Inside Asian Gaming

inside asian gaming September 2015 14 Macau in the space of a decade to No. 1 in the world in casino revenue. The pain is being felt across every facet of the market because other factors are bleeding into it, as we know: a fairly dramatic downturn in the Chinese economy mainly, exacerbated recently by epic turmoil in the country’s stock markets. It’s been especially painful, though, for VIP-centric operations like Wynn Macau’s. Wynn’s high-end image has enjoyed tremendous cachet among wealthy gamblers. Despite its relative small size, the quality of the product and the deft management of it have combined to rank the company behind only the much larger operations of SJM and Galaxy in VIP market share. The first six months of 2015 were characteristic of its positioning. Gaming revenue accounted for 94% of aggregate sales, and VIP generated more than 89% of it. The hit it took over this period was commensurate with that of its principal rival in the space, and it was severe. Turnover and gross win from junket play each were down more than 47% year on year. Adjusted EBITDA plunged 44%. The impact on parent Wynn Resorts, which controls 72% of Wynn Macau, has been profound. In the first half of 2014, Macau generated 71.5% of corporate net revenues—$2.09 billion worth—and 71.8% of EBITDA and delivered a whopping dividend besides. Net revenues are down 27% since, as Macau’s contribution dropped to 61.9%. The contribution to EBITDA shrank to 62.3%. The total company- wide was down 35.7%. Net income attributable to Wynn Resorts shareholders was $11.9 million, a decrease of 97.2% from last year. As of this writing, Nasdaq-listed Wynn’s share price was down more than 62% from its 52-week high of $192.45. More than $11 billion of market cap has gone away. What Mr Wynn had admired most about Beijing was that it could be counted on for a measured approach to policy, that it wouldn’t spring any surprises on you. There was no trace of that on the most recent earnings call. He described the company as “pretty sanguine” about the progress on Wynn Palace, the company’s $4.1 billion extravaganza slated to open on Cotai next March. “The [Macau] government happily gave us 100 percent of our last and final request for construction labor,” he reported. But, he cautioned, “Macau continues to be more of a question than a certainty as we head through 2015 and toward our opening. … We never know quite what to expect these days.” It’s an unfamiliar situation for the tycoon. Long renowned for a singular acuity in anticipating trends in resort gaming—indeed, for creating many of the resorts that nudged them along—he’s been backed into a reactive mode along with his competition. As Nomura Holdings analyst Richard Huang put it recently, “The tougher call is when the mass market can really offset the destruction of high-end demand.” In the words of the gaming analysts at Sanford Bernstein, this is the “paradigm shift” whose outcome will determine Macau’s future. It will be of paramount interest to the entire market to see how the Wynn brand fits into this. Its calling card in China has always been as luxury purveyor to an elite with aspirations and the wherewithal to indulge them. How do you climb down from the Michelin- and Forbes Five-Star ratings his two hotels consistently win? The short answer is you don’t. It’s a dilemma. Sanford Bernstein has voiced concern about Wynn Palace’s “high-end positioning”. “While we are of the view that ‘supply drives demand,’ the new casinos are not without ‘concept risk.’ The paradigm shift inMacau has unfolded itself at a much faster pace than most operators expected.” CLSA’s Aaron Fischer has implied much the same in a recent client note. “We believe the focus should be on getting Wynn Palace opened on time” with less focus on the VIPs and more on tourist attractions. Mr Wynn, true to his style, refuses to tip his hand. And he doesn’t do soft openings. He said on the second-quarter earnings call that he was still waiting for word from the Macau government on how many table games the casino will receive. At that point the company had plowed around $2.65 billion into the “fully integrated resort” described in corporate filings. What is known is that at 51 acres it encompasses a very sizable space to work with. It will feature a 1,700-room hotel, an array of the company’s characteristically potent mix of retail and F&B offerings, meetings space and a spa. There will be a “performance lake” at the entrance bordered by restaurants and enlivened with fire and lights, reminiscent of Bellagio and Wynn Macau but on a more elaborate scale. Past announcements have spoken of an amusement ride as its centerpiece: an aerial tram with gondolas in the shape of dragons that breathe smoke as they ferry visitors over the lake from the light rail station that will adjoin the complex. “Our resorts have always had a special public entertainment piece,” Mr Wynn has said. What is known, too, is the peninsula properties are carrying staff in excess of their needs and incurring the extra cost to ensure the new resort will be ready to receive its guests without a hitch. But then execution has always been Wynn Resorts’ strong suit. In Macau it could well be what tips the scale back its way. As the Sanford Bernstein group has said, “Not all gaming operators are identical. The differences are becoming more apparent, and companies will begin to diverge as a competitive environment continues to evolve with greater focus on mass. Marketing acumen and operational expertise become more important, management quality and strategy are critical.” Mr Wynn has describedWynn Palace as “the single most important project in the company’s history”. That’s saying a lot for the man behind The Mirage, Treasure Island, Bellagio and Wynn Las Vegas. It has never been more accurate than it is now.