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Macau May Be a Bigger Problem for Wynn Resorts Than It Thought

Pity poor Wynn Resorts (NASDAQ: WYNN), which, despite getting the rebound going in Macau with the opening of its new Palace resort on Cotai in August, hasn't reaped any of the benefits. It reported third-quarter earnings earlier this month indicating that even though the new casino sprinted out of the gate, it was going to be a longer race than expected.

Image source: Pixabay.

Gambling revenue has been increasing

When the $4.4 billion Palace opened in late summer, analysts said gambling revenues that had been falling all month long suddenly reversed course and bounded higher, allowing the tiny Chinese gambling enclave to report higher monthly gaming revenues for the first time in over two years. It was believed that VIP gamblers that had been laying low in the only place it's legal to gamble in China returned to see what a world-class operator like Wynn had produced.

Las Vegas Sands (NYSE: LVS) followed that up the following month with the opening of its similarly situated Parisian, and monthly revenues were again higher than they had been the year before, seemingly the start of a sustained recovery. And October notched an even bigger year-over-year increase.

Yet the tale of the two resorts couldn't be more different as one seems to be more adept at playing the situation in Macau, one that de-emphasizes high rollers in favor of mass-market gamblers and family entertainment. Sands reported profits jumped to $0.72 per share in the most recent quarter, handily beating analyst calls for $0.60 per share as the casino operator saw a 19% increase in visitors to its Macau properties in September. It seems they wanted to see what Sands was capable of producing. Wynn, on the other hand, recorded a net loss of $17.4 million for the period, or $0.17 per share.

The figure-eight Ferris wheel at Melco Crown Entertainment's Studio City resort. Image source: Studio City.

It's all fun and games

The interest, of course, was sparked by the mandate Cotai is now operating under to transform the gambling mecca into a more family-friendly destination, with attractions and gambling opportunities that appeal to more people than just the high rollers. Melco Crown Entertainment (NASDAQ: MPEL) and Galaxy Entertainment (NASDAQOTH: GXYEF) have opened resorts with less focus on high-stakes gambling and more on family fun with a theme park-like atmosphere.

Yet Macau has always been about VIP gambling, and the crackdown on corruption by Beijing that netted several junket operators who fly in the high rollers and lend them money to gamble, caused a 26-month decline in gambling revenues. The casino operators also found themselves having to contend with an annual limit imposed on the number of gambling tables geared toward VIPs. When the Palace and Parisian opened, they were granted only 100 high-stakes tables, with just 25 more to come in 2017 and 2018.  

That forced Wynn and Sands to shuffle VIP tables from their existing Macau resorts into the new venues, but as Wynn found out, that only served to cannibalize performance. Revenues at Wynn Macau tumbled 11.5% in the third quarter to $518 million, while adjusted property EBITDA, or earnings before interest, taxes, depreciation, and amortization, fell 7% to $151 million. Most of that ended up at the Palace, which recorded revenues of $165 million and adjusted EBITDA of $25.5 million during the 40 days it was open.

In contrast, Sands said the Parisian contributed $19.2 million of adjusted property EBITDA during its first 18 days of operation.

Pardon our appearance

Chairman and CEO Steve Wynn suggested the slow start to the Palace was in large part caused by the construction underway all around the resort. Infrastructure construction, including a light-rail system that will have the Palace as the first stop when it's completed, makes it difficult if not hazardous to get to the casino. He also said more casual dining options were necessary and that he underestimated demand for such restaurants. Wynn is now expanding its Red 8 casual chain to handle the demand, but it will take several months.

While adjustments are always going to be necessary -- Melco, for instance, eschewed any VIP tables at its City of Dreams casino, in favor of going all mass market, but has since had to backtrack because of poor performance -- certain decisions Wynn made with the Palace seem critical.

Where Melco and Galaxy have roller coasters, Ferris wheels, and other forms of entertainment, and Las Vegas Sands' Parisian has a half-scale Eiffel Tower that provides rides to observation decks for sweeping, panoramic views of the city, not to mention a large Parisian facade at street level, Wynn went a different route.

Image source: Wynn Macau.

The Palace is more of an upscale resort that opted to offer customers enhanced luxury retail shopping opportunities rather than gauche entertainment. It does offer a gondola ride with views of the city, but it's not the same sort of mass-market appeal the other resorts targeting that demographic possess.

While the casino may be operating under the hope that if they build it people will come, it may be it requires they actually build entertainment that appeals to mass-market audiences and not just one-off venues that have at their heart the same VIP gamblers they've always targeted. That may well be the reason Wynn Resorts' new resort isn't faring the same as Las Vegas Sands', and it suggests Macau may be a bigger problem for the casino operator.

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