Wynn Resorts and Wynn Macau: a strong March 2010 quarter

the results

WYNN reported surprisingly good March quarter results after the market close yesterday.  Earnings per share were $.26 vs an analyst consensus of $.14 and a loss of $.27 a share in the year-ago period.  (Remember, I own both WYNN and 1128, Wynn Macau.)

The main reasons for the strong performance were a huge increase in table games revenue from Wynn Macau (coming from basically the same facilities as a year ago–the new Encore in Macau opened earlier this month); and, in Las Vegas, higher table games revenue and a rebound from last year’s abnormally low “win” percentage (amount retained by the casino per dollar bet) of 17.7% to 23.2% (21%-24% is normal).

While it’s striking that Wynn could post operating profit up 82% year on year from Macau, the firm’s performance is actually better than that.

For casinos that cater to typical bettors or that have a large percentage of slot machines (which may be the same thing said another way) individual wins and losses almost always even out during a quarter, so that the casino’s overall win percentage stays relatively steady.  Not so with casinos, like WYNN’s, that cater to high rollers.  Their individual customers can win or lose millions of dollars at the tables in a single night.  While clients’ “hot” or “cold” streaks even out over, say, a year, they can make a noticeable difference to quarterly results.  Win in the first three months of this year for Wynn Macau was 2.7% from its high roller VIP segment.  That’s at the low end of the normal range of 2.7% – 3.0%.   And it compares with a win percentage of 3.55% a year ago.  That may not sound like much, but it’s a 30% negative swing.

the numbers

Operating income from Wynn Macau was $125 million vs. $68.7 million a year ago.  Las Vegas had an operating loss of $34.5 million vs. a loss of $58.4 million in the opening quarter of 2009.

EBITDA (earnings before interest, tax and depreciation and amortization), which is basically the cash the properties generate from operations, was $181.6 million for Macau vs. $114.6 million.  It was  $60.3 million vs. $43.9 million for Las Vegas.  The main difference between EBITDA and operating earnings in Las Vegas is adding depreciation for the casinos back in.  For Macau, it’s depreciation plus management fees paid to WYNN.

From an operating earnings perspective, then, Wynn Macau now accounts for more than 100% of WYNN’s results.  Looking at EBITDA, Macau is “only” 75%.  As Steve Wynn has often said, WYNN is now a Chinese company.  In fact, WYNN is planning to move parts of its corporate headquarters to Macau when it completes an anticipated new resort in Cotai.  Assuming WYNN gets government permission, construction will begin in 2014.

Macau

It sounds like good news will continue to come for WYNN from the SAR.  For one thing, the win percentage from its VIP tables, which produce the vast majority of the company’s operating profit there, will likely return to normal.  For another, WYNN’s revenue per table is continuing to expand at a faster rate than the market’s–evidence that the WYNN high roller strategy is working in Macau.  Also, the newly-opened Encore will begin to make a contribution to results in the current quarter.

In addition, the government of Macau is determined to run a market that grows in an orderly–and profitable–manner.  It has already slowed down the pace of new construction–Encore got in just under the wire–and set a (low) limit on the total number of table games permitted in the market through the end of 2013.  And, when a bidding war began to break out a while ago over the fees paid to managers of high-roller junkets to Macau, the SAR stopped it by setting a legal cap on these payments.  All of these moves favor WYNN.

In a short –and sometimes slightly testy–conference call, Steve Wynn made an interesting comment about why he thinks the mass-market strategy in Macau will not be the best one.  In his view, China has 300 million affluent citizens that the central government wants to encourage to spend more.  The country also has a billion poorer citizens that it doesn’t want to see gambling their money away.  Therefore, a high-roller strategy is in line with what Beijing wants; a mass-market approach runs counter to government policy.

Las Vegas

In my experience, casino revenues in any market are a function of available market floor space and of the rate of GDP growth.  Las Vegas has just seen the last of a series of huge increases in floor space come on line in MGM’s CityCenter–whose novelty has taken customers, at least temporarily, from other casinos, including WYNN’s.   Although the worst is over on this front, it will take years for the market to absorb all the new floor space now in operation.  In addition, while GDP growth has resumed, the pace of advance is likely to continue to be slow.

My guess is that WYNN will continue to gain market share and steadily march back toward operating breakeven.  As smaller, less proficient and less well-capitalized competitors fall by the wayside, WYNN’s business in Las Vegas will also benefit.  The real question is how long this process will take.

An addendum, a couple of hours after I first published this:

How to value WYNN and 1128

A lot depends on how you allocate overheads, debt and the value of the brand name.  Here’s one approach:

From the minority interest line, we can see that 1128 earned HK$864 million in the quarter, or about HK$.17 a share.  I think HK$.80 is a reasonable guess for the full year, but HK$1 isn’t out of reach.  If we apply a 20x multiple to the HK$.80, that would mean a price of HK$16 by yearend.

That would make WYNN’s interest in 1128 worth about US$7.5 billion.

What do we say about the Las Vegas business, then?  My instinct would be to consider this on a cash generation basis, as if the company were split into two parts, one (Macau) for growth investors, the other (Las Vegas) for income investors. I think this produces a fairly conservative value.

Las Vegas generated about $60 million in cash flow this quarter.  Against that, let’s apply the interest expense for 3/4 of the overall company debt, or about $37 million (the rest is on the 1128 balance sheet). This leaves $23 million, or maybe $100 million for full-year 2010.  If we capitalized this flow at 6%, a low number but we’re also hopefully at a very low point for cash generation, that would yield a value of about $1.7 billion.

WYNN has about $2 billion in cash.

Add the three pieces up and we get about $11 billion, or about the current market cap.

In other words, assuming Macau perks along and Las Vegas stays at the status quo, WYNN is fairly valued now.

What could go right, in a way that would make this number too low?  1128 could earn HK$1 instead of HK$.80, which would raise our sum of the parts by about US$ 2 billion.  Or, Las Vegas operations could get better, faster than anticipated, either by the market starting to grow again or WYNN taking market share.

Either could happen.  I think the first is more probable, but the second would have more positive leverage on profits and would come as a bigger surprise.

Personally, I’m content to watch and wait–though my wife and I may donate some stock we bought a year ago to charity.


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