the WYNN Cotai project

Last Monday in Hong Kong, Wynn Macau announced that it had received a 25-year concession from the government of the SAR to develop a new casino in Cotai.  The concession consists of 51 acres of land.  1128 will pay a land premium of US$193.4 million and annual rent of US$771,738.

The planned casino, which WYNN has been talking about for the past six months, will likely cost US$3.0-$3.5 billion and will probably debut in 2014 (the concession requires the casino to be in operation within five years).  Given that 1128 already has about US$ 1 billion in cash on the balance sheet and will probably earn another US$2 billion from its existing Macau casino operations before the new venue opens, financing the project will not be a problem.

market implications

I think there are four:

1.  Macau, which I think has done an excellent job of developing the casino industry in the SAR, has been very careful in recent years grant new casino concessions slowly enough that supply doesn’t outpace demand.  The WYNN concession indicates that it believes strong demand from the mainland will continue for at least the next several years.

2.  There had been speculation in Hong Kong that Beijing was upset at the relatively greater success of US casino groups in Macau vs. the incumbent Ho family.  The WYNN concession shows me that this isn’t the case.  All along I’ve believed that the SAR has actually been eager to have US casino operators (why else give an initial concession to WYNN?), for two reasons:  to get the convention/resort expertise of Las Vegas, and to break the power of the triads in the market.

3.  The Hong Kong stock market has apparently begun to worry about what happens to the casino industry in Macau after the concessions granted to current operators end in 2022.  I think these worries are silly–as if Macau would set onerous new terms that would compel operators either to leave or to run their casinos to extract capital rather than expand.  That would turn the SAR from the Las Vegas of China into its Atlantic City–an outcome that would be disastrous both for the casino operators and for Macau.

For those who think that pieces of paper are more important than common sense in these matters, the WYNN Cotai concession agreement requires the company to remain in Macau and run a casino for the next twenty-five years.

4.  There have also been market worries that, because current concessions end in about ten years, western banks won’t finance casino expansion.  For the incumbent operators, this is not a big issue.  For one thing, casinos are so cash generative that a company like 1128 won’t need financing.  For another, mainland Chinese banks are likely the preferred lenders to the casinos.

thoughts on WYNN and 1128

Both WYNN and Wynn Macau have been spectacular performers, year to date.  I don’t think anything is “wrong” with either stock.

WYNN hasn’t participated in the market rebound of the past few days, mostly, I think, because it resisted the preceding downdraft.  1128 is suffering from (misplaced, in my opinion) jitters in the Hong Kong market about the possible rapid deceleration of growth of the Macau gambling market.

For the moment, the US market is, understandably, concentrating on stocks that have been severely beaten down in the market’s fall.  I expect investor interest will return to WYNN soon enough (although I have written October $170 calls on a small part of my holding).

1128, which I also hold, is a more difficult situation to assess.  To US eyes, it’s a fabulous stock.  It’s trading on well under 20x forward earnings, with easily 25-30% earnings growth is prospect–much more if the Macau gambling market remains as strong as I think it will. And there’s the capacity expansion in a couple of years, as well.  Yet Hong Kong investors, who will make or break the market in the stock, appear unwilling so far to differentiate 1128 from its much weaker competition.  And they’re clearly worried about a possible downturn in Macau gambling.  More patience may be required here.