Wynn’s Macau Bet Pays Off
As the growth rate of China’s economy continues to astonish market observers, the disposable income that its expanding professional class has to spend is also climbing. That’s clear from the second-quarter profit posted by Wynn Resorts Ltd. («www.businessweek.com»), one of the first western gaming companies to establish a beachhead in Macau, which has become the center of Asian gambling activity.
The casinos in Las Vegas and Macau were key drivers that enabled the Las Vegas-based company to more than double its revenue in the second quarter to $687.5 million from $273.4 million a year ago. Strong results in its Las Vegas business was another big contributor. Macau alone generated $352.5 million in revenue.
Wynn swung to a profit of $89.6 million, or 82 cents a share, from a loss of $20.1 million, or 20 cents a share, in the year-ago period. Buoyed by much stronger than expected VIP volume, Wynn Macau continued to gain market share, capturing an estimated 17.2% of the Macau gaming market in the June quarter, vs. 15.6% in the first quarter and 13.4% in the fourth quarter of 2006, according to a Citigroup research note.
That’s “impressive given that the property’s total gaming positions represent approximately 7.3% of the total market,” the note said. (Citigroup does investment banking with Wynn and makes a market in its securities.)
Investors were impressed, pushing the shares up 9.0% to $117.00.
Driving growth in market share in Macau was a rise in VIP market share to an estimated 18% from 16% in the first quarter, while Wynn’s mass market share stayed flat, UBS Investment Research said in an Aug. 3 note. The higher market share came in spite of increased competition from the Grand Lisboa and Crown Macau, UBS said.
Wynn opened its Macau resort last September with a 110,000 square foot casino, another 26,000 square feet in retail space, seven restaurants and other assorted features. It plans to add a 20,000 square foot casino in the third quarter, with further expansion scheduled for the Chinese New Year in 2008. Also on the drawing boards is Wynn Diamond Suites, a second resort hotel featuring 400 luxury suites and villas, along with restaurants, retail shops and additional gaming space or high rollers. The estimated cost of Wynn Diamond Suites is between $550 million and $600 million and the project is expected to open to the public in the first half of 2010.
Part of Wynn’s success in Macau in the first nine months has stemmed from quickly adapting its operating profile to learn which amenities will make customers want to stay at its property longer, and consequently spending a bigger chunk of their gaming budget there, BMO Capital Markets analyst Jeff Logsdon told BusinessWeek. (BMO make a market in Wynn’s securities.)
The company’s Las Vegas casino also seems to be providing an experience that keeps high rollers at its gaming tables for longer periods, which works in the house’s favor, he said.
“For a couple of quarters in a row now they have a gaming hold percentage what the house keeps above the level of what have been the traditional norms amongst those who cater to VIP, or high-roller, business,” Logsdon said.
Wynn reported a table hold of 24.2% at its Las Vegas casino in the second quarter, up from 19.8% a year earlier.
The fact that VIP business was a bigger contributor to Wynn’s Macau revenue in the second-quarter than in the first quarter could have worked against the company’s profits, as VIP margins are typically much lower than those of the mass market. But the VIP margin was high, mostly because about 25% of that business came directly from high-end customers rather than through junket operators, UBS Investment Research said in an Aug. 7 note. The substantial commissions that casinos pay to junket operators drive down profit margins. (UBS Securities LLC makes a market in Wynn’s securities.)
One thing that sets Wynn Macau apart from other gaming properties in the city is its world-class hotel and gourmet dining experience, which is new to customers who, until recently, have been drawn to Macau just for the gambling.
