2Q14 results for Wynn Resorts (WYNN) and Wynn Macau (HK: 1128)

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.


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.









the Macau gambling market contracted by 3.7% in June!

The recently released monthly report from Macau’s Gambling Information and Coordination Bureau (DICJ) showed that aggregate casino win (the amount gamblers lost in the casinos last month) amounted to MOP 27.2 billion, or about US$3.4 billion.  That’s a 3.7% year-on-year drop, the first red figure I can remember for the SAR, and the only one on the DICJ website, which contains comparisons going back to 2010.

Yes, the figures might have been slightly in the black if not for the World Cup keeping potential gamblers glued to their TV sets at home rather than being at the casino tables.  And it has been clear that the yoy comparisons would get progressively tougher as 2014 unfolded.  That’s because 2013 results got stronger as the VIP market returned to normal after the mainland Chinese Communist Party leadership transition.

There are two more important reasons for the flattening out of the Macau gambling market, however.  Both are temporary, I think.

–the continuing anti-corruption crackdown by Beijing, which has VIP gamblers adopting a lower profile, and

–lack of junket operator credit (junket operators typically borrow, at rates of 1%+ per month, funds that they advance to VIPs), in the wake of the apparent disappearance of a prominent organizer with US$1 billion – US$1.3 billion of his company’s funds.  This has understandably made lenders reluctant to back any junket operator as fully as before.

Interestingly, the Macau gambling stocks, which have been very weak performers since early this year, rallied on the DICJ report.

What to do?

My guess is that the VIP segment of the Macau market will be at best flat for the rest of the year. That will make it hard for the aggregate gambling market in the SAR to show significant advances.  However, the real story of Macau is below the surface.  It’s the rapid shift away from VIPs and toward the mass affluent that’s now going on.  The latter, which already account for the bulk of the SAR’s win, are also big spenders in the casinos’ food, entertainment and shopping venues (remember, non-gambling activities can account for half a casino’s income, and they’re just getting started in Macau).

The Hong Kong-traded casino stocks, which have been very weak performers since early in the year, seem to me to have already discounted the negative developments I’ve described above.

In my view, the worst hurt by the VIP slowdown will be the traditional casinos run by the Ho family.  The least affected will be Sands China, Wynn Macau and Galaxy Entertainment (I own Galaxy and the parents of the two others).

I’m not rushing to add to my exposure (although I think I may have missed the bottom in Wynn Macau a couple of weeks ago), but i have no desire to sell, either.



Macau gambling developments, December 2013–a longer view

The Macau Gaming Inspection and Coordination Bureau published its monthly “Gross Revenue from Games of Fortune” report (I love the names) a couple of days ago.  Here it is:

Monthly Gross Revenue from Games of Fortune in 2013 and 2012
Monthly Gross Revenue Accumulated Gross Revenue
2013 2012 Variance 2013 2012 Variance
Jan 26,864 25,040 +7.3% 26,864 25,040 +7.3%
Feb 27,084 24,286 +11.5% 53,948 49,325 +9.4%
Mar 31,336 24,989 +25.4% 85,284 74,314 +14.8%
Apr 28,305 25,003 +13.2% 113,589 99,317 +14.4%
May 29,589 26,078 +13.5% 143,178 125,395 +14.2%
Jun 28,269 23,334 +21.1% 171,447 148,729 +15.3%
Jul 29,485 24,579 +20.0% 200,932 173,308 +15.9%
Aug 30,737 26,136 +17.6% 231,670 199,444 +16.2%
Sept 28,963 23,866 +21.4% 260,632 223,310 +16.7%
Oct 36,477 27,700 +31.7% 297,109 251,011 +18.4%
Nov 30,179 24,882 +21.3% 327,288 275,893 +18.6%

Source: Macau DICJ.   Figures in millions of MOP.

