How Will Lower VIP Gaming Turnover Impact Wynn Resorts?

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Wynn Resorts (NASDAQ:WYNN) has been shifting more gaming tables from VIP to mass-market gaming, which is comparatively performing better in Macau. The market has been on a decline for several months now due to lower gaming volumes. VIP gaming has been the worst hit, primarily reflecting Beijing’s anti-graft measures and a crackdown on junket operators. These initiatives have led VIP players to maintain a low profile, which in turn, has resulted in lower revenues for casino operators. We don’t believe VIP gaming turnover will recover to the highs it made in 2013 in the medium term. If the Macau gaming market rebounds in the coming months, it would primarily be due to growth in mass-market gaming, in our view. Casino operators realize the VIP situation in Macau and accordingly, they are focused on growing the mass-market business, which also offers higher margins, as it does not involve junket operators. Melco Crown last month opened a new casino resort – Studio City, which has only mass-market gaming tables on the floor. Even Wynn Resorts’ and Las Vegas Sands’ upcoming casino resorts in Cotai are primarily targeting mass-market gaming.

See our complete analysis of Wynn Resorts’ stock here

VIP Gaming Has Seen Massive Growth In Past But Future Is Uncertain

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We estimate that Macau VIP gaming contributes around 20% to Wynn’s stock value. While the segment is currently facing headwinds in world’s largest gambling hub, its growth in the past has been stellar. The VIP gaming turnover has surged from a little under $55 billion in 2009 to around $123 billion in 2013. However it showed first signs of weakness in 2014 when the volume dropped to $108 billion. Wynn’s hold percentage for VIP gaming has been in the narrow range of 2.8% to 3%, translating into revenues of $2.1 billion last year, after adjusting for junket commissions. [1]

Looking ahead, future looks gloomy for VIP gaming in Macau. A few years back, VIP gaming accounted for 70% of the overall revenues in Macau while it contributed only 53% in Q3 2015. [2] The decline in VIP gaming can be attributed to Beijing’s’ anti-graft measures. China wants Macau not to be a mere gambling hub but thrive in tourism. It has encouraged casino operators to develop resorts with more focus on non-gaming operations. Given that Macau is the only legal hub for gambling in China, a growth in tourism and visitation will still result in higher demand for mass-market gaming while VIP gaming may continue to struggle.

Having said that, there could be a brighter side for VIP gaming. Given the crackdown in Macau, VIP gaming to some extent has found its way outside Macau. Now Beijing may further tighten the scrutiny for money transfers to and from foreign jurisdictions, thereby making them less attractive option and VIP gaming may eventually return to Macau. [3] Even if this were to happen, we believe that any significant upside is unlikely in the near term.

Our Forecast And Upside/Downside Scenarios To Wynn’s Stock Price

We currently estimate casino turnover and revenues from VIP side to decline 50% in 2015 to $54 billion and $1 billion respectively. It must be noted that the turnover is down 49% for the nine months period ending September 30th, 2015. [1] However, we expect an uptick in 2016, primarily reflecting the benefits from its Cotai resort. Wynn recently announced a three months delay in opening of its casino and the date is now postponed to June 25th. We will soon update our model to adjust this time lag. Looking ahead, we expect the turnover to steadily grow towards $100 billion mark by the end of our forecast period (towards 2022). Continued growth in China’s high net worth individuals will aid the VIP gaming demand in the region. An estimated EBITDA margin of 30% for Wynn’s overall Macau casinos will translate into EBITDA of $600 million, representing 20% of the company-wide EBITDA.

There is a potential upside of 10% to our price estimate for Wynn Resorts, if the VIP gaming sees a faster than expected growth and the turnover reaches $135 billion by 2022. On the other hand, any changes to policies and unsupportive measures from Beijing could result in slower growth in turnover. There could be a 10% downside to our price estimate if the turnover remains rangebound under $80 billion in the coming years.

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Notes:
  1. Wynn Resorts’ SEC Filings [] []
  2. Macau VIP market falls 38 pct in 3Q: govt, GGR Asia, Oct 16, 2015 []
  3. Regional casino risk from China crackdown: S. Bernstein, GGR Asia, Nov 25, 2015 []