• The shares of Wynn Resorts have incurred a sharp decline as broader markets observed a sell-off from rising benchmark oil prices, inflation, and resurgence of coronavirus cases in China. Per reports, the WHO has been actively exploring modalities to announce an end to the pandemic as infections in many countries are at record low levels. Also, the uncertainty surrounding the extension of casino licenses in Macau was abated with a temporary extension. Notably, Wynn’s 50% of long-term debt is linked to the construction, renovation, and other financing activities in Macau.
• Macau’s gaming regulator published a five-year development plan for the city, highlighting key aspects regarding sustainable growth, regulatory oversight, and casino license renewal. Notably, all casino stocks including Wynn Resorts observed a contraction over concerns of regulatory pressure hampering operations and shareholder returns. The plan proposes a requirement of government approval to pay dividends. However, its merits include the promotion of mass-market gaming that has a significantly higher casino win rate and contributed 40% of Macau’s gross gaming revenues in 2019.
• Wynn Resorts has been expanding its presence in the sports betting and iGaming industry with its WynnBET application. While the company’s sizable Macau exposure has been weighing on its finances, the sports betting business unveils a market opportunity comparable to Macau (In 2019, Macau’s reported $36 billion of gross gaming revenue while the U.S. sports betting market is projected to reach $40 billion at maturity).
• Therefore, the benefits of competing in the sports betting business outweigh the risk of a slow recovery in Macau.
• The sports betting and iGaming industry is projected to have the potential to eventually reach $40 billion in the U.S. and $70 billion globally. Thus, multiple online betting platforms and the commercial casino operators are eyeing a sizable market share.
Below are key drivers of Wynn’s value that present opportunities for upside or downside to the current Trefis price estimate for Wynn Resorts:
For additional details, select a driver above or select a division from the interactive Trefis split for Wynn Resorts at the top of the page.
Wynn Resorts is a leading developer, owner, and operator of destination casino resorts. It currently owns and operates the Wynn Las Vegas and Encore at Las Vegas, as well as the Wynn Macau and Encore at Macau. Wynn reports its results in two segments: Wynn Las Vegas, (which includes Encore at Wynn Las Vegas) and Wynn Macau.
Wynn in Las Vegas hosts 4,748 hotel rooms and suites, 192,000 square foot casino space has 238 gaming tables, baccarat salons, private VIP gaming rooms, poker rooms, approximately 1,829 slot machines, and a race and sports book.
Wynn Macau features 1,008 hotel rooms and suites. It has 273,000 square feet of gaming casino space. The casino has 312 gaming tables, 954 slot machines, and poker rooms. The main competitors include prominent firms in the gaming and casino industry such as Las Vegas Sands, MGM Resorts, Boyd Gaming, Harrah’s Entertainment, SJM, and Galaxy, among others. A new casino resort Wynn Palace features 1,706 guest rooms, suites, and villas. It has 424,000 square feet of casino space. The casino has 323 table games and 1,020 slot machines, private gaming salons, and sky casinos.
We believe that Macau VIP gaming operations are the primary source of value for Wynn Resorts because:
Macau offers significantly high gaming revenues as compared to the Las Vegas Strip. Macau gaming revenues are approximately five times higher than that of the Las Vegas Strip. In 2018, gaming revenues at Las vegas Strip were $7.24 billion as opposed to about $37.6 billion in Macau. This significant difference is due to the very high demand for gambling in Macau, which is also the only place in China where gambling is legal. A lot of tourists from nearby countries visit Macau for gambling. In fact, the 2014 figure was much higher at $44 billion, seven times the size of the Las Vegas Strip. The casino business is primarily divided into two categories in Macau, VIP gaming, and mass-market gaming. VIP gaming offers high volume, but lower casino hold percentage while mass-market gaming offers high hold percentage. Wynn has established a premium casino image in the region, and it is helping the casino attract more and more VIP players. Wynn is further developing a new casino resort in the Cotai region. The new resort will further enhance Wynn’s capacity in Macau and drive growth in the coming years.
Wynn is recognized worldwide as a premium brand resort. It has a sophisticated style and offers exquisite luxuries to its customers. It mainly caters to high-end gaming customers, and the company does not intend to shift its focus from its existing global image. Its premium offerings include an array of amenities and indulgences including private lagoons and waterfalls, an exclusive shopping promenade featuring renowned designers, an 18-hole golf course designed by Tom Fazio and Steve Wynn as well as a tranquil spa and salon. The nightly entertainment includes the magical Lake of Dreams and the provocative water show ‘Le Reve.’ The company has been targeting the VIP gaming customers and has been successful in its business model so far. We estimate that Macau VIP gaming contributes more than 20% to Wynn Resorts’ stock price.