Another very healthy month, in what has been for the Hong Kong consensus a surprisingly good year.  My only caution would be against extrapolating from the current year-on-year comparisons.  Yes, current figures are likely to trend upward in 2014 (by 1o%+).  But May through November of 2012 was an unusually weak period for Macau, as a result of overall global economic softness + uncertainty surrounding the once-in-a-decade change in Communist Party leadership on the mainland.  Comparisons will get much tougher, starting with December.

a pat on the back for Macau

In just over a decade the SAR has created a booming Las Vegas-style gambling market from pretty much nothing.  While doing so, it has also severely weakened the relative power and influence of the previous gaming monopolist, the Ho family, with its purported connections to the Chinese underworld.  By carefully controlling capacity additions and by banning cutthroat price competition, the industry has enjoyed almost uninterrupted prosperity.  So too the SAR>

where to from here?

This question has two aspects to it:

1.  how does the Macau gambling market evolve?  and

2.  how do the Macau gambling companies evolve?

My thoughts:

1.  The next several years are pretty much set.

New capacity is being added; new transportation links are being forced that will make Macau accessible to increasingly large portions of the mainland.  All-but-professional super rich VIP baccarat players are being supplemented by middle class tourists.  This latter development is in its infancy.

Three years down the road, Macau gambling revenue will be at least a third higher than now.  Spending on hotels/restaurants/shows/shopping?    …make up a number.  Double what it is now?

What then?  My guess is that if becoming the Las Vegas of 2000 was Macau’s aspiration, it’s fervent desire today is not to become the Las Vegas of 2013, a city mired in overcapacity.  I think the SAR will take its foot off the gaming pedal and (mixing my metaphors) begin to steer the economy in a non-gaming tourist direction.

I’m not saying the party is over–far from it–but maybe we’re eating the main course now.

2.  Casinos are gigantic cash flow generation machines.  Left to their own devices, they’d just plow that money back in to new capacity in Macau.  But so far they haven’t been allowed to give in to these impulses, nor will the future be any different, in my view.  What do they do with the money they’re going to be awash in.

Some of it will go to permitted new expansion in Macau. Some will go to repay debt–although with borrowing costs close to zero, no one is going to be in a great rush to pre-pay borrowings.

Some may end up in real estate development nearby (Hengqin, anyone?).  But real estate alone doesn’t make use of the casino operator’s special skills.

Dividends?   …probably so, but especially if the companies with US parents can do so in a tax-efficient way.

However, I think the next serious turn of the wheel will see at least some Macau players using their companies’ cash flow to build casinos elsewhere.  This could be a very interesting investment development, with Macau casino firms turning into multinational Asian gambling conglomerates.  Galaxy Entertainment, for example is already talking about this openly, with Japan as its first target.

This may well also be what Wynn ends up doing.  The Las Vegas Sands case is more complicated, since that firm has two Asian subsidiaries, one in Macau and one in Singapore.

Macau gambling, October 2013

The Macau Gaming Inspection and Coordination Bureau (DICJ) recently released its tally of aggregate gambling winnings of the Chinese SAR’s casinos during the holiday month of October.  The results, in MOP millions, are as follows:

Monthly Gross Revenue from Games of Fortune in 2013 and 2012
Monthly Gross Revenue Accumulated Gross Revenue
2013 2012 Variance 2013 2012 Variance
Jan 26,864 25,040 +7.3% 26,864 25,040 +7.3%
Feb 27,084 24,286 +11.5% 53,948 49,325 +9.4%
Mar 31,336 24,989 +25.4% 85,284 74,314 +14.8%
Apr 28,305 25,003 +13.2% 113,589 99,317 +14.4%
May 29,589 26,078 +13.5% 143,178 125,395 +14.2%
Jun 28,269 23,334 +21.1% 171,447 148,729 +15.3%
Jul 29,485 24,579 +20.0% 200,932 173,308 +15.9%
Aug 30,737 26,136 +17.6% 231,670 199,444 +16.2%
Sept 28,963 23,866 +21.4% 260,632 223,310 +16.7%
Oct 36,477 27,700 +31.7% 297,109 251,011 +18.4%

Source: Macau DICJ.


The monthly “win” is an all-time record for Macau, and, in my view, stunningly good.

