Wynn Resorts (NASDAQ:WYNN) knew it wasn't going to get the 400 table games it hoped for with Wynn Palace opens later this month. But the news may be even worse than feared.
The $4.2 billion Wynn Palace was granted 100 table games to be used in the mass market, with another 25 coming on January 1, 2017 and January 1, 2018. And reports out of Macau are saying that the tables must be for the mass market, which is far less lucrative than VIP play.
Table games are big in Macau
Macau put in a cap on table game growth in 2013 as the government worried gaming was expanding too quickly. Massive new resorts from Las Vegas Sands (NYSE:LVS), Melco Crown (NASDAQ:MLCO), and Galaxy in Macau's Cotai region led to a rise in gaming tables, and a table cap was seen as a way of limiting growth.
There was no major expansion in the market in 2013 and 2014, so the cap was no big deal then. But last year Melco Crown opened Studio City and Galaxy opened the second phase of Galaxy Macau. Both were awarded 250 table games.
This year, Wynn Resorts and Las Vegas Sands will open resorts, with MGM Resorts (NYSE:MGM) and SJM expected to follow in 2017. The flood of properties creates a challenge for allocating tables.
To adjust, Wynn Resorts said it would move 250 tables from Wynn Macau on the Macau Peninsula to Wynn Palace. That would leave 350 tables at Wynn Palace and 270 tables at Wynn Macau. That may be a good compromise given the current situation, but a lack of table games is going to limit revenue opportunity.
Consider that in the third quarter Wynn Resorts generated $28,239 in gaming win per table per day in the VIP segment and $10,853 at each mass market table. Each additional VIP table could be worth over $10 million in revenue each year! So the low number of tables given to the new resort is big. And it makes Melco Crown's allocation to Studio City last year look generous.
Can non-gaming revenue make up the slack?
To make up for the lost gaming revenue, Steve Wynn says that Wynn Palace will adjust how it compensates players and charges for non-gaming items. And that could work. In Las Vegas, non-gaming generated $327.4 million in revenue in the second quarter, compared to $419.0 million in revenue overall. So, Wynn has a history of generating a lot of revenue from non-gaming activities. That strategy will have to be used again at Wynn Palace.
What investors will need to watch over the next few quarters is how much incremental EBITDA, a proxy for cash flow, is added from Wynn Palace. If the property can generate at least $500 million in incremental EBITDA for Wynn Resorts each year, it'll still be a good investment and bide time until Macau improves and more tables are potentially allocated after 2018. If it makes less than that, investors will likely be disappointed.
An uncertain future for Wynn Resorts
Steve Wynn thinks his company can navigate the table game challenge and still generate a significant amount of cash flow from his most ambitious resort yet. With Wynn Palace opening later this month, it won't be long until we see how that strategy plays out. The disappointment in table games could be a cloud over the resort, or it could push Wynn to a new level of non-gaming revenue in the region. And how that plays out will tell us a lot about where the stock goes in the rest of the year.