual rate of 25% throughout our forecast period (till 2022), our price estimate will still be close to $80 per share, much higher than sub-$60 levels seen for Wynn Resorts this past week. In fact, our current price estimate of $118 reflects more than 100% upside to Wynn’s stock price. We believe that Wynn’s Cotai resort will provide a significant boost to the company’s EBITDA in the coming years (see – Our Revised Price Estimate of $118 For Wynn Resorts).

See our complete analysis of Wynn Resorts’ stock here

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Notes:
  1. The Recent Junket Incident In Macau Does Not Warrant Any Caution For Investors, Trefis, Sep 14, 2015 []
  2. Neptune US$107-mln loss fresh worry for Macau VIP, GGR Asia, Sep 29, 2015 [] []