Wynn Resorts Pre-Earnings: Preparing For A Stronger Future

Wynn Resorts (NASDAQ: WYNN) is set to report its Q3’16 earnings on 2nd November 2016 post market close. We expect mid to high single digit growth in earnings due to improvement in Macau gross gaming revenues in August and September, along with the opening of $4.2 billion Wynn Palace in Cotai strip. Wynn’s improved table allocation strategy, which helped it in outperforming Macau casino industry in Q2’16, is likely to add to the gains from its new casino. On the lines of Macau government’s directive of expanding non gambling revenue sources, Wynn has added $100 million water fountain show, $200 million artworks and about 1700 hotel rooms in Wynn palace. Las Vegas strip’s revenues have fluctuated in Q3’16 due to decline in number of Chinese visitors, though it showed a 16.8% in increase in September due to increased baccarat revenues. However, the impact on Wynn’s earnings is likely to be small as the region accounted for just 14% of the company’s revenues in 2015.

Non-Gambling Revenue Sources, Improved Table Allocation To Minimise Losses 

Wynn Resorts opened its new casino in Cotai strip on August 22nd, with an estimated cost of about $4.2 billion. Although the Wynn Palace has a capacity of 350 tables, Macau government approved only 100 new gambling tables for 2016 and will approve 50 more over the next two years. However, Wynn is likely to transfer 250 tables to Wynn Palace from its existing casinos to make up for the shortfall. While the other new casinos are allocating a greater number of tables to mass market gaming, Wynn is targeting VIP gaming along with premium mass market segment as it plans to allocate 60 of the 350 tables to VIP gaming in order to challenge dominance of SJM and Galaxy in the Macau VIP gaming market. Wynn has an improved table allocation strategy and it is focusing on the premium mass segment, which caused Wynn to outperform Macau casino industry in Q2’16. Due to these factors, the company is likely to gain momentum going forward. Wynn’s unique value proposition is ths focus on premium mass market gaming, which should lead to improved earnings.  However, it can be a risky move as all of its competitors are shying away from VIP gaming due to corruption crackdown in China.

Macau’s GGR (gross gaming revenue) increased by 1.1% in August 2016 and 7.4% in September 2016 after declining for straight 26 months. However, this improvement can primarily be attributed to the opening of Wynn Palace and Las Vegas Sands (NYSE: LVS) The Parisian in August and September, respectively. Analysts also believe that Macau GGR have hit their bottom and that may be the reason behind increased GGR of the region in the past few months. However, it is still too early to determine if the Macau market has stabilized, as we have not witnessed any significant growth in gaming volumes and Chinese economy is yet to regain its momentum.

We Expect Less Fluctuation In Revenues Going Forward

One of the primary reasons for the nearly 35% decline in Macau GGR was that market was overly dependent on VIP gaming and corruption crackdown led to nearly two-third decline in VIP tables last year. Casino operators are now looking for diversified sources of revenues in Macau in order to minimize risk and stabilize revenue growth. Wynn Palace is also a step in that direction as it features 1700 luxury rooms, Chinese artworks, air conditioned gondolas circling a lake, and  water fountain show synchronised to music. This is expected to increase Wynn’s non-gambling revenues which accounted for just 11.2% of its revenues from Macau. This is in stark contrast to Wynn’s operations in Las Vegas, where non-gambling sources constitute nearly 65% of revenues.

For our model and valuation, please refer to our complete analysis of Wynn Resorts

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