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Is Steve Wynn About to Lose His $4 Billion Bet on Macau?

By Rich Duprey - May 25, 2016 at 11:35AM

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As casino operators spend billions developing new properties in Macau, the gambling oasis continues to struggle from the Chinese government's crackdown on corruption and excess.

The new Wynn Palace, whose scheduled opening was pushed back later into the year, could be a symptom of the troubles that are about to befall Wynn Resorts. Image source: Wynn Resorts

Just because Wynn Resorts (WYNN 2.11%) surprised Wall Street with better than expected earnings earlier this month, don't think the casino operator is ready to hit the jackpot just yet. Precisely because its new $4 billion Wynn Palace resort is set to open in Macau later this year, investors might actually want to place bets that it's going to crap out very quickly.

Like Las Vegas Sands (LVS 5.03%), Wynn derives 60% of its net revenue from Macau, so its fortunes will naturally rise and fall with the health of the tiny gambling oasis. Both companies have major new properties opening on the island this year, so the difficulties Macau is facing will only become that much more palpable when the projects come online.

With the Chinese government still cracking down on corruption and the local economy hurting, Wynn Resorts, which caters more to VIP clientele than its competitors in the region, will arguably feel the pinch more acutely.

Perhaps only Melco Crown Entertainment (MLCO 4.70%), which is almost wholly vested in the island, has as much or more at stake.

Earlier this month, Macau gaming regulators instituted a ban on phone betting, or proxy betting, as it's called, which happens when a third party places a bet at a casino table for a VIP high roller on the phone. Although it wasn't a standard practice among casino operators to allow this practice, particularly among U.S.-based operators that feared running afoul of "know your customer" regulations that, among other things, require them to identify the sources of a gambler's funds, Wynn Resorts was one of the companies that did allow it.

It had dropped the practice back in 2014 but ended up implementing it again the following year. On the earnings conference call with analysts this month, CEO Steve Wynn acknowledged proxy betting was now a thing of the past on the island. In response to an analyst question about the matter, he said, "Yes, okay. As of now, it's illegal. There's no more phone betting. They stopped it today. The (Gaming Inspection and Coordination Bureau) made it official. It's finito."

While Wynn made it clear that proxy betting was not a material source of revenue for the casino, analysts have estimated the practice amounted to as much as 5% or 10% of the industry's take on the island.

Although the ban on proxy betting isn't an especially worrisome development itself, the continued crackdown that has crippled Macau gaming revenue for 23 straight months indicates that the situation really isn't improving. Melco Crown's co-chairman of the board resigned his position and sold down his stake in the casino, so he could focus on developing operations elsewhere, including Australia.

Others are similarly looking elsewhere in Southeast Asia for places to cater to VIP clientele. The tiny Pacific island of Saipan could become the next big stop for gambling junkets and their high-rolling clients.

Bloomberg recently reported that Imperial Pacific International Holdings is investing over $7 billion over the next few years to expand its casino presence on Saipan. It opened a temporary casino on the island last July and reported in April that it generated $62 million on average every month in the first quarter, a 36% increase from November and December. Then, earlier this month, it said business was so intense that its temporary casino, which has a total of 16 VIP gambling tables, 32 mass tables, and 109 slot machines and electronic table games, was already "saturated". It said VIP rolling chip turnover surged 69% in April.

Saipan, Cambodia, Vietnam, and other countries may soon become the new destination hot spots for Chinese VIPs. Operators such as Wynn, Las Vegas Sands, Melco Crown Entertainment, and others that have sunk billions into new casino and hotel projects may soon find that the struggles they've coped with in Macau are going to get worse. So with Wynn Resorts shares up almost 40% so far in 2016, investors may just want to cash in their chips now.

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Stocks Mentioned

Wynn Resorts, Limited Stock Quote
Wynn Resorts, Limited
WYNN
$58.18 (2.11%) $1.20
Melco Crown Entertainment Limited Stock Quote
Melco Crown Entertainment Limited
MLCO
$6.02 (4.70%) $0.27
Las Vegas Sands Stock Quote
Las Vegas Sands
LVS
$35.28 (5.03%) $1.69

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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