Wynn Palace Cotai's grand $100 million fountains. Image source: Wynn Resorts.
Wynn Resorts (WYNN +1.25%) posted a great second quarter compared with its dismal results much of the past two years. Wynn's stock has more than halved since the summer of 2014, mainly because of the decline in Macau, the Chinese gambling mecca that at one time made up around 75% of Wynn's total revenue.
Wynn Resorts' biggest win so far in 2016? Macau. In the most recent earnings release, management said that the sales increase to $1.06 billion in the quarter "was the result of a 3.6% increase from our Macau operations, partially offset by a 1.1% decrease from our Las Vegas operations." Here's what renewed growth in Macau could mean for Wynn.
Wynn's mixed 2016 results
For the second quarter of 2016, Wynn reported $108.7 million adjustable net income, up from $75 million a year ago. Adjusted earnings per share rose 44% to $1.07.
Wynn attributes its successful quarter to its operations in Macau, for which it reported a 9.4% increase in its second-quarter adjusted property EBITDA, compared with just a 0.2% increase in Las Vegas. Adjusted property EBITDA attributable to Macau made up 62% of Wynn Resorts total over the past six months.
However, while the second-quarter success is encouraging, the company is still making up lost ground from Q1. Wynn Resorts' operating income from Macau is down 17% year over year for the first six months of the year, even though EBITDA rose in Q2.
| Metric | Macau, Q2 | Las Vegas, Q2 | Macau, 6 Months | Las Vegas, 6 Months |
|---|---|---|---|---|
| Adjusted property EBITDA | $190.4 | $122.3 | $381.6 | $231.3 |
| % change year over year | 9.4% | 0.2% | (1%) | (0.6%) |
| Operating income | $85 | $46.4 | $185.5 | $91.4 |
| % change year over year | (9%) | (20%) | (17%) | (14%) |
Source: Wynn Resorts earnings report. Dollar amounts in millions.
Macau's painful history could be turning around
The Chinese government decided in the summer of 2014 to restrict tourism to Macau as a means to curb illicit activity from high-net-worth Chinese mainland business tycoons and government officials. The result was that total gambling revenue in Macau plummeted over the next two years, from nearly $4 billion at its best months in 2014 to around $2.2 billion at its lowest month of July 2016.
Wynn's encouraging numbers from Macau, much better than the Q1 results, could be an encouraging sign that Macau's fortunes are turning around. Macau's monthly total gambling revenue dropped 4.5% in July, compared with 8.5% in June. Union Gaming Group analysts predict that revenue will turn positive by September, stating, "We expect the growth rate to generally remain positive from that point forward after September." Merrill Lynch analysts similarly believe that a growing mass-market segment, which is more profitable than the VIP segment, will lead to more recovery by the end of the year. That would be timely as Wynn finally opens its biggest development in many years -- Wynn Palace Cotai.
Wynn's $4 billion new resort finally opens
Wynn Resorts has been planning and building its new Wynn Palace Cotai for six years, and it finally opened on Aug. 22. The new $4 billion sits on Macau's Cotai strip, across the island from the Macau peninsula area, where Wynn's other Macau casino is located.
Wynn Palace Cotai's grand opening ceremony. Image source: Wynn Resorts.
Wynn Palace comes with all of the splendor that we've come to expect from CEO Steve Wynn as he continues to aim for the premium mass market. The biggest draw for tourists is the $100 million performance lake in front of the property, complete with fountains synchronized to music. As guests arrive at the front of the lake, air-conditioned gondolas can fly them over the water to the building's main entrance.
The resort has over 1,700 rooms between multiple hotel towers and private villas, all of them exquisitely decorated as Wynn seeks to maintain its industry-leading average daily hotel room rates above $300. The resort also has plenty of high-end restaurants, shopping, and more.
The view from inside one of Wynn Palace's luxury rooms. Image source: Wynn Resorts.
It's not all good news -- the Macau government allotted the resort only 150 gambling tables (100 now and 25 more at the start of 2017 and 2018), under the 250 that some analysts predicted. However, Wynn will be able to transition some of its excess table allotment from its peninsula property to Wynn Palace for approximately 350 table games at Wynn Palace and 270 table games at Wynn Macau on the peninsula.
Additionally, Wynn has plenty of competition. Melco Crown (MPEL +1.87%) opened its own massive new casino resort in Macau called Studio City earlier this year. Then there's Las Vegas Sands' (LVS +1.84%) much-anticipated Parisian resort, to open in September. The Parisian sits directly across the Cotai strip from Wynn Palace and is Las Vegas Sands' fifth property there, making it by far the leader in number of gambling tables, slot machines, and hotel rooms. Finally, MGM Resorts International (MGM +0.79%) is building its first Cotai resort directly behind Wynn Palace to open in early 2017.
Can Macau continue to bolster Wynn Resorts?
Wynn's Macau operations have struggled in the past few years, and much of the reason earnings looked good in Q2 was the comparison with such a poor 2015. However, there are also encouraging trends for why Macau could continue to bolster Wynn's earnings in the years to come, especially with the opening of Wynn Palace Cotai.
Even though Wynn Palace Cotai will have a lot of competition, it's uniquely geared toward a more premium clientele. Additionally, new additions to Macau, such as a light-rail line with a stop at Wynn Palace, a new bridge from Hong Kong to Macau, and other positive moves, should help to improve total tourism. Analysts at Morningstar predict Macau visitation to rise nearly 50% in the next 10 years to 45.6 million by 2025, as well as mid-single-digit growth in annual gambling sales over that same time.
