Wynn Resorts (NASDAQ:WYNN) didn't exactly go bust betting on table game assignments at its new $4 billion Palace casino opening in Macau this month, but the dramatically lower number it was given by regulators suggests there is more trouble ahead for casino operators in China's gambling oasis.
Beijing has been cracking down on the growth of gambling in Macau. Its drive against luxury and a probe into corruption snared several junket operators that serve as the lifeblood of the island's casinos. Junkets fly in VIP gamblers and loan them money to gamble with, a service for which the casinos pay them a portion of the proceeds. But after the screws were tightened and coupled with a sagging Chinese economy, gaming revenues in Macau have fallen for 26 consecutive months.
Macau is also under orders to diversify away from catering to high rollers and make it a more family-friendly, Las Vegas-like environment, offering non-gambling forms of entertainment and table games with more mass appeal.
Putting its cards on the table
Although Wynn Palace on Macau's Cotai Strip has some $3.6 billion worth of non-gambling amenities, it's the casino in which it invested some $400 million that ultimately drives the business. And Macau just told Wynn it will only get 100 table games when it opens. That's less than half the 250 allotted to Galaxy Entertainment (OTC:GXYEF) and Melco Crown Entertainment (NASDAQ:MLCO) when they opened their resorts in Cotai, and it's a fraction of the 500 tables Wynn says the Palace can handle.
Analysts had expected Wynn to get a similar number of tables assigned to it, but the lower number indicates Macau is taking a hardline stance on the 3% annual growth rate it has set for table games on the island. That decision should worry Las Vegas Sands (NYSE:LVS), which is scheduled to open its new mass-market Parisian casino next month, and MGM Resorts (NYSE:MGM), which follows early next year with the MGM Cotai.
It's likely Wynn will get a bump in tables after the casino opens, as both Galaxy and Melco were assigned a few dozen more after their resorts opened their doors, but it seems doubtful it will be so many that it will put it at parity with its rivals.
As a result, Wynn will be shifting tables from its existing Wynn Macau resort to the Palace, but that means the casino operator will simply be cannibalizing revenue at one resort in favor of the other. A Nomura analyst pegs the hit to Wynn Macau's earnings power at around $85 million next year.
Still on a losing streak
The decline could be even worse. Macau is entering its third year of falling gaming revenues after July's take came in at 17.8 billion Macau patacas, a 4.5% drop from the year-ago figure. While that's one of the smallest percentage declines since the downdraft began, it also appears that the amount being spent on the island is leveling off.
Although analysts are expecting September revenues to actually show an increase, that's not saying much: Last September, revenue fell 33%, which had been on top of a near 12% decline the year before that. Moreover, over the past five quarters, gaming revenue has consistently averaged about 54.8 billion patacas with no signs they'll be experiencing any real growth anytime soon. With 35 casinos operating in Macau now and three more opening in the months ahead, simply relying on mass-market entertainment may not be enough for the casino operators to thrive.
Wynn CEO Steven Wynn has had a contentious relationship with Macau's regulators in recent years, and last year railed at the "outrageous and ridiculous" policy of being granted tables only weeks before a resort opened.
"We build tens of thousands of rooms and restaurants and attractions," he said on a conference call with analysts last year, describing what he saw as the insanity of Macau's regulations, "but we said you're not allowed to gamble because you can't have the tables. But that's one of the reasons they come to Macau."
Not so mass appeal
And relying upon a mass-market audience may not be enough, either. After Melco Crown Entertainment's disappointing table assignment at Studio City, it said it was not putting in any VIP tables, but would assign them all to the mass market. That hasn't worked out well as Studio City generated just $179 million in gaming revenues in the first quarter. It's since said it will now put in three VIP tables.
With Wynn's paltry allotment, it's going to be even more hard-pressed to generate the returns expected from his investment and its rivals may not fare any better.