Wynn Resorts (WYNN) and Wynn Macau (1128:HK) (I): the worst and best of times

The WYNN story

WYNN is a story of two casino complexes:

–one is in Las Vegas, and consists of the Wynn Las Vegas and Encore hotel/casinos,

–the other is in the Chinese Special Administrative Region of Macau, and consists of the Wynn Macau and soon-to-be-opened Encore (414 rooms), plus a third hotel planned for Cotai (at a cost of roughly US$2 billion).

This is really a tale of two cities–or rather, one city and one SAR.  The former is mired in recession, the latter is booming.

I recently listened to the WYNN fourth quarter earnings conference call and have taken at least a glance through the 10-K.  In this post I plan to make some general remarks about WYNN and then write about the US operations.  In tomorrow’s post, I’ll write about Wynn Macau.  For what it’s worth, I own both stocks.

A Chinese company

If we judge by Earnings Before Interest Taxes Depreciation and Amortization (EBITDA), which is a common measure of the cash generated by operations, WYNN has been a Chinese company for the past couple of years.

—————————-Macau—————-Las Vegas     (EBITDA in US$ millions)

2009                                     $502                               $244

2008                                     $486                               $253

2007                                     $364                                $417

If the first two months of 2010 are any indication, the percentage of the total generated by Macau this year will be even larger.

The contrast is even more stark if we compare pre-tax income:

————————–Macau—————-Las Vegas (in US$ millions)

2009                                 $272                       -$230

2008                                 $254                       -$105.

This difference hasn’t been lost on Wall Street or in Hong Kong (where investors nevertheless continue to be dubious that US-style casino-hotels will be successful in China).  The market capitalization of WYNN is $8.2 billion, that of 1128 is $6.8 billion (all the figures in this post are US$).  WYNN’s 72.3% interest in the latter is therefore worth US$ $4.9 billion.  This implies the stock market is currently valuing WYNN’s Las Vegas holdings at $3.3 billion.

WYNN’s assets

How do WYNN’s physical assets stack up in each place?

————————Macau               Las Vegas

hotel rooms                  600                      2,450

casino space        222,000 sq ‘           186,000 sq ‘

table games                 390                        220

slot machines          1,200                      2,710.

Which is the cheaper stock?

That depends (another way of saying I don’t know).  The two stocks, WYNN and 1128, exist in different markets, offering different alternative stock choices and catering to investors with potentially sharply differing risk preferences.  To state the obvious, neither will do well if Macau falters, and diversification of Las Vegas probably won’t help WYNN all that much.

Las Vegas is bouncing along the bottom at present and offers the possibility of surprisingly positive earnings results as and when demand returns.  The implied valuation of WYNN’s Las Vegas assets is about the same as the market cap of MGM, a company that I think is significantly weaker than WYNN.  WYNN is the value investor’s choice, I think.

Macau is booming.  1128 is gaining market share (I’ll elaborate tomorrow).  On the other hand, the heavy hand of government regulatory tightening can appear at any time.  Wynn Macau is the growth stock investor’s choice.

WYNN’s Las Vegas strategy

Aggregate statistics for Las Vegas in 2009 make grim reading.  Visitors were down by 3% year over year, but overall gaming revenues were down almost 10% and room rates were off by 22%.  Conventions held in Las Vegas were down by 14%, and the number of convention attendees was off by 24%.

Steve Wynn doesn’t expect recovery in Las Vegas any time soon (more about this below).  In hindsight, the decision to build Encore (cost:$2.3 billion) was a mistake.  Wynn expected it would generate $250 million in annual ebitda, but the way I read the figures it ended up only making WYNN’s loss bigger.

bouncing along the bottom

My guess is that Las Vegas is starting to bounce along the bottom.  Two reasons:

–the last of the new hotels, MGM’s City Center, has come on-stream, adding the last 6,000 rooms of (over-)capacity to the market.  So all the bad news is out there for everyone to see.

–the economy is gradually recovering, and Las Vegas has become really cheap.  Visitor statistics are starting to reflect this.

