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Why Did Wynn’s Stock Shed 20% Of Its Value In A Week?

Casinos and hotels stand illuminated at night on the Cotai strip in Macau, China on Monday, Sept. 17, 2018. Photographer: Anthony Kwan/Bloomberg

© 2018 Bloomberg Finance LP

Wynn Resorts (NASDAQ: WYNN) reported its Q2 2019 earnings earlier this week, with its core casino revenues falling 3.5% sequentially from the already low levels seen in Q1 2019. In this article, Trefis analyzes the recent events leading to reduced investor confidence towards casinos in Macau, and the possible impact on Wynn’s yearly earnings.

Trefis updated Wynn Resorts’s valuation to $136 per share – down 5% from our the older level of $143 a share due to soft Q2 performance, and expected headwinds for the rest of the year as detailed further below. You can view our interactive dashboard on Wynn Resorts Earnings to observe the quarterly revenue trends and modify forecasts to gauge the impact on its stock price. Additionally, you can find more of our Consumer Discretionary sector data here.

A Quick Look at Wynn Resorts’ Revenues

Wynn reported $7.7 billion in Total Revenues for full-year 2018. This included four revenue streams:

  • Casino: $5.5 billion in FY2018 (72% of Total Revenues). This segment includes income from regulated gambling activities at Wynn properties. Macau and Las Vegas properties contribute 90% and 10% of the casino revenues, respectively.
  • Rooms: $843 million in FY2018 (11% of Total Revenues). This segment includes income from visitors/tourists who lodge in Wynn properties. Macau and Las Vegas properties contribute 35% and 65% of the room revenues, respectively.
  • Food and Beverage: $867 million in FY2018 (11% of Total Revenues). This segment includes income from restaurants at Wynn properties. Macau and Las Vegas properties contribute 25% and 75% of the Food and Beverage revenues, respectively.
  • Entertainment and Retail: $491 million in FY2018 (6% of Total Revenues). This segment includes income from retail stores at Wynn properties, per different agreements. Macau and Las Vegas properties contribute 54% and 46% of the Entertainment and Retail revenues, respectively.

An Overview of Recent Events In Hong Kong, And Their Impact On Casinos In Macau

  • In February 2019, the Hong Kong government introduced an extradition bill that included an extradition policy for Mainland China. The bill triggered protests in Hong Kong with protesters demanding its total withdrawal.
  • The demonstrations in Hong Kong have gradually grown large enough for the United States to issue a travel advisory earlier this week.
  • Moreover, China has hinted at a possible military intervention to bring stability in the region.
  • The protests in Hong Kong have had a direct impact on activities in the region as a whole. Located just 40 miles from Hong Kong, Macau has seen a notable reduction in activity due to the protest.
  • Also, Hong Kong accounts for nearly 15% of the total tourist population visiting Macau, and sharp reduction in tourists from Hong Kong to Macau led to an 8% sequential reduction in number of tourists in Macau in the month of June (according to visitor statistics released by DSEC).
  • Although the numbers for July are yet to be released, investors expect a sharp drop due to ongoing demonstrations – a trend that is likely to remain over coming months.

How Does It Impact Wynn Resorts?

In its recent earnings release, Wynn Resorts reported a sequential drop in casino revenues.

  • This was primarily due to a sharp drop of 33% (y-o-y) in VIP turnover at Wynn Macau and a modest decrease at Wynn Palace.
  • Besides VIP gaming, slot handle also declined at both Wynn properties, and growth in mass-market games also trended lower
  • Mass and slot gaming revenues came within the expectations as Macau is observing a slowdown this year.
  • The possibility of ongoing clashes hurting the stability of the region has investors worried about a significant drop in tourist inflow from Mainland China as well as Hong Kong over the rest of the year
  • Notably, Mainland China and Hong Kong account for nearly 80% of Macau’s tourists.
  • To put things in perspective, a 20% decline in mass-market table games drop for Wynn would reduce our estimate for hurt Wynn’s earnings enough to justify a 16% reduction in share price estimate from $136 to $114.

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