Two factors appear to be at work:

–the expansion of casino capacity and the parallel development of non-gambling entertainment (at the insistence of the Macau government) in the Cotai region is broadening the appeal of Macau as a tourist destination and drawing in a younger, “merely” affluent crowd in large numbers, and

–the upturn in the Chinese economy is prompting the return of increasing numbers of the enormously wealthy VIP baccarat players who have until now formed the backbone of Macau’s casino industry.


What I find interesting is that the Hong Kong-traded Macau casino stocks have been selling off on this good news.  This is partly, I think, because the stocks have been extremely good performers over the first three quarters of the year, as it became clearer that the Chinese economy was beginning to rebound.  The fact that more speculative and less skillful operators in the Macau market have been leading the pack had already been suggesting that the recent run was getting a bit long in the tooth.  In addition, however, I think the pullback we are seeing also is in line with an emerging mood of caution I see building in stock markets around the world.

I don’t think anything is wrong, either with Macau gambling or with the strongest operators.  A while ago, I trimmed my casino holdings a bit, based solely on position size.  Others may be doing the same, only timing their move a bit better than I did.  I expect that as Macau continues to exhibit strong growth in gambling win over the coming months, the stocks will take up their outperforming ways again, with Galaxy Entertainment, Sands China and possibly Wynn Macau in the vanguard.

3Q13 earnings for Wynn Resorts (WYNN)


After the close yesterday, WYNN reported its 3Q13 earnings results.  Revenue came in at $1.39 billion, up 7% year on year.  Macau was up by 9.6% and Las Vegas by 1.1%.  The company posted EPS of $1.84, much higher than the Wall Street consensus of $1.65, and considerably ahead of the $1.48 WYNN tallied in the comparable period of 2012.


In my view, the basic WYNN story remains unchanged for now:

–The company is capacity constrained in the booming Macau market and will remain so until its new casino in the Chinese SAR, the Wynn Palace, opens in early 2016.  In the meantime, it is refurbishing and fine-tuning its existing capacity to boost profits and maintain competitiveness with new casinos currently being opened in Macau.  But it probably won’t keep pace with overall growth in that market.

–Las Vegas is flattish, which is good performance in a city suffering from the combined effects of slow economic recovery in the US, massive overcapacity created at the market peak and the continuing expansion of regional casinos in hard-strapped states looking for new sources of revenue.

The current situation is probably best summarized by the stock’s market capitalization, almost 95% of which represents the value of WYNN’s Asian subsidiary, Wynn Macau.  Some anticipation of the Wynn Palace’s opening must already be included in the latter’s price, since Las Vegas still accounts for a quarter of WYNN’s total EBITDA.


Perhaps the most interesting thing about the company’s earnings conference call was Steve Wynn’s apparent distress at the shabby way in which he feels his company is being treated by Massachusetts as it applies for a casino operating license there.  The bone of contention seems to be the state regulator’s suspicion of anyone doing business in Macau.

My quick reading of the situation suggests the vetting process is a little weird.  On the one hand, Massachusetts wants to outdo New Jersey as the strictest venue for casino operation in the US.  On the other, it is still considering MGM, which is barred from doing business in NJ.  And it seems to be intimating that applicants will get more favorable consideration if they give financial support to local tourist boards.   It will be interesting, though not crucial for WYNN, to see how the process turns out.  My sense is it will be a much bigger black eye for Mass than for WYNN if its application ends up being rejected.

my take

I’ve been holding both WYNN and HK: 1128 (Wynn Macau) for a long time.  I’ve recently sold my position in the latter, both on the idea that I can buy it back next year, when the new Palace is nearer to opening and because my overall casino holdings (I also own LVS and HK:0027 (Galaxy Entertainment)) had become too large).

WYNN and 1128 are the best casino operators in their markets, in my opinion.  Las Vegas may be boosted by a better climate for the convention/meeting business in Las Vegas next year.  But I don’t see market-beating earnings acceleration for 1128 for at least seven quarters.  Yes, the stock has been a blockbuster performer in Hong Kong recently, up by over a third during the past three months.  But that’s a short-term negative, in my opinion, not a positive.