WYNN, and indirectly Wynn Macau, report strong 3Q2010 results

After the close on Tuesday, WYNN reported its 3Q2010 earnings results.  Since it breaks out the performance of its US and its (72.3%-owned) Macau operations separately, it also in effect renders an accounting of 1128’s performance, even though Hong Kong securities regulations only call for semi-annual reports.

the numbers

WYNN’s revenues for the quarter reached $1 billion, up from $773.1 million in the comparable period of 2009.  Of the increase of $226.9 million, $222.9 million comes from Macau (remember, accounting conventions in the US–and just about everyplace else–dictate that WYNN show 100% of the revenues and costs of 1128 in the income statement and then subtract the share of profits that belongs to third-party owners in a “minority interest” line at the bottom).

Macau had operating income of $124.7 million for the quarter, up 50% from $83.2 million in the September period of 2009.  Las Vegas had an operating loss of $16.2 million, an improvement from the deficit of $20.9 million it  posted last year.

Net income was $48.7 million, or $.39 per share, after adjusting for a loss of $64.2 million on redeeming a bond issue early.  This compares with net of $39.9 million, or $.33, in the third quarter of 2009.  Given that Macau operations earned about $113.7 million, after tax, in the quarter, this implies the rest of the company lost $65 million.

the details

Quarter on quarter, Macau’s operating results were down by about 11% as the house winning percentage from high rollers returned to a more normal 2.88% of the amounts bet, as compared with the very favorable 3.22% it enjoyed during the three months ending in June.

In Las Vegas, casino income was down, hotel results were flattish, but the popularity of WYNN’s nightclubs more than offset this.

the (near-term) future

October was a huge month for Macau–both the market, where revenues were up 50% year on year (up 20% over the average month of the third quarter), and for 1128, which earned $90 million for the month.  WYNN was unclear whether this figure was EBITDA, which it presumably is, or some even more favorable measure.  Assuming WYNN means EBITDA, that would be a 25% jump over what 1128 earned in the average month of the third quarter.

Steve Wynn thinks the Las Vegas market bottomed in the third quarter and that a slow recovery is now underway.

Planning is just about complete and preliminary construction work for 1128’s expansion in the Cotai area of Macau is starting.  Opening of the new casino complex is slated for 2014-2015.

what about the stocks?

WYNN has a market capitalization of about $13.7 billion.  1128 has a market cap of around $11.7 billion, meaning WYNN’s ownership share of the subsidiary is being valued in the Hong Kong market at $8.5 billion.

The most straightforward conclusion would be that Wall Street is assigning a value to WYNN’s Las Vegas assets of around $5 billion.  Yes, the company is perhaps the only healthy body in a sea of walking wounded.  Yes, there’s the iconic name, the well-maintained facilities, the promise of economic recovery in the US that will likely bring WYNN a larger share of a more profitable Las Vegas.  Still, that seems like a lot to pay–and implies one should hold 1128, the “pure” Macau play, that can easily be bought through any discount broker.

Maybe that’s not 100% right, though.  There are certainly institutional investors whose contracts with clients prevent them from buying foreign stocks.  Hong Kong and Macau are different places with different rules, where it’s sometimes hard for many people to keep up with what’s going on–or even to understand how local investors are likely to react to a given piece of news. In addition, WYNN controls 1128 and receives management fees from it.  For al these reasons, there may be an “intangible” premium attached to owning WYNN.

Having said that, as a growth investor, my preference is for 1128.  My guess is that the parent company premium is as wide as it’s going to get.  This would mean all the upward price momentum will come from developments in Macau, until Las Vegas gives strong signs of profit recovery.  Given the sluggish overall US economy and the large amount of overcapacity in Las Vegas, I don’t think that will be soon.  As it happens, I own a very large (at least, for me) combined position in WYNN and 1128.  I’m going to trim the former.

…oh–the dividends!

WYNN will be paying an $8 per share dividend on December 7th to holders of record on November 23rd.  Given that the company is not paying taxes in the US as present, this makes a lot of sense.

The board of 1128 is considering paying a regular dividend, and has declared an initial payout of HK$.76 on December 3rd to holders of record on November 22nd.  1128 thinks it will easily be able to finance Cotai construction costs of maybe $2.5 billion, and still pay a dividend.

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