Global Gaming and Casinos Industry Specialist, Casino Business Review LLC

Howard J Klein

I am a 25+ year c-level executive of the casino industry in operations, marketing, international development and strategic planning. Currently, a consultant specializing in the casino space. Industry expert contributor and publisher of a subscription letter called "The House Edge". Extensive experience in marketing and development in the Asian gaming market while a senior executive at Caesars, Ballys Grand and Trump Taj Mahal.
Part of senior executive teams that valued acquisitions and mergers with companies in the casino, hotel, d entertainment rant  and restaurant space.

Global Gaming and Casinos Industry Specialist

Equity Bottom-Up

<ul>
<li>After three consecutive months of declining double-digit revenue growth, our sources are calling a reversal of the percentage gain resuming mid to upper teens. Once it does we see upside movement in the shares in short order.</li>
<li>Wynn Macau Ltd. retains leadership in highest win per unit per day in the market in VIP and premium mass.</li>
<li>The stock now sits at over 30% off its 52 week high as the market continues to absorb new capacity without only temporary, minimal hit to market share. Over time it will assert its marketing edge over peers in the VIP and premium mass segment.</li>
</ul>Since early last spring, Wynn Resorts Ltd (NASDAQ: WYNN) parent of Wynn Macau Ltd (HK1128) has been rocked by headwinds emanating from both internal and macro woes. After hitting a one year high at US$200, it has plunged to its current trade at US$145. The Macau sector has been shaken by fears over the escalation of the US/China trade dispute morphing into a full-scale trade war. General jitters (unwarranted in our view) have dogged sector analysis as the 2020-2023 reconcession negotiating window inches closer. But the Macau gaming sector is as much a market of emotion as it is of hard fact.The eruption of allegations over the sexual misbehavior of founder CEO Steve Wynn early last spring had resulted in his resignation and subsequent private sale of his 11% stake, leaving his ex-wife, Elaine, as the company's largest single stockholder. She has since opportuned the board to make changes in governance and bring in new directors. New management has acted swiftly to meet those demands and set a fresh course. Even though the market applauded these moves, the shares continued to slide when 1Q18 results reflected some temporary disruption in junket activity in Macau and questions about pipeline projects continued to bubble up from the analyst community which resulted in some downgrades. But realistically, the parent's governance woes had little impact on Macau results.The declining y/y GGR growth rate did. As recently as May 2d WML reached a 52 week high of HK30.90. Since then it has dropped around 30% to $20.90HK at writing. We believe there could be some echo chamber effect on the Macau stock from the parent's woes but not a great deal. The GGR numbers out of Macau was what was really sending the sector lower with other perceived headwinds, which in reality were little more than breezes. But volatility has become a hallmark of the sector.Since the 2015 corruption crackdowns by Beijing, Macau has posted 27 straight months of recovering GGR propelled by fading fears over more punitive government measures, vigorous growth in overnight tourism and the new supply coming on line that caused much less cannibalization if any than some analysts anticipated. The depth of the Macau gaming market is beyond question and has many gifts to present to sector participants in the years ahead as infrastructure improves. Yet the last three months of double-digit y/y growth at a diminishing rate worried investors. Last April's GGR showed a 27.6% y/y growth over 2017. This number dropped in May to 12.%, inched slightly up in June to 12.5% and recommenced decline in July to 10.2%.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/061/529/original/%24.gif?1535039340" class="editor-image img-responsive" data-smartkarma-image-id="61529"></figure><div class="content-caption">WML is off 30% from 52 wk high</div>This set up expectations that the pace of y/y increases would continue to decline with some analysts predicting a dive below double digits base on what was seen as the recovery from 2015 reaching a mature arc. Macro factors in the Chinese economy were likewise blamed. Yet, YTD, Macau is still running at a 17.5% y/y growth rate. Now with August results, if they indeed resume a higher growth pattern, could break the bearish trend and spike Wynn Macau stock.August estimate: Human intelligence vs. projected numbers at the momentBest estimates by several banks now expect August to show anywhere between at 15% to 18% gain. Our numbers, arrived at through different means agree, but come in a bit higher. As a result, we think a strong August performance could create an entry point for WML stock now.Our estimates come from a blend of on-site observations by friends and associates in the industry, some active, some retired. These are men and women who can read a casino floor with uncanny precision just by walking around, observing gaming position occupancy, junket room activity, general footfall on the casino floor and key areas at check-in, dining outlets, and shopping malls. We evaluate their "human intelligence" samplings by shift and day against our own internal, historic Macau metrics and derive our own estimate as to where a given month's GGR may be trending.<div class="content-highlight">We stress that these are eyeball estimates of pros who have run casino floors as VPs or shift managers over many years. They have proven fairly accurate each month. Of course, all estimates are subject to the recurring hold percentage factor implicit in baccarat play in particular. We have all experienced solid months that were disrupted in the final days by the big wins of a handful of huge VIP players. With that in mind as a caveat, we believe August will indeed show a nice upside on GGR. We are looking for a range of 15% to 18%. If achieved this will break the declining trend of the last 90 days and reset growth to the mid to upper teens between now and the end of the year. If that holds, it would bring 2018 GGR up over the US$40bn mark, for the first time since the pre-crackdown year of 2013. Because of its dominance in VIP and premium mass we see WML at an enticing entry point before the August numbers are released.