Investors wagering on Wynn Resorts' newest Macau property are finding that even as the government supports development in the gambling region, it insists on a policy that could limit gaming-related growth.
Macau, the only place where it is legal to gamble in China, has a policy in place that curbs the supply of new game tables to 3 percent compound annual expansion.
Designed as a way of prodding casino companies to offer more non-gaming activities, those table caps limit the amount of dealer activity at their properties, as well as the inflow of game money from Chinese gamblers. As a result, they have the potential to reduce earnings for casino-resort operators in the market.
"It's a pretty significant driver of revenue to have as many as tables as you can, especially during peak periods," Union Gaming analyst John DeCree said.
Wynn Resorts is set to open its $4.2 billion Wynn Palace property in Macau's Cotai area on August 22. In advance of that opening, industry analysts had predicted the casino-resort would get a table allocation from regulators of between 200 and 250. Those estimates were not considered overly optimistic, since they were roughly equivalent to the allocation at two other Cotai casino properties.
But in its second-quarter earnings report late Thursday, the company disclosed that "we will receive an allocation of approximately 100 table games for Wynn Palace, with additional table games allocated to us post-opening." Investors sold off the company's stock on the news, as the lower-than-expected initial allocation could dampen the earnings potential for Wynn Palace next year.
"A 150-table deficit reduces the earnings power of Wynn Macau by $85 million in 2017 and lowers fair value from $92 to $83," Nomura analyst Harry Curtis said in a research note Friday. The firm likewise lowered its stock rating on Wynn Resorts to "reduce" from "neutral," indicating the initial "paltry allocation is a clear message from Beijing that it is serious about Macau enforcing the table cap."
Wynn shares fell more than 6 percent, to $97.95, on Friday, with nearly 8 million shares exchanging hands. That compares with the stock's 10-day average volume of roughly 2.5 million shares. Yet even with Friday's decline, the stock is up more than 40 percent this year; and some analysts saw Friday's dip as a buying opportunity.
"We think the market is a little skittish heading into the [Wynn Palace] opening," DeCree said. He raised his price target on Wynn stock to $115 Friday, from his previous target of $105.