Wynn's Hong Kong IPO seems less about investment opportunity in Macau and more about bailing out the home operationThursday, 15 October 2009
A standout feature of a globalised economy is that investor exposure to the equities of a single company in North America or Europe can mean exposure to physical or invisible assets on the other side of the world.
The breaking of the historical territorial link between where a company was founded and where it currently conducts its business is a relatively recent phenomenon. It has major potential benefits for equity investors as it allows them to diversify into other markets without necessarily going to the trouble of researching the secondary market in great depth. A blue chip or otherwise solid global company can act as the de facto gatekeeper to the alternative market thanks to its own due diligence procedures and positive management record.
So what's the significance of this for Asian casino gaming markets and investors? Arguably, it's this: gaming investors from North America may know more about the fundamentals of Las Vegas than they do about Macau, but they trust people like Steve Wynn to spend their money wisely in Asia.
Mr Wynn and his management already have a good track record for tight cost control, quality execution and good returns in the Macau market. On the costs front he scored massively by getting Lawrence Ho and James Packer to pay US$900 million of the initial US$1.2 billion cost of Wynn Macau via a gaming sub-concession purchased from Mr Wynn for Melco Crown Entertainment.
In terms of grabbing Macau revenue share and maximising investor returns, Mr Wynn understood from the outset that in a VIP-focused market such as Macau, Wynn Macau needed partnerships with external junket agents and could not rely only on direct players or the mass market for success. Then via careful selection of his retail partner brands at Wynn Macau (such as Prada and Louis Vuitton), he managed to create one of Asia's highest grossing malls per square foot. He avoided getting into the as yet unproven meetings and conventions market in Macau. It doesn't end there. At a modest capital outlay of US$650 million, he is creating a significant amount of extra VIP capacity (400 suites described as having more of a residential than hotel feel) on the Macau peninsula.
So when Wynn Resorts Ltd announced plans to float a local unit on the Hong Kong stock exchange, what investor wouldn't want a piece of that action—especially in a rising local equities market? Even grannies on the Las Vegas Strip know that Asian people are passionate gamblers. And even those outside professional investor circles know that only 18 months ago gross gaming revenues in Macau were building at 50% year on year. They still managed to average 30.9% year on year growth in 2008, despite a global recession and a credit squeeze on local VIP gamblers.
So far, so good. But when the prospectus for the company's initial public offering in Hong Kong makes it explicit that the bulk of the US$1.6 billion raised will be going not into direct investment in the hot hot Macau market, but instead into a Cayman Islands company controlled by the Wynn parent company to be used for (at the time of going to press) unspecified purposes, then the local IPO starts to look like as if it could be a great bit of financial engineering on behalf of the core product in Las Vegas.
Wynn says it doesn't need any of the cash to complete the US$650 million Encore Macau, the VIP-focused complement to Wynn Macau due to open next door in the second quarter of 2010. In addition, a well respected gaming analyst has told Inside Asian Gaming he thinks it will be a "very, very long time" before Wynn considers building a resort on Cotai. A number of other analysts have speculated that the 'unspecified purposes' for the funds from the Hong Kong offering will include repaying US debt.
Add these factors together and take away the froth and bubble of publicity surrounding a Hong Kong-listing for Wynn, and one quickly forms the impression that this is rather less about an opportunity to invest in Macau, and rather more about supporting the parent company back home. Indeed, the prospectus makes it clear that only HK$38.8 million (US$5 million) of the cash raised will actually stay with the local subsidiary. That's little more than a gesture. Because, however, of strong demand for the Wynn local unit's shares and strong trading prices in the first days after the Hong Kong IPO, then more money is expected to come from the allocation of a further 15% of shares to institutions at the original offer price (known in the financial world as 'greenshoe'). The cash raised from that greenshoe option could find its way into the coffers of the local unit.
A sophisticated investor understands, of course, that in applying to purchase such stock, he or she is gaining exposure not only to the mighty beating heart of the modern Asian casino industry, but also to the rather more sclerotic arteries of the company's core business in Las Vegas.
Encore Las Vegas cost US$2.3 billion to build, but in the first quarter of 2009 following its December 2008 opening, its contribution to Wynn's Las Vegas operations was lacklustre. The company's Las Vegas revenues rose only 5.7% despite Encore Las Vegas adding 2,000 rooms, 97 tables, 850 slots and food and drink outlets to its product offer.
If Wynn's Hong Kong IPO prospectus had said something to the effect: 'We caught a bit of a cold with Encore Las Vegas by launching it into a recession and we'd quite like some help with that please', it's difficult to imagine that the Hong Kong market's reception for the Wynn flotation would have been quite so rapturous.
A fact that tends to support this analysis is that within hours of the successful Hong Kong flotation (where by end of trading on the first day the share price had risen 6.1% above the launch valuation), Wynn Las Vegas, LLC and Wynn Las Vegas Capital Corp, subsidiaries of Wynn Resorts, announced the pricing of US$500 million worth of new mortgage notes due in 2017.
The idea, therefore, that Wynn Resorts is somehow becoming more 'Chinese' by listing in Hong Kong might be misleading. It could just be that Macau is becoming more like Las Vegas, at least in the way that a business is capitalised.