WYNMY - Wynn Macau: Sit On The Sidelines On This One

2023-04-14 16:43:57 ET

Summary

• Wynn Macau, Limited is heavily indebted and its leverage ratio is now 1.25.
• Management is not sure when tourism will return to pre-pandemic levels.
• There are many risk factors here for Wynn Macau management to mitigate or work through.

Wynn Macau, Limited (WYNMF) is a high-end hotel and casino operator in Macau, and currently operates two hotels in the city: Wynn Macau and Wynn Palace. Both hotels contain 1,008 rooms and suites with approximately 273,000 square feet of casino space and 59,000 square feet of retail and restaurant space. Wynn Macau, Limited is a subsidiary of NASDAQ-listed Wynn Resorts, Limited (WYNN).

WYNMF has been struggling in recent years, and this is likely to continue as tourist levels have not returned to pre-pandemic levels. Also, weak economic factors are zapping consumer appetite to spend. In the short term, this is going to hurt WYNMF.

Macau and its 10-Yr Gambling Licenses

Macau has 41 casinos in the city and it is managed by 6 casino operators who were granted a license to operate:

• Sands China
• Galaxy Entertainment
• MGM China
• Melco Resorts
• SJM Holdings
• Wynn Macau.

On January 1, 2023, the licenses were renewed for another 10 years. As part of the license renewals , the 6 casino operators had to collectively invest $12.5 billion on new theme parks, music, and sports avenue, as well as explore overseas customer markets and develop non-gaming projects.

As part of the 10-year license renewal for WYNMF, they have committed to spending MOP17.73 billion or $2.19 billion USD over the next 10 years to help promote Macau. This will be done through digital marketing campaigns and establishing partnerships with airlines that serve both Macau and Hong Kong. On an annual basis, WYNMF is committed to spending ~$220MM a year to help promote the city.

Financial Statements are Weak

WYNMF saw its financials deteriorate in the past 2 years because of Covid and tourism restrictions. Its F-Score has been trending at a 5 and below. The F-Score determines how financially healthy a company is. A score of 9 shows a firm is financially healthy, and a score of 0 shows the company as being financially weak:

(Source: Wynn Macau Financials.)

Although its 2021 financial statements show an F score of 5, this is mainly because the score in the prior year was so low that a marginal improvement will boost the F Score in 2021.

One of the biggest risk factors is its leverage. Its long-term debt now exceeds the total assets in Wynn Macau, Limited, and this metric had actually grown from 1.12 to 1.25 as of June 30, 2022. This implies the company owes the lenders more than what the company is actually worth.

Also, in each of the past 6 years, WYNMF has been steadily issuing more shares. Its June 30th, 2022, reporting shows the largest share issuance at 6 million shares. If companies are issuing shares for a large expenditure or an acquisition that will generate value in the long run then that is good. In this case, I believe Wynn Macau, Limited is issuing shares to cover its operating costs, which is a red flag because they have been issuing more shares as early as 2017 (before the pandemic).

In looking at the profit ratios, the company still shows it is losing money. Gross margins continue to be negative and cash flow return on assets has deteriorated further.

The one caveat is these financials are based on June 30, 2022. Tourism and travel have improved immensely since then, so the financial figures today may paint a better picture.

Investors are Still Bearish on Wynn Macau, Limited

Wynn Macau's stock price has not recovered from its pre-pandemic price. Just before the pandemic hit, the stock price was trading in the high teens-early $20 range. Today, its price is hovering below $10:

There are a lot of risks here, and the stock price reflects this.

The stock did trade at a low of ~$3 in late 2022, and since then the stock has popped. It is possible the stock may be in the bullish territory where investors are starting to bid up the stock price again. But given the fundamentals of Wynn Macau, this stock is very speculative if investors decide to trade on it now.

Conclusion: Not a Buy

Investors should sit on the sidelines on this one. There are a lot of risk factors that Wynn Macau, Limited needs to mitigate. In its most recent financial update , its management couldn't predict when its operations will return to pre-pandemic levels given that regional demand remains weak and inbound tourism has been slow.

In addition, Macau is asking Wynn Macau, Limited to commit to spending $2.19 billion USD over 10 years or $220 million USD annually is going to be a drag on profits. Just recently, Wynn Macau is looking to issue $600MM in convertible bonds, and this is going to increase the company's debt further.

Wynn Macau, Limited is entirely dependent on tourism and gambling in Macau. This makes WYNMF a very cyclical stock. When the economy is doing well and consumers want to spend, then WYNMF's bottom line improves. When there is economic uncertainty and consumers are watching their wallets, then WYNMF's bottom line takes a hit.

Even before the pandemic, gambling revenues since 2013 have been on a steady decline. This explains why the government of Macau requested that 6 casino operators spend over $12 billion USD over the next 10 years on non-gambling attractions. This was a way for the Macau government to diversify away from gambling since gambling revenues make up a sizable piece of government income.

Overall, there are a lot of factors working against WYNMF at the moment. Externally, management is not clear if tourism will return to pre-pandemic levels and the government of Macau is committing Wynn Macau, Limited to spend $2.19 billion USD. Its debt continues to grow and it continues to issue new shares. This implies the company needs more money.

I'll take a wait-and-see approach on Wynn Macau, Limited.

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