2015 was tough for all the casino operators in Macau, and it marked a 34% decline in gross gaming revenues. The primary reason for this drop is the government’s anti-corruption crackdown. A wave of high-profile arrests of senior Chinese officials has hurt the VIP business of Macau casinos as they preferred to maintain a low profile. Furthermore, the weakening economy added to the woes for casino operators in the region. Moreover, Beijing wants Macau to diversify its economy, largely dependent on gambling, which accounts for a significant portion of the local government revenues.
Starting in 2016, the overall gaming market started to improve and continued into 2017, the gross gaming revenues of the region increased by about 20%. This metric improved by 14% in 2018, sustaining its growth momentum from a year ago. Much of these can be attributed to the new casino openings in the region, including Wynn Palace. We continue to expect strong growth in Macau’s GGR in the short term, driven by increased visitation due to better road and rail connectivity. However, a slow start to 2019 and the fear of the weakening of the Chinese economy could slightly dampen its near term outlook.
Wynn is looking at Macau, the Asian replica of Las Vegas, for future growth. Wynn currently operates the Encore at Macau, and its Cotai resort was completed in the third quarter of 2016. The following factors strengthen the trends mentioned:
Macau surpassed the Las Vegas Strip as the world’s biggest gambling hub in 2006 after the government allowed the entry of overseas casino operators. Since then, the region has witnessed unprecedented growth. In 2014, the region collected $44 billion in gaming revenues while the figure stood at $29 billion in 2015, still far more than the gaming revenues collected on the Las Vegas Strip. Macau continued its robust showing in 2018, with gaming revenues growing to nearly $37.6 billion.
A strong Chinese economy followed by a burgeoning middle class, an increasing population of high net worth individuals, and enhanced infrastructure connectivity is helping boost Macau’s growing gaming industry. Macau offers a world-class gaming infrastructure. All major gaming companies like Melco Crown, Las Vegas Sands, and MGM Resorts have a presence in Macau.
The economic recession of 2008-2009 slowed down the growth of the Las Vegas gaming industry. Other factors mentioned below also accentuated the slow down:
Other US states like Pennsylvania and Delaware have legalized table games. Similar actions by other states could affect the number of tourists visiting Las Vegas. More than 80% of the tourists visiting Las Vegas are domestic. The Las Vegas gaming market has reached a saturation state. Casino operators indulge in intense competition to sustain their margins. Intense competition is affecting the industry margins.
Excess room capacity hitting the markets is expected to pressurize the margins of the gaming industry by pushing average daily rates down. Furthermore, Asian tourists prefer Macau to Las Vegas as a result of two things: firstly, it offers world-class gaming infrastructure since the advent of foreign gaming companies in Macau in 2006, and secondly, it is at a nearby location. The decline in the number of Asian tourists would also affect the Las Vegas gaming industry.
Gaming revenues in Las Vegas has been fluctuating in recent past, casino revenues in 2018 declined slightly due to a fall in win % and slot machine win. However, Las Vegas reported a decent uptick in tourist visitations in the first two months of 2019, and this trend is expected to continue in the near term. As a result of improving tourism in Las Vegas and the rising demand for gaming and leisure should continue to drive the industry in 2019.
The Macau government is reinforcing a series of initiatives in order to drive visitor growth in the region. The gaming industry is a key contributor to Macau’s GDP. The government is investing in new transportation links to ease travel for Chinese visitors. It should be noted that most of the tourists visiting Macau are from Mainland China.
The Guangzhou-Zhuhai high-speed railway is expected to improve travel time from Guangzhou to Macau to 40 mins, down from the 2+ hours taken by bus. The Macau Light Rapid Transit will link ferry terminals and key locations. It will have 12 stops on the Macau peninsula, 11 stops on Cotai and Taipa, and will fully integrate different regions within Macau.
Also, the Hong Kong-Zhuhai-Macau bridge, which opened in October 2018, will connect Hong Kong to Macau, thereby, reducing car travel time from 4 hours to 40 minutes and should drive greater Mass market visitations. The Macau International Airport is presently undergoing capacity upgrades. Its capacity will be increased to handle 10 million people per year from the current capacity of 7.8 million people. This project is expected to get underway in early 2019.