Continued Macau Headwinds Takes A Nasty Toll On Wynn’s Q3 Earnings But Outlook Remains Positive

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Wynn Resorts (NASDAQ:WYNN) recently reported its Q3 2015 earnings, which came in 62% lower compared to the prior year period. [1] This was very much on expected lines given the massive decline the Macau market has seen during the quarter. Wynn continued to move more tables from VIP to mass-market gaming, which comparatively performed better. Wynn’s mass-market drop was down only 14% as compared to a whopping 51% decline in VIP turnover during the quarter. [1] It thus makes sense for Wynn to move more tables to mass-market gaming. Having said that, Wynn’s reliance on VIP gaming is more than mass-market and that’s why it saw a massive decline in top line.

Looking forward, Wynn will open its new Cotai resort on March 25th, 2016. However, the company is not clear on how many tables will be approved by the Macau government. For instance, Melco Crown’s Studio City is scheduled to open end of this month and it is likely to get only 250 tables as compared to 400 intended. The total number of new table approvals in 2015 is likely to be around 500, marking an 8% growth from last year, exceeding the 3% cap on table growth in Macau. [2] While this could be a supportive measure from the government, it still is less than what casinos demanded. For Wynn, it intends to have 500 gaming tables in the new casino but no one knows what they will end up with.

Nevertheless, we maintain our bullish stand on Macau and Wynn and expect mass-market gaming to drive growth in the medium to long run, led by buoyant growth in China’s middle class, which will boost visitation from Mainland China to Macau. We currently estimate the 2015 EPS to be around $3.91 and have a $118 price estimate for Wynn Resorts, which we will soon update to incorporate the recent quarterly earnings.

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Looking at Wynn’s Q3 performance, a decline in Macau gaming led to 27% lower revenues and 39% drop in EBITDA. While VIP turnover plunged over 50%, its win percentage of 3.17% was higher than 2.78% seen in the prior year period. On the other hand, mass-market table drop declined only 14% but the hold percentage of 19.6% was much lower than 23.6% seen in the prior year quarter. [3] Overall, Q3 EBITDA margins remained lower while mass-market table drop was surely encouraging. Now even the comparison will become favorable going forward, as the gaming revenues have more or less been stable for most of 2015.

Looking at the overall Macau market, it has been declining for several months amid government’s anti-graft measures that were rolled out last year. However, even Beijing is now willing to provide stimulus to various sectors as China’s economic growth rate is slowing down below the government’s desired range. [4] Also, there are reports of increased tourist arrivals during first 11 days of October, which, in turn fueled the gaming revenues. [5] These new developments could bring in recovery sooner than later.

Now the reason we believe that the casinos will do well in the long run, is the growing middle class of China, which will fuel the Mainland China visitation to Macau. China’s GDP per capita is expected to grow to over $12,000 by 2020 as compared to $7,575 in 2014. [6] The Mainland China visitors to Macau are also on the rise and have grown from around 13 million in 2010 to over 21 million in 2014. [7] These factors will primarily boost the mass-market gaming in the region and Wynn could benefit from the same, especially with its new Cotai resort, which will significantly enhance its capacity in the region. Accordingly, we currently estimate Wynn Resorts’ gross gaming revenues of over $8 billion and EBITDA of $3 billion by the end of our forecast period (towards 2022).

See our complete analysis of Wynn Resorts’ stock here

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Notes:
  1. Wynn Resorts’ Earnings Press Release [] []
  2. Leong: DICJ considering table applications from Melco Crown, Galaxy, Macau Business Daily, Oct 15, 2015 []
  3. Wynn Resorts’ SEC Filings []
  4. Chinese Stocks in Hong Kong Rise on Stimulus, U.S. Rate Outlook, Bloomberg, Oct 5, 2015 []
  5. CASINO SHARES SURGE ON STRONGER-THAN-EXPECTED REVENUE, Macau Daily Times, Oct 14, 2015 []
  6. China’s GDP per capita to exceed $12,000 by 2020: report, ECNS Wire, May 19, 2015 []
  7. Visitor Arrivals, Macau Government Tourist Office []