Personal Finance
LVS

Wynn Resorts Has a Tourist Problem

Macau skyline showing City of Dreams casino along Venetian canal

Las Vegas Sands (NYSE: LVS) might generate the most total revenue from Macau, but Wynn Resorts (NASDAQ: WYNN) realizes almost three-quarters of its profits from the Chinese gaming enclave, and recent indicators suggest the region is heading for a more severe slowdown than previously believed.

Though gaming revenue rebounded above expectations in November, Barron's reports that UBS analyst Robin Farley has dramatically revised her forecast downward. Her prior outlook for Macau gross gambling revenue (GGR) was for 5% growth in 2019, but she now believes GGR will fall by 1% next year, and that revenues in 2020 will only grow by 4% -- half the rate she originally estimated for that year. Essentially, Macau is attracting more tourists and fewer gamblers, and the results are starting to show up in the casinos' earnings reports.

Macau skyline showing City of Dreams casino along Venetian canal

Image source: Getty Images.

The chips are down

After rising in 2017, gaming revenue growth softened considerably this year, particularly in September and October due to a typhoon that closed all the casinos for a weekend; results from China's Golden Week holiday were also weak.

Macau 2018 monthly gaming revenue growth

Data source: Macau Gaming Inspection & Coordination Bureau. Chart by author.

Although November's strength surprised analysts -- gaming revenues rose 8.5% for the month -- Farley still sees a hard slowdown coming because VIP gambler visits are slipping, and China faces broad macroeconomic concerns.

VIP baccarat revenues are a proxy for high roller traffic in Macau, and while gross gaming revenue is up 13.7% in 2018 to 276.4 billion patacas (about $34.35 billion) -- the highest it's been in four years, actually -- VIP baccarat continues to decline. VIP baccarat receipts hit 40 billion patacas (about $5 billion) in the third quarter, lower than the 41 billion patacas reached in the second quarter, which itself was down from nearly 43 billion patacas in the first quarter.

Farley notes that plenty of people are still going to Macau, but they're not spending as much on average as they once were, and she forecasts spending will decline further because the territory is drawing a more tourist-heavy crowd.

A tourist trap

Of course, this is what Beijing has been pushing. When the government agreed to allow gambling to expand into the Cotai district, it required casino operators to introduce entertainment options that would attract more non-gambling spending. So Las Vegas Sands Parisian resort includes a half-scale Eiffel Tower, while Studio City International (NYSE: MSC) features a giant figure-eight Ferris wheel and a Batman-themed 4-D flight simulator ride. For its part, Wynn Resorts opted for luxury retail outlets and a gondola ride with views of the city.

The Chinese government wants Cotai to be more like Las Vegas, and it's set a target of 9% non-gaming revenue for the casinos by 2020. Casinos have achieved that threshold five years early, but for comparison, Las Vegas casinos derive about two-thirds of their revenue from non-gaming activities.

The high rollers can be a mixed blessing for casinos: Though they spend more than tourists, it also costs more to lure them in. Doing so requires casinos to partner with junket operators who ply VIP gamblers with amenities and loan them money to gamble with. In return, the casinos must pay the junket operators a percentage of what they win from the high rollers the operators bring.

Watch out for Wynn

If Farley turns out to be correct in her forecast, and if VIP gamblers make themselves more scarce in the next couple of years, that will heavily impact Wynn Resorts, because its operations are more reliant on wealthier gamblers.

There's a lot of uncertainty facing Macau beyond tourist flow and macroeconomic concerns in China. Japan, for example, will soon pick the three cities it will allow to host its new legalized casinos; once these resorts open, they may prove more attractive to VIPs than Macau's venues, particularly if Beijing continues cracking down on money flows out of mainland China to the territory.

Given its problems abroad as well as weakness at home , Wynn Resorts isn't looking like a good bet these days.

10 stocks we like better than Wynn Resorts

When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Wynn Resorts wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of November 14, 2018

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

LVS WYNN MSC

Other Topics

Stocks

The Motley Fool

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

Learn More