EUR 850.00 For Business Accounts Only

Morningstar | Wynn Macau Remains Undervalued as Its Long-Term Growth Isn’t Priced In

Narrow-Moat Wynn Macau Limited remains undervalued as the market fears a weak economy and construction disruption at the group’s properties will put pressure on earnings in the near term. We believe this is a good opportunity for long-term investors to buy this quality name as we see long-term growth potential for the group--the new premium mass area in the peninsula launching at the end of this year and the two hotel towers with over 1,200 rooms in Cotai, which will begin construction in 2020. Our fair value estimate of HKD 23 per share is reaffirmed. Over 70% of Wynn Macau Limited ‘s EBITDA was generated outside of VIP, which is low compared with peers that have disclosed similar figures. For example, 91% of departmental profit for Sands China for full-year 2018 came from non-VIP, and over 85% of luck-adjusted EBITDA on a Macau-wide basis in the third quarter came from non-VIP for Melco Resorts. This again validates Wynn Macau Limited’s competitiveness and focus on the high end and VIP segment. As a result of a slowing economy and construction disruption this year, we expect premium- and VIP-focused Wynn Macau Limited will be more affected than its peers in the near term.

The combined adjusted EBITDA of Wynn Palace and Wynn Macau in the quarter was USD 394 million, beating our estimate of USD 358 million and the guidance of USD 303 million to USD 340 million as a result of a stronger-than-expected VIP turnover at Wynn Macau and mass revenue in December. In the quarter, Wynn Macau Limited’s overall VIP revenue was down 5% year over year (up 3% for the market), up 15% sequentially (5% for the market), while mass revenue increased 14% year over year (17% for the market) and 6% sequentially (9% for the market). Adjusted EBITDA margin was 30.5%, lower than 31.2% in the third quarter as the two properties’ casinos played less luckily in both the VIP and mass segments. Adjusted EBITDA gained 5% year over year, a material deceleration from the third quarter's 27%.

Wynn Palace’s performance was better than Wynn Macau in the quarter. Wynn Palace’s VIP volume was only flattish sequentially while mass drop growth was solid at 9% sequentially and 16% year over year. Wynn Macau’s VIP volume weakened 18% year over year and 9% sequentially despite increase in tables, as a result of increased VIP room supply in the market, decline in volumes contributed by mid-tier junkets, and construction disruption. The adverse impact of the construction disruption will increase in the next six months as per management. Mass drop at Wynn Macau gained 6% sequentially.

The aim of redesigning Wynn Macau and remodeling of the Encore Tower is to reposition the property to a premium mass focused property in the long term and reduce its reliance on second tier junkets. Wynn Macau made a large share of its profit from second tier junkets in the first two quarters of 2018 that are more volatile in nature. Currently, VIP revenue accounted for 55% of gross gaming revenue in the property. A new premium mass area facing the water, additional retail, the completely redone Encore tower will be launched in the fourth quarter this year.

We will roll our model a year forward after the company releases its full results but we do not anticipate significant changes to our estimates.