Why Wynn Lost and Las Vegas Sands Won in Macau

The opening of the new Wynn Palace in Macau is credited with halting the two-year slide in the region's gaming revenues, but it couldn't maintain the momentum. Image source: Wynn Palace.

The big jump in Macau gaming revenues suggests the recovery underway in the Chinese gambling enclave is real. After a scant 1% rise in August that stopped a 26-month skein of losses in its tracks, the better-than-14% surge in November is a hearty turnabout that all casino operators welcome.

Yet it's also clear the rebound is uneven. While most casinos reported better-than-expected third-quarter results, not all did. Most notably, Wynn Resorts (WYNN 0.56%) missed Wall Street forecasts for its new Palace resort on Macau's Cotai Strip, causing its stock to plunge after the news. While it has regained all that lost ground, and more, over the past month, it's worth a look at why Wynn's new casino got off to a slow start while Las Vegas Sands (LVS +0.04%), which also opened a new resort on the strip, was able to beat estimates and show much-stronger results.

The Palace opened Aug. 22, 2016, and The Parisian opened Sept. 13, 2016. Data source: company SEC filings. 

A roll of the dice

Wynn's third-quarter revenue rose 11% from last year, to $1.1 billion, which was in line with analyst estimates, but all of the gains came from the newly opened Palace, which cannibalized the existing Wynn Macau, where revenue fell by $67 million. Together, they generated $683 million in revenue, and earnings before interest, taxes, depreciation, and amortization (EBITDA) of $177 million, both well below Wall Street's estimates.

In contrast, Las Vegas Sands saw total revenue grow 2.6%, to $2.97 billion, beating projections of $2.82 billion as the Parisian contributed $19.2 million of adjusted property EBITDA during the 18 days it was open in the quarter.

Image source: Flickr user Azchael.

Considering the Palace and the Parisian are in relatively close proximity to one another and are both targeting the same customer, why did one do well and the other less so?

Partly, it's a result of the infrastructure Macau is building to accommodate the influx of tourists it is hoping to attract to the region. For example, a new light-rail system is being built that, when completed, will have the Palace as its first stop, a potential benefit for the casino. However, construction makes it difficult if not dangerous for guests trying to get to the casino.

On the earnings conference call with analysts, CEO Steve Wynn said it was "an anomalous situation where all four sides of our property are currently being enclosed by either barricades or construction blockades of one kind or another."

While such conditions are beyond the control of Wynn, and the resort will have to bide its time until the construction is completed, there were other problems confronting it, some of which were self-inflicted.

A too-spacious casino floor layout: As the table above indicates, the Palace's cavernous casino floor is about double the size of the Parisian, which, while not exactly an intimate setting, packs the crowds closer together, generating more excitement and electricity. A Morningstar analyst contends the Palace's slow start was "due to the design of its large and open casino space, which is leading to the perception of thin crowds and thereby reducing the feel of compressed energy that many gamers seek." To rectify the problem, Wynn will adjust the layout to reduce space without reducing the number of tables.

Image source: Wynn Palace.

Lack of casual dining options: It's not that there's a lack of dining options -- the Palace has 12 different restaurants plus the Ling Wei Bar -- but rather a lack of casual restaurants for guests to eat at.

The resort hosts five separate fine dining establishments, like Mizumi and SW Steakhouse, and it has seven different casual locations, including 99 Noodles and Sweets, but because the Cotai Strip is geared toward a mass-market audience, Wynn says he underestimated the number of casual eateries he would need. In comparison, the Parisian has 10 casual dining restaurants, so to compensate, Wynn is now expanding its Red 8 chain to handle the demand, but it will be several months before the expansion is complete.

A more promotional environment: Wynn's president, Matt Maddox, noted the Cotai Strip is a more promotional environment than Macau proper, though not exaggeratedly so. However, a Wells Fargo analyst estimates promotional allowances and discounts as a percentage of gross gaming revenue ran as high as 30.4% at Wynn due to opening the Palace, well above the company's usual 24%, though he's not necessarily worried at the moment.

VIP business returned to Macau much more strongly than anticipated in November, and the analyst thinks that could have tilted the discounting scales in the new resort's favor.

Better-situated competition: While the Palace may find its location on the light-rail line advantageous in the future, the casino is otherwise situated a good distance from the strip itself, which tourists may find off-putting (VIPs, on the other hand, if they really are back, might enjoy being out of the limelight more). In contrast, the Parisian, which is also off the strip, is located right next door to Sands' other resort, the Four Seasons. The interconnected resort layout is more attractive to guests who want to take in more than one casino.

It won't get any easier, either

There will be more competition coming in 2017 as MGM Resorts opens its new MGM Cotai casino, Melco Crown Entertainment debuts its fifth hotel tower at City of Dreams, and the over-the-top luxury hotel The 13 opens its doors early in the year. All-new venues, lots more hotel space, and a gaming market just trying to regain its footing may prove challenging to Wynn Resorts.

While many of the problems it faces are correctable, having to go in and remodel a brand new resort it just opened already puts it behind its rivals and indicates a rare miscalculation for Wynn Resorts.