New Macao concession is huge for Wynn

Wynn Resorts (WYNN, quote) announced this week that the company had received permission from the Macanese government to begin construction of a 51-acre resort in the Cotai district of the Special Administrative Region. 

Image courtesy WiNG: http://commons.wikimedia.org/wiki/User:WiNG

Wynn's Macau resort

This represents an important development for the future of Wynn’s Macao operations and its attempts to regain share in the world’s largest gaming market.

The necessity of this concession cannot be understated. Wynn has seen their market share slowly dissipate as the heart of gaming in Macao has moved from the Macao Peninsula — where Wynn’s two casinos are located — to the reclaimed land between Coloane and Taipa Islands, known as Cotai.

As a result of this migration, Wynn’s grip on the high-end gaming segment that it once dominated has loosened. In order to recover its long-term position, a resort complex in Cotai would be requisite; however, the government had long stood in the way of increased expansion as it has attempted to diversify its economy from an over-reliance on gambling.

The Macanese government’s decision is not just a boon to Wynn; this move may be indicative of a relaxation in regulations pertaining to the industry as a whole.

According to the Financial Times, Richard Huang, an analyst at CLSA Hong Kong, claimed that this development is positive for all companies in the industry as it signals an increased likelihood that the government would raise its cap on gaming tables.

More gaming tables, of course, means more ability to increase revenue. Previously, there had been concerns that Las Vegas Sands’ (LVS, quote) newest resort, Cotai Central, would be constrained by a lack of available tables. Although CEO Sheldon Adelson has already dismissed these claims as unfounded, table availability appears to be even less of an issue going forward.

This new concession has taken some industry observers and participants by surprise; just last week on his company’s conference call, Adelson claimed he had not heard anything from the government about new permits in Cotai.

While this development is crucial for Wynn’s future in the former Portuguese enclave, it will be some time before the company’s bottom line is bolstered by this expansion; the resort is unlikely to open before 2016. In the medium-term, Wynn is likely to see its market share slip, though not precipitously, as gamers opt for the newer mega resorts offered by Galaxy, Melco Crown Entertainment (MPEL, quote) and Las Vegas Sands in Cotai.

As well, while investors have little reason to worry about Wynn’s quarterly dividend, once the newest Cotai project is underway, the lavish, one-time annual dividends it has paid in the past become less fiscally feasible. Wynn currently has a very manageable $2.8 billion in long-term debt, and a cash position of about $1.3 billion. However, given that the new project is expected to cost around $4 billion, paying out an additional $500 million plus in unnecessary dividends annually seems unlikely as it could compromise the company’s debt profile.

For long-term investors, Wynn is now in much better shape as the result of this major catalyst on the horizon, although investors should be mindful of developments with former shareholder Kazuo Okada’s lawsuit. Over the short-and-medium term, the stock could very well outperform the market but underperform its peers in Macao. If Macao growth continues at a 20% annualized clip, but Wynn loses a few percentage points of market share over the next four years, this could be construed as a net positive for the stock, knowing that Wynn will likely claw back market share once their Cotai development is open for business.

It’s a little too early for long-term investors to start a position here, given the length of time before the positive effects of the Cotai concession will materialize on Wynn’s balance sheet. However, a move down to the lows seen in December of around 100 would be a fantastic entry point for long-term investors.  

Disclosure: Author is long LVS; immediate family is long LVS, WYNN, and MPEL. 

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