</div>Capsule Look: Wynn Macau Ltd. Note: All numbers here shown in HKDAt writing: $20.901 year high: May2: $30.90 52 wk high" $31.35Market cap:106.8bn. P/E: (ttm) 21.33 EV/EBITDA: 14.53EPS (ttm) $0.98 Gross margin: 42.06% Operating margin: 24.51% FCF for 2017 was: 103.4bn.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/061/530/original/016a4eda-cb54-43ee-82ff-c76e9760d4885636-wynn-palace-jpg@500px.jpg?1535039427" class="editor-image img-responsive" data-smartkarma-image-id="61530"></figure><div class="content-caption">Wynn Palace leads the market in VIP win per unit</div>RationaleDue to property richness relative to sector peers, long a hallmark of Wynn properties, the revenue stream is heavily weighted to the upper middle to upper VIP segments producing strong operating margins. Wynn Palace, for example, has a win per unit per day that runs 30% higher than the citywide average. The mass segment likewise led the city with a 47% above average win per unit per day. The edge provided by property richness and its consequent impact on customer perception results from what I have named, "the aspirational free business customer" arrivals. That's the secret sauce of Wynn properties outperforming its peers. And that's what creates the edge for WML.The Wynn Marketing Edge<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/061/531/original/T28541_EXT_Z007EC.jpg?1535039488" class="editor-image img-responsive" data-smartkarma-image-id="61531"></figure><div class="content-caption">Wynn Macau experienced minimal migration</div>Wynn property richness is a quality some analysts in the past have characterized as overkill. (Read some of the bank analysts appraisals of Wynn Palace prior to opening that questioned its cost). Yet actual results over time in its performance in Nevada and New Jersey has proven that despite higher average room rates. dining costs entertainment offerings and shopping choices, the RevPar of Wynn properties run higher than its peers. Thus the properties tend to attract more affluent patron bases both on the casino floor and in the dining, shopping and entertainment amenities. This upscale clientele, in turn, acts as an aspirational magnet for status-conscious patrons who may not by definition, be VIPs or even upper-level premium mass patrons.Furthermore, Wynn properties, usually bearing the ne plus ultra status in its markets likewise attracts mass "look-see" footfall and in turn, builds gaming and non-gaming revenue at no defacto cost. One sees this at the masses of gawkers leaning at the rails of the baccarat games in casinos all over the world. But those gawkers at Wynn I have observed over a long career translate far more readily into revenue as they either find lower limit games on the floor, migrate into popular priced dining outlets and yes, buy lots and lots of t-shirts and mugs to show friends and relatives back home that they'd been at a Wynn property. As a result, Wynn properties do not have to "buy business" by deep discounting.They do of course, manage room rates down like all peers during soft periods, but they always start from a higher base. As Wynn once told me, "Folks who visit these places want to ooh and ahh. And the more you give them to ooh and ahh about and tell their friends, the more cheap, if not free marketing you are buying." This is a proven case at Wynn Macau's two properties, particularly Wynn Palace. This sampling revenue comparison below shows how this edge works in Las Vegas is instructive to give color to our assertion here that all Wynn properties sustain their marketing edge over time.Note: The following numbers TTM shown in USD:Property:                     Revenue       EBITDAWynn?Encore                $1.69bn          $532mBellagio:                         $1.36bn            $515m       Note: Bellagio now owned by MGM International Resorts (NYSE: MGM) was conceived, developed and built by Wynn and opened in 1998.  It continues to benefit from Wynn's contention to the writer that "the best marketing of all is built into the walls of a property." Venetian/Palazzo:        $1.61bn          $338m.MGM Grand:              Lt    $1.13bn        $373.mConclusionWynn Macau Ltd's parent Wynn Resorts Ltd and its peers in Las Vegas have reduced expectations for Q3 due to slowed bookings of general tourist business and conventions and no major one-off events like the highly touted fight last year. While Q4 in Las Vegas is expected to rebound there are lagging issues which could tamper bullish sentiment on the parent's shares. This is not the case with Wynn Macau Ltd. The only headwinds that impaired its 1Q numbers were attributed to a temporary migration of some key junkets that will be mitigated going forward and the perception across the investing community that the three consecutive months of slowing Macau GGR growth presaged a continuing maturity of the recovery and lowered earnings expectations ahead. Too many analysts often forget the Warren Buffet admonition that "trees do not grow to the skies" when commenting on monthly GGR results. The built-in depth of the Macau gaming market bears the entire final word on its performance. In reviewing our sources and metrics we look for a nice northward move for August GGR and see that as an entry point for the shares of Wynn Macau Ltd. which we believe at their current trade, are undervalued.As usual our caveat: Black swans swim, headwinds blow that do not show up on advance weather reports and the game of baccarat has a mind of its own. So we are tracking a month we still believe will show a spike an provide a smart entry point for Wynn Macau Ltd at its current price, over 30% off its high.


