Wynn Resorts (NASDAQ:WYNN) woes in China may get worse beyond the forced 15-day closure of Macao's casinos and the resulting plunge in gaming revenue that followed the coronavirus outbreak.

Regulators for the gambling enclave warned gaming companies and affiliated operators they should maintain staffing levels throughout the downturn because "maintaining social responsibility is one of the priorities of the Macau SAR Government." That means keeping a stable labor force is of utmost importance.

Woman wearing surgical mask riding on a train

Image source: Getty Images.

That's not likely an issue for Wynn. It noted at the beginning of the industry shutdown that it would be losing between $2.4 million and $2.6 million a day with most of the expense being its 12,000 employees, so the resort operator is probably keeping its staff employed now that the casinos are open again.

But one of the region's junket operators has reportedly closed its VIP gaming rooms at Wynn Macau, Melco Resorts & Entertainment's Altira resort, and SJM Holdings Grand Lisboa, and that could be more of a concern.

The casinos remain a ghost town and Wynn generates nearly 90% of its revenue from Macao, 40% of which comes from VIP gaming. It suggests the resort operator could see an even sharper decline than some of its peers in the coming quarters.

An integral part of the operation

Junkets still play a vital role in the overall financial health of Macao casinos. They recruit high-stakes gamblers from mainland China and elsewhere and extend them credit to gamble at the casinos. In exchange for a percentage of the money the VIPs wager, the junkets host lounges at the resorts for the high rollers to play at.

Yet their influence is waning. In 2013 there were as many as 235 junkets operating in Macao, but a crackdown on supposed corruption and money laundering saw their numbers plummet and also precipitated the more-than-two-year recession that gripped the gambling oasis.

Two years ago they represented almost 55% of the gross gaming revenue wagered in Macao, but regulators imposed a new series of controls on junket operators that saw their numbers diminish further.

Last year there were just 100 junkets and their percentage contribution to gross gaming revenue had fallen to 46.5%, but the latest data from the Gaming & Inspection and Coordination Bureau shows 2020 is starting off with 5% fewer junkets, or 95 operators.

Smaller slice of the pie

Casinos like Wynn, Melco, and Las Vegas Sands have offset the declining contribution from VIP gambling by appealing to a mass market audience, but even there Wynn is facing headwinds, as it only has a 14% share of that market.

Its share of VIP gaming is also declining. Wynn began 2019 with about a 23% share, but analysts estimate that has fallen to 16% as of February. It may also have played a role in the resort operator raising the commission it paid junkets to 42.5% from 40%.

Credit Suisse wrote in a note to clients that falling volumes would see junket operators "allocate business to operators offering higher commission." It estimates Wynn's EBITDA (earnings before interest, taxes, depreciation, and amortization) margin from junkets is currently around 13%, but the higher commissions will cause it to fall to 10%, leading to a 7% effect on EBITDA, though it may offset some of that with market share gains.

More downside than upside

What's clear is that all casino operators in Macao are going to feel the effects of the COVID-19 virus for some time. Goldman Sachs estimates gross gaming revenue will fall another 70% in March, while the second quarter of 2020 will suffer a 30% decline.

Some operators, though, may feel the effects more than others because of their reliance upon Macao and VIP gaming, and Wynn Resorts could be among those hit the hardest.