So Steve Wynn’s view may turn out to be too pessimistic.

WYNN’s strategy for Las Vegas?

Even though the profit figures are very ugly, on a cash flow basis WYNN is in better financial shape than competitors LVS and MGM.  Wynn’s idea is to plow money back into upgrading the Las Vegas properties so they offer increasingly better value for money, that is, new amenities and better customer service. than rivals’.  For example, the company is converting the porte-cochere in front of Encore–which looked at the skeletons of abandoned casino projects across the street–into an inward-facing beach club/night club complex.  It’s also beginning to refurbish the rooms at the Wynn Las Vegas hotel.

This is probably the best (read: only sensible) WYNN can do.

A small move back east

Last month WYNN also announced an agreement to develop and run a restaurant/casino complex on the Philadelphia waterfront.  It will be one of two in this area, and will include both slot machines and table games.  Bloomberg has a report on Steve Wynn’s testimony before the Pennsylvania regulatory authorities.

It’s hard to know what this means for the company other than establishing a potentially powerful marketing outpost for the Las Vegas properties in a part of the country that the Golden Nugget used to dominate.  WYNN will invest $250 million for 51% of the project and retain an option to buy out its partners.

The sources of Steve Wynn’s pessimism

1.  recession and overcapacity in Las Vegas

2.   disfunctional Washington, implying slower recovery than otherwise possible

3.  President Obama’s frequent lambasting of Las Vegas, which, putting the best possible face on it, gives corporations an excuse to locate conventions at cheaper venues.  To Wynn, this hostile attitude toward a world-leading, employment-generating industry contrasts sharply with the rescue from bankruptcy of GM and Chrysler, firms that are not technologically competitive and that have inferior performance records over long periods of time.

4.  Casino customers are not, by and large, employees or executives of large corporations.  Instead, they’re entrepreneurs, professionals or small business owners.  Washington policy is hurting this group’s confidence in two ways.  Health care reform will likely mean higher expense for providing medical benefits for employees.  The idea of increasing personal income taxes for “rich” Americans hits this group as well.  Many structure their businesses so their results appear on the owner’s individual tax returns.

If I ran a Las Vegas casino complex, I’d be upset, too.  But Wynn may be too close to the problem.  My guess is that Washington may delay recovery a bit, but it won’t stop it from happening.

Of course, the latest figures from the Las Vegas Convention and Visitors Bureau are for December, which showed a continuing mild uptick in visitors.  Steve Wynn has figures, for his properties at least, for January and February 2010, which we don’t.

A peculiar aspect of the cash flow statement for 2010

I’m just noting this.  I don’t quite know what to make out of it.  WYNN issued new stock during the worst of the stock market turmoil, at about a third of the current price (meaning all existing shareholders were diluted), to raise $200 million in cash.  Toward the end of the year, after an inflow of about $1.5 billion from the Wynn Macau IPO, WYNN made a dividend distribution to shareholders of just under $500 million.

Maybe the way to think of the stock offering was as an insurance policy, but it looks a bit foolish now.  It didn’t do much for the chief financial officer’s longevity, either.  He left the company right after the offering.

The conference call

It was one of the odder I’ve experienced.  The analysts on the call ranged from very savvy to some who didn’t appear to know basic accounting concepts (welcome to post-recession research departments).  There was even a retail broker, apparently a big fan of Steve Wynn, who had a lengthy chat–something I’ve never heard before.

A large dose of political views (another first for me) aside, the company appeared to be very bullish both about Macau and about WYNN’s ability to create the same market niche there that it has established in Las Vegas, and once had in Atlantic City.

Trying to focus on what WYNN is doing in Las Vegas, rather than railing about, the company message seems to be that it isn’t depending on movements in the general economy to bring it back to profitability.  Unlike rivals, whose casinos looked distinctly shopworn last time I was there (admittedly, months ago), WYNN seems to be concentrating on improving its properties and waiting for the day when it can raise room prices.

What WYNN needs most is time, I think.

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