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Morningstar | Temporary Setback in Wynn Macau’s 2Q Results Due to VIP Competition; FVE Unchanged at HKD 22. See Updated Analyst Note from 02 Aug 2018

Narrow-moat Wynn Macau reported disappointing results for its second-quarter operations due to competition in the VIP business. After updating our valuation model, we retain our HKD 22 fair value estimate, leaving shares slightly undervalued. While we expect VIP competitive pressures in the near term, we believe upcoming room renovations for its Macau Peninsula property (the first since the resort opened eight years ago) and the firm’s plan to add additional entertainment options on undeveloped acreage in Cotai will help Wynn Macau remain competitive in the long term.

Wynn Resorts' Macau operations generated a combined adjusted EBITDA of USD 352 million in the second quarter, up 18% year over year but down 16% sequentially. The Macau operations' margin (based on operating revenue instead of net revenue) improved to 30.3% from 28.8% a year ago, though it slipped 258 basis points from the first quarter. The results were below expectations, mainly due to lower VIP volume in the Wynn Macau property (down 13% year over year) and its poor win rate of 2.56% (EBITDA impact of USD 13 million), versus a theoretical rate of 2.85%. These were partly mitigated by better mass-market operations. Meanwhile, Wynn Palace's operations remain robust, with VIP table games turnover up 21% year over year (win rate of 3%), and table drop in mass-market operations surged 67%. The ramp-up in Wynn Palace is evident in its adjusted property EBITDA growth of 105% year over year to USD 179 million, versus the Wynn Macau property's fall of 18% to USD 173 million.

Management believes the VIP weakness is mainly due to competitors' promotional activities (credit extension and favorable junket commissions) to drive awareness of their newly opened high-rolling gaming rooms. However, the firm decided not to compete on price for short-term gain, as these initiatives will prove temporary (as has been the case in the past).

Instead, Wynn Macau will continue to focus in providing the best product and service to sustain its long-term competitive position. On a positive note, the firm has already experienced 20% overall gaming growth in July (above the industry's 10% lift). Furthermore, the biggest junket operator at Wynn Palace will increase its table capacity by 40% in September, which should drive VIP volume growth, in our view.

We think Wynn Macau’s development pipeline will help the firm defend its market share, which includes reconfiguring the West Casino, adding two new restaurants and additional retail space, and renovating all the Encore rooms in the Macau Peninsula property. In addition, the firm is also planning (to be finalized in the next few months) its entertainment-focused development on the adjacent 7-acre parcel near Wynn Palace.