As the U.S. gambling industry has grown over the past few decades, and the market has become somewhat saturated, many casino operators have diversified their business models, focusing more energy and resources in Asian markets like Singapore or Macao, China. Wynn Resorts Ltd. (WYNN) is one of the companies that has successfully installed its high-quality casino and resort brand in China, while still gaining revenue growth in the Las Vegas Strip. Maybe that’s why investment gurus Ken Heebner (Trades, Portfolio) and Steven Cohen (Trades, Portfolio) recently bought over 150,000 company shares each.
Expansion in the VIP market
The peculiarity of this company is that it focuses on the luxury segment of the casino industry. Founded in 2002 by business magnate and casino guru Steve Wynn, the company now operates four megaresorts: Wynn Macau and Encore in China, and the Wynn and Encore resorts on the Las Vegas Strip. Furthermore, Chinese gambling reels in approximately 75% of the firm’s revenue, and with gaming revenues growing at a 19% pace, amounting to $40.9 billion over the 12-month period in 2013, Wynn’s focus on this market is more than justified. The company’s position as the first premier luxury brand in the Chinese casino market also provides a competitive advantage. Gamblers and resort customers attending Wynn resorts pay the highest room rates and place the largest bets per hand in the industry, resulting in the highest revenue and EBITDA per table.
Possessing one out of six available gambling licenses in the valuable Macao Strip is also a strong advantage for the casino operator, earning it a narrow economic moat rating. However, the firm’s late entry into the Cotai market, in addition to its focus on the VIP chip rolling segment, may cause a loss in market shares, since the mass market, catered to by competitors Las Vegas Sands Corp. (LVS) and MGM Resorts International (MGM), is growing at a 25% annual rate. In order to counterbalance losses, Wynn Resorts will launch its newest operation in the Cotai Region by 2016, which will include 2,000 hotel rooms, 500 gaming tables, restaurants and other retail outlets. Although the $4 billion project will put some strain on the company’s debt levels, I believe this move will strengthen the firm’s position as a premium brand, therefore attracting high-end VIP customers from China’s mainland.
Valuation and Projection
With the current proliferation of regional casinos in the U.S, due to the over-saturation of the Las Vegas Strip (number of rooms increased 15% in 2007-2010, but revenue declined 15% in the same period), Wynn Resorts focus on the Macao market is the best strategy. Its competitive advantage in the VIP segment not only allows for sky-high 222.3% shareholder returns on invested capital, but also generates an outstanding EPS growth rate of 204.90%. Moreover, this casino operator is bound to benefit in the long-term from the demand and supply imbalance in the Chinese market, causing industry revenue to grow at a 12% to 15% pace, while supply crawls at a 3% to 5% ratio.
Wynn Resorts current 25% revenue growth rate will also be sustainable in the long run, with the new Cotai casino accounting for a 12.7% compound annual growth rate in Macao, while Las Vegas operations grow at a slower 3.6% pace. However, EBITDA margins will continue to expand in both markets successfully at a 33.7% and 31.7% pace, therefore sustaining fiscal 2013’s 35.80% growth. The company’s share buyback rate of 4.60 is another bonus from which investors will profit. Although the stock is currently trading at a 56% price premium relative to the industry average of 23.0x, I feel bullish that this firm’s high returns and strong growth ratios will make for a profitable investment.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned.