Wynn doubles down on Macau with $4.1 billion Palace casino opening

Macau's most expensive casino
Macau's most expensive casino

The lavish Wynn Palace — six years in the making and costing $4.1 billion — threw open its doors Monday in Macau as the world's biggest casino market remains in the grips of a gaming slump.

"In every business there are good years and bad years," Wynn Resorts Chairman and CEO Steve Wynn was quoted as telling reporters at a pre-opening event Wednesday. "For our return on investment, I expect we will be fine."

Macau has been coping with China's economic slowdown, Beijing's campaign against corruption, the transition from high-roller gamblers to mass-market players, and other headwinds.

Macau is clearly operating in an environment of increasing costs and mounting competition amid a challenging macro environment.
Jamie Soo
Daiwa Capital Markets

The government's clampdown has reduced the ranks of the casino junket operators and curtailed the flow of money from Chinese high-roller gamblers. The so-called junkets are the commissioned middlemen hired by the casinos to bring in the wealthy VIP gamblers from mainland China.

"Macau is clearly operating in an environment of increasing costs and mounting competition amid a challenging macro environment," Daiwa Capital Markets analyst Jamie Soo said last week in a research note to clients. "We view the Street's forecasts for incremental profitability due to new property openings this year to be far too optimistic."

July marked Macau's 26th consecutive monthly gaming revenue decline, with gross gaming revenues declining 4.5 percent during the month on a year-over-year basis. Daiwa estimates Macau's GGR will fall by 10 percent in 2016 from the prior year.

High-end gamblers

Nonetheless, some industry analysts are more optimistic about the Palace's outlook and point out the 1,700-room megaresort is focusing on so-called premium mass gamblers, a gaming segment not impacted as severely in the Macau slowdown as the VIP market.

Yet the new resort does have plenty of features that cater to the VIP side, including special tables, junket rooms and high-end suites and garden villas.

"We believe Wynn Palace is a potential game-changer for Wynn and will increase Wynn's hotel room count by 168 percent, from 1,010 to 2,710," Citi analyst George Choi said in a note. "We like the earnings improvement that the new Macau property will likely bring to Wynn."

Leading up to the Palace opening, there was some concern the gaming table caps put in place by the Macau authorities could curtail gaming growth. The table policy, a way of encouraging the resorts to offer more nongaming activities, currently caps the supply to 3 percent table growth each year.

Shifting tables

In July, Wynn received a low initial table allocation from regulators of 100 for the Palace, well below the range of between 200 and 250 tables that industry analysts had expected, and far below the 400 tables management expected when it first announced the project. More recently, the company learned it would get 25 additional tables at the start of 2017 and 25 more one year later.

The company reallocated 250 tables from its older Wynn Macau property to the Palace, bringing the total table tally at the new resort to 350. The Palace is Wynn's first resort on Cotai, a strip of hotel-casinos where Las Vegas Sands plans to open another property next month.

"We believe that for Wynn and other operators, peak table capacity is only an issue for major holidays," Buckingham Research Group analyst Christopher Jones said in a note.

Glitzy features

Added Jones, "Ultimately, we believe that the opening of Wynn's first outpost on Cotai, with 1,700 rooms and expansive non-gaming operations will allow Wynn to yield up both tables and as well as the overall property."

The floral-themed Palace is Wynn's most expensive resort bet ever and provides a reminder of the casino mogul's flair for glitz.

The new resort's artwork collection is worth north of $125 million, and includes a 3-ton stainless steel "Tulips" sculpture by American artist Jeff Koons. Moreover, there's a performance lake fountain show, air-conditioned gondolas, and a rooftop garden looking over the South China Sea.

For shopping, Palace's 200,000 square feet of retail space includes shops from Chanel, Cartier, Hermes, Prada and Gucci.

We spent, without exception and without any possibility of contradiction, more money on non-casino attractions in Wynn Palace than has ever been spent on any facility of that sort on the planet Earth.
Steve Wynn
Chairman and CEO, Wynn Resorts

Wynn hasn't estimated when the new resort will be breakeven.

"We spent, without exception and without any possibility of contradiction, more money on noncasino attractions in Wynn Palace than has ever been spent on any facility of that sort on the planet Earth," Wynn boasted last month during the company's second-quarter earnings call.

Shares of Wynn Resorts were down 2 percent Friday in light trading, but through last week the stock was up 40 percent this year, outperforming its U.S. casino peers and the broader market.

Oversupply concerns

Meantime, several multibillion dollar resorts in Macau are set to open soon, raising the risk there could be an oversupply amid the current gaming slowdown.

"The $64k question is if the opening attracts new play or recycles existing customers to the incremental capacity," Nomura analyst Harry Curtis said in a note last week. "While we expect modest market growth (2-3 percent), it will not be sufficient to generate adequate returns on invested capital net of cannibalization."

Rival Las Vegas Sands' Parisian Macao, a $2.7 billion, French-themed resort on Cotai, is scheduled to open Sept. 13, giving the company a total of six properties in Macau overall (five being on Cotai). MGM Resorts International is majority owner of MGM China, which plans to open MGM Cotai, a $2.5 billion resort, in the second quarter of 2017 (that resort will more than double MGM's presence in Macau).

"It is worth saying again — new supply opening into weak markets has never resulted in better-than-expected EBITDA," said Curtis. "Perhaps 2017 will be an exception, but we doubt it since the negative operating leverage in these buildings is high."