2023-03-10 08:12:44 ET
Summary
- Recent industry metrics suggest that the Macau gaming market has good recovery prospects.
- Wynn Resorts' Macau business could perform above expectations, as the growth of its direct VIP segment has helped to offset the loss of junket VIP customers to some degree.
- I raise my rating for WYNN stock from a Hold to a Buy, as I think that its shares still have room to go higher.
Elevator Pitch
I rate Wynn Resorts, Limited ( WYNN ) shares as a Buy now.
My earlier write-up for WYNN published on September 22, 2022 was focused on how Macau's gaming license and China's reopening plans could potentially impact the company.
For the purpose of this article, I will primarily write about WYNN's Macau business operations as represented by its 65.8% equity interest in its subsidiary, Wynn Macau, Limited ( OTCPK:WYNMF ) ( OTCPK:WYNMY ) [1128:HK]. The Macau market accounted for a substantial proportion or 75.9% of WYNN's adjusted property EBITDA prior to the pandemic outbreak in 2019.
I have decided to upgrade my investment rating for WYNN from a Hold previously to a Buy now. With this latest update, I evaluate recent industry data and corporate metrics relating to Wynn Resorts, and find that WYNN's shares still have the potential to rise further.
Macau's Recent Gaming And Tourism Data Were Encouraging
According to the latest numbers released by Macau's Gaming Inspection and Coordination Bureau, otherwise known as DICJ, Gross Gaming Revenue or GGR for Macau grew by +33.1% YoY from MOP7,759 million in February 2022 to MOP10,324 million for February 2023. The actual Macau GGR for the previous month turned out to be around +9% higher than the consensus estimate of approximately MOP9.5 billion .
More significantly, Macau's GGR for February 2023 and the first two months of the current year have already recovered to 42% and 44% of pre-COVID levels, respectively based on my calculations. This implies that the Macau gaming industry is on track to meet or even beat the market's expectations for full-year 2023. The Chief Executive of Macau has forecasted a GGR of MOP130 billion for 2023, which is about 44% of the MOP292 billion GGR achieved by Macau in 2019 prior to COVID-19.
Separately, tourists arrivals in Macau increased by +259% MoM and +101% YoY to 1.40 million for January 2023, based on the latest available data provided by Macau's Statistics and Census Service or DSEC. The number of hotel guests in Macau for the first month of 2023 was 819,143, which was equivalent to a +235% YoY growth rate. As per my estimates, Macau's tourists arrivals and hotel guests have recovered to 41% and 50% of where they were respectively, in January 2019. Looking ahead, Macau has set an ambitious target of having 40 million tourists visit Macau every year, which will be even higher than the 39.4 million tourist arrivals that Macau witnessed for 2019.
At the company's recent Q4 2022 earnings briefing on February 8 this year, Wynn Resorts shared that its Macau business registered its "strongest EBITDA performance" since the pandemic outbreak in 2019, or roughly "$4 million of normalized EBITDA per day" during the January 2023 Chinese New Year holiday period.
The Macau gaming industry and WYNN are expected to be beneficiaries of China's pivot away from its longstanding COVID-zero policy. As reported by Reuters in a February 3, 2023 news article , China has taken actions such as "dropping existing quotas and scrapping a mandatory COVID-19 test" and restarting "group tours" for travel between Mainland China and Macau since February 6.
The Impact Of Junket Crackdown Might Not Be As Bad As Feared
Macau has been cracking down on junket operators in recent times. In early 2022, Seeking Alpha News reported that the head of a leading junket operator was apprehended by Macau's enforcement agencies. A February 7, 2023 Nikkei Asia article noted that Macau has begun "enforcing a 5% tax on commissions" paid to junket operators.
There are fears that the Macau gaming industry and Wynn Macau will be badly affected by the substantial loss of junket VIP clients, but these concerns appear to be overdone.
WYNN disclosed at its fourth quarter results call in early February 2023 that it has witnessed "former junket customers migrate into both, premium mass and into direct (VIP)." Specifically, Wynn Resorts saw "turnover" for its Macau business' direct VIP operations (sourcing VIP clients directly without relying on junkets) grow to +40% higher than pre-COVID levels during the Chinese New Year holiday this year.
In the past, VIP turnover for WYNN's Macau business was roughly a 20-80 split between direct VIP and junket VIP. Recent data outlined above suggests that it is possible that Wynn Macau could gradually grow its direct VIP segment to make up for junket VIP customer loss over time.
Share Price And Valuations
Wynn Resorts' stock price has already more than doubled from its 52-week trough of $50.20 recorded on June 23, 2022 during intraday trading to close at $109.63 as of March 9, 2023. But WYNN's shares did trade close to $150 in early-January 2019.
In terms of valuations, WYNN is currently trading at consensus forward FY 2024 and FY 2025 EV/EBITDA multiples of 9.3 times and 8.5 times, respectively as per S&P Capital IQ data. As a comparison, the five-year and 10-year (prior to 2020) mean forward EV/EBITDA ratios for Wynn Resorts were higher at 11.6 times and 11.7 times, respectively.
Closing Thoughts
I have a Buy rating awarded to WYNN. Considering my expectations of a further recovery in the Macau gaming market and the growth potential of Wynn Macau's direct VIP segment, I think that a positive re-rating of WYNN's shares and valuations is highly probable.
For further details see:
Wynn Resorts: Shares Still Have Legs To Run