After three consecutive months of declining double-digit revenue growth, our sources are calling a reversal of the percentage gain resuming mid to upper teens. Once it does we see upside movement in the shares in short order.
Wynn Macau Ltd. retains leadership in highest win per unit per day in the market in VIP and premium mass.
The stock now sits at over 30% off its 52 week high as the market continues to absorb new capacity without only temporary, minimal hit to market share. Over time it will assert its marketing edge over peers in the VIP and premium mass segment.
Since early last spring, Wynn Resorts Ltd (NASDAQ: WYNN) parent of Wynn Macau Ltd (HK1128) has been rocked by headwinds emanating from both internal and macro woes. After hitting a one year high at US$200, it has plunged to its current trade at US$145. The Macau sector has been shaken by fears over the escalation of the US/China trade dispute morphing into a full-scale trade war. General jitters (unwarranted in our view) have dogged sector analysis as the 2020-2023 reconcession negotiating window inches closer. But the Macau gaming sector is as much a market of emotion as it is of hard fact.The eruption of allegations over the sexual misbehavior of founder CEO Steve Wynn early last spring had resulted in his resignation and subsequent private sale of his 11% stake, leaving his ex-wife, Elaine, as the company's largest single stockholder. She has since opportuned the board to make changes in governance and bring in new directors. New management has acted swiftly to meet those demands and set a fresh course. Even though the market applauded these moves, the shares continued to slide when 1Q18 results reflected some temporary disruption in junket activity in Macau and questions about pipeline projects continued to bubble up from the analyst community which resulted in some downgrades. But realistically, the parent's governance woes had little impact on Macau results.The declining y/y GGR growth rate did. As recently as May 2d WML reached a 52 week high of HK30.90. Since then it has dropped around 30% to $20.90HK at writing. We believe there could be some echo chamber effect on the Macau stock from the parent's woes but not a great deal. The GGR numbers out of Macau was what was really sending the sector lower with other perceived headwinds, which in reality were little more than breezes. But volatility has become a hallmark of the sector.Since the 2015 corruption crackdowns by Beijing, Macau has posted 27 straight months of recovering GGR propelled by fading fears over more punitive government measures, vigorous growth in overnight tourism and the new supply coming on line that caused much less cannibalization if any than some analysts anticipated. The depth of the Macau gaming market is beyond question and has many gifts to present to sector participants in the years ahead as infrastructure improves. Yet the last three months of double-digit y/y growth at a diminishing rate worried investors. Last April's GGR showed a 27.6% y/y growth over 2017. This number dropped in May to 12.%, inched slightly up in June to 12.5% and recommenced decline in July to 10.2%.WML is off 30% from 52 wk highThis set up expectations that the pace of y/y increases would continue to decline with some analysts predicting a dive below double digits base on what was seen as the recovery from 2015 reaching a mature arc. Macro factors in the Chinese economy were likewise blamed. Yet, YTD, Macau is still running at a 17.5% y/y growth rate. Now with August results, if they indeed resume a higher growth pattern, could break the bearish trend and spike Wynn Macau stock.August estimate: Human intelligence vs. projected numbers at the momentBest estimates by several banks now expect August to show anywhere between at 15% to 18% gain. Our numbers, arrived at through different means agree, but come in a bit higher. As a result, we think a strong August performance could create an entry point for WML stock now.Our estimates come from a blend of on-site observations by friends and associates in the industry, some active, