Wynn Resorts Stuck in Neutral Amid Macau VIP Risk, Says Analyst

Posted on: September 16, 2020, 09:20h. 

Last updated on: September 16, 2020, 11:07h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Shares of Wynn Resorts (NASDAQ:WYNN) are lower by more than two percent Wednesday after Roth Capital analyst David Bain downgraded the gaming operator, citing, among other factors, risk in the marquee Macau market.

Wynn Macau
An analyst downgraded Wynn’s stock today, citing exposure to that market and weakness in Las Vegas. The Wynn Macau is pictured above. (Image: Getty Images)

In a note to clients today, Bain lowered his rating on the Encore operator to “neutral” from “buy,” while trimming his price target to $75.

That implies downside from the $80 area at which the stock currently resides. The analyst points out that a VIP-led recovery in Macau may not materialize to the extent market observers previously believed, and that could weigh on Wynn equity.

“While structural elements for visitation improvements are advancing, we believe a VIP-led recovery will be less broad-based than many anticipate and carry specific risks,” said Bain. “We believe certain operators are structurally better positioned from the more visible, long-term dynamic Macau gaming market than Wynn.”

Risks mentioned by the Roth analyst include ongoing geopolitical volatility between the US and China, and concession renewal risk for US operators in Macau, among others.

Risky Business

By Bain’s estimate, Wynn derives 68 percent of its earnings before interest, taxes, depreciation and amortization (EBITDA) from the world’s largest gaming center, adjusting for its ownership stake in Wynn Macau.

That’s fine in a normal operating environment, and it’s exposure that’s served Wynn investors well over the years. But 2020 is far from the usual climate for gaming companies. Wynn Macau and Wynn Palace, along with the special administrative region’s (SAR) other casinos, were closed for 15 days in February because of the coronavirus pandemic. Only recently have there been most signs of a pickup in visits.

Some investors like Wynn stock due to Asia-Pacific exposure. But Bain sees risks by way of a lack of liquidity among high-end players, new room supply coming to market, and a dearth of Hong Kong dollars flowing into the gaming hub because travel remains limited between the two SARs.

Bain added that Wynn has less exposure to the Cotai Strip than rivals Las Vegas Sands (NYSE:LVS) and Melco Resorts & Entertainment (NASDAQ:MLCO), a relevant point because border expansions and new capacity could drive traffic to that area of Macau.

Not Loving Las Vegas, Either

The analyst forecasts Las Vegas, where Wynn owns its namesake integrated resort, and the Encore, will account for 22 percent of 2022 EBITDA. But there are issues, there, too. Namely, Sin City is now highly dependent on leisure travel from neighboring California.

“Given the lack of domestic/international travel, lack of near/intermediate-term group and business events, the beginning of a long Las Vegas recovery is currently levered to California leisure traffic, which offers little visibility/reason for investor enthusiasm,” said Bain.

Without a coronavirus vaccine readily available, many tourists that need to fly to Las Vegas are saying “No, thanks.” That increases the importance of drive-in traffic from neighboring states, namely California.

That’s a negative at a time when the Golden State economy is still reeling from the effects of the pandemic. As Bain notes, California accounted for a quarter of all US jobless claims in the last week of August.