2Q12 for Wynn Resorts (WYNN) and Wynn Macau (HK:1128)

the results

After the New York close on July 17th, WYNN reported its financial results for 2Q12.  Revenue for WYNN, which includes 100% of the revenue of Wynn Macau, was $1.253 billion vs. $1.374 billion in the comparable period of 2011.  Earnings were $139.0 million vs. $200.8 million in last year’s 2Q (before subtracting a $107.5 million charge for the present value of a planned charitable contribution by Wynn Macau to the university there).

EPS were $1.38 in 2Q12, compared with $1.60 in 2Q11.  The reason the eps comparison looks better than the net profit comparison is that the forced sale of Aruze USA’s 24.5 million shares in WYNN to the company reduced the number of shares outstanding to by about 25% 101.0 million.

The immediate reaction of the market to the results was relief that the numbers weren’t weaker than they were.  Of course, on the other hand, it’s not that long ago that WYNN was closing in on the $140 mark, as Wynn Macau received permission to build a new casino in Cotai.

details

Las Vegas

Business is up around 5% year on year, both in the gambling and non-gambling parts of WYNN’s operations.

The hotel/entertainment/shopping gain is straightforward.  It’s not so easy to see the improvement on the gambling side, however.  The industry accounting convention is not to measure revenue by the amount that gamblers bet–which was up around 5% yoy for Wynn in 2Q12–but rather by the share of that amount that the casino wins from them.

For slot machine play, which consists of huge numbers of small transactions, the odds almost always even out during a given quarter.  It’s not the same for table games, particularly for the high-roller segment of the market that WYNN specializes in.  The typical table game “win” percentage for Wynn is about 23%.  But in the June quarter of 2012 that figure was a mere 15%.  And the comparison is against 2Q11, when the win percentage was a whopping 27.6%.  The negative win comparison for high stakes baccarat was even worse.

I don’t think this is anything to worry about.  It’s just a fact of life.  Over the coming quarters, the win percentage will doubtless return to normal–and results will look more favorable than they do now.  The bottom line, however, is that the trend for WYNN’s Las Vegas operations is up.

Macau

Wynn Macau’s results are flattish.  That’s mostly because, for the moment, that market has run out of steam.

Two reasons:

–slowdown in the Chinese economy has translated into a flattening out in business for Macau casinos from mainland gamblers, and

–at the same time, casino floor space in Macau has expanded significantly as operators begin to develop Cotai.

The result is increasing, price-driven competition for junket operators to steer customers to a given casino.  Either customers are offered larger credit lines, or junket operators are offered higher commissions.  Wynn Macau’s position is strong enough that it isn’t compelled to participate.  However, until the economic environment in China improves, Wynn Macau will be doing well simply to maintain the current level of operating profit.

my take

WYNN is the strongest operator in an industry that I think has attractive investment characteristics.  On the other hand, I think LVS is the cheaper stock. And, although I have no desire to sell either WYNN or LVS (I have switched a little money from the former to the latter, however), I think all the Macau-related stocks will mark time until the Chinese market begins to pick up again–probably in early next year.

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