it’s been same old, same old for the big casino operators…

I haven’t written about WYNN and its subsidiary Wynn Macau (1128) for a while.  That’s mostly because I perceive the company to be in a holding pattern.  It has two casino operations:  Las Vegas and Macau, the latter through 72%-owned Wynn Resorts.

–In Las Vegas, all the major casino resort operators, WYNN included, upped their operating leverage by opening big new casino and hotel capacity in 2007-08, just as the recession was unfolding.  Demand dropped through the floor.    Profits disappeared faster.  Results since have been consistently weak as the casinos wait for demand to pick up and/or for weaker entries to close up shop.

–In the Macau market, which is now many times the size of Las Vegas, 1128 has been capacity constrained for some time.  Its next expansion, the Wynn Palace, isn’t slated to open until early 2016.

…until now

Las Vegas

For WYNN, the near-term story is Las Vegas.  And the change is for the better.  Room revenues in 2Q14 were up by 7.3% year-on-year in the quarter.  Average room rates rose to $283, up from $268 in 2Q13.  Occupancy increased from 88.4% from 86.9%.  To my mind, the room rate rise is a particularly important indicator of increasing demand.

In addition, the amount bet at WYNN’s Las Vegas tables was up by almost 15%, year-on-year.  The company’s win percentage was an unusually high 27.4%. vs.  the company’s expected range of 21% – 24%.  In all likelihood, the “extra” win from this quarter will be offset by sub-par “luck” in coming periods.  But, again, the more interesting number is the sharp jump in table games betting.

Slot machines were flat.

Management said on the earnings conference call that the 2Q strength was continuing into 3Q.

Macau

In Macau, the individual pluses and minuses for 1128 may be a little different, but the near-term profit profile–flattish–remains the same.

Overall market growth in Macau has slowed as an economic lull in China and Beijing’s anti-corruption campaign have tempered VIP’s  enthusiasm for high-stakes gambling.  This has been offset by a sharp jump in visits by the mass affluent, who–unlike their high-roller counterparts–are more concerned with being entertained than at winning a lot at baccarat.  They also want to eat, shop and go to shows.  So from the casinos’ point of view, they’re great customers.

While it waits for the new capacity the Wynn Palace will bring, 1128 is refurbishing its existing hotel and casino spaces.  It’s also raising salaries considerably, both to reinforce its reputation for superior service and to retain staff.  While these actions may make profits a bit weaker than they would be otherwise, it makes sense to use the current lull to set the stage for stronger growth in a year or two.

my take

WYNN has a market cap of $22 billion.  Its stake in 1128 is worth $16 billion, meaning that Wall Street is valuing the Wynn name, Las Vegas operations, royalties from Macau and the potential of future casino development in, say, Japan, at $6 billion.  That’s roughly 25x earnings.

WYNN shares yield 2.3%, 1128 about double that.

Last year, I sold the 1128 I had held since just after the IPO, partly because my casino holdings had become too large a part of my portfolio, partly in anticipation of the current fallow time.  I’m beginning to think about buying it back.  But I’d prefer to do so in the mid- to high-HK$20s.  Rightly or wrongly, I think I have time before the market begins to discount the opening of the Wynn Palace–with a presumed strong profit upsurge–in 2016.

I bought a lot of the WYNN I hold during the market collapse in early 2009.  I may be influenced by the tax I’d pay if I sold (I hope not, because this is virtually always a bad way to think), but I’m content to collect the dividend while I wait for Las Vegas to recover and the Wynn Palace to open.  To me it sounds as if the first may already be happening, which would be good news for WYNN shares.

What would I do if I owned nothing in this sector?

The least risky thing to do would be to buy a small amount of either WYNN or LVS and try to add on weakness.  LVS has the better near-term profit profile; WYNN has the better management, in my view.  Their valuations are similar, although their business models are a bit different.  LVS runs convention hotels; WYNN focuses on the high-roller niche.  (I own both.)

The most attractive firm I see at the moment is Galaxy Entertainment.  It’s a Macau-only operator and trades either in Hong Kong, or on the pink sheets–so it’s riskier than the other two.