Why Wynn Stock Looks Overvalued Despite Expectations Of A Recovery In Macau

by Trefis Team
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The shares of Wynn Resorts (NASDAQ: WYNN) rallied more than 25% from less than $120 in early December to over $150 last week, primarily due to the Chinese government’s diversification plan for Macau as well as the easing of trade tensions between the U.S. and China. While the company’s stock has tanked more than 6% over trading on Tuesday to $142 following reports that the World Health Organization could declare an international public health emergency over the coronavirus in China, Trefis believe that the stock remains overvalued. We maintain Wynn Resorts’ Valuation at $129 per share, which is 10% below the current market price. The most significant factor behind our view is that the Macau Gaming Market has been facing headwinds from the declines in VIP Baccarat, and Wynn Resorts’ 20% share of Macau’s VIP Gaming Market is likely to put pressure on the company’s top line in 2020.

A Quick Look at Wynn Resorts’ Revenues

We expect Wynn Resorts to report $6.6 billion in Total Revenues for full-year 2019. This includes four divisions:

  • Casino: $4.5 billion in FY2019 (68% of Total Revenues). This segment includes income from regulated gambling activities at Wynn properties. Macau and Las Vegas properties contribute 90% and 10% of the casino revenues, respectively.
  • Rooms: $808 million in FY2019 (12% of Total Revenues). This segment includes income from visitors/tourists who lodge in Wynn properties. Macau and Las Vegas properties contribute 35% and 65% of the room revenues, respectively.
  • Food and Beverage: $839 million in FY2019 (13% of Total Revenues). This segment includes income from restaurants at Wynn properties. Macau and Las Vegas properties contribute 25% and 75% of the Food and Beverage revenues, respectively.
  • Entertainment and Retail: $481 million in FY2019 (7% of Total Revenues). This segment includes income from retail stores at Wynn properties, per separate agreements. Macau and Las Vegas properties contribute 54% and 46% of the Entertainment and Retail revenues, respectively.

Despite Strong Growth In Mass Market Gaming, Wynn’s 15% Market Share Is Unlikely To Raise Its Top Line

  • In 2019, Macau’s GGR declined by 3.4% (y-o-y), as reported by the city’s regulator (DICJ).
  • The Mass Market segment mitigated the impact of declines in the VIP segment – something we highlighted in a separate interactive dashboard about trends in the Macau Gaming Market.
  • In recent quarters, the Mass Market segment has benefited from growing visitation and a stable hotel occupancy rate in Macau.
  • While Macau’s diversification plan and a higher remittance limit are expected to increase per capita spend and further boost Mass Market Gaming Revenues, Wynn Resorts is expected to face headwinds due to its low market share.
  • In 2018, Total Mass Market GGR was around $13 billion, and Wynn’s mass-market drop was roughly $10 billion. Hence, casino win = $10 billion x 20% = $2 billion, implying a market share of 15% for Wynn.
  • To put things in perspective, Las Vegas Sands has a 45% market share of Mass Gaming Market, and its stock has only gained 15% since last December.

Wynn Resorts’ 20% Share of VIP Gaming Market Is Likely To Weigh On Its Top Line

  • Wynn Resorts generates nearly 90% of its casino revenues from Macau.
  • According to our estimates, the company generated $3.4 billion of VIP Gaming revenues in 2018, before deducting junket commissions. (It roughly translates into a 20% market share considering a $17 billion VIP Gaming GGR)
  • In the last three quarters, Wynn Resorts’ casino revenues from Macau have been trending downwards due to sharp declines in its VIP Gaming Turnover.
  • Considering Wynn Resorts’ low share of Mass Market Gaming and its sizable dependence on VIP business, Trefis maintains Wynn Resorts Valuation at $129 per share, using a forward P/E multiple of 18.5 and a forecast of $6.95 for EPS in 2020.

See all Trefis Price Estimates and Download Trefis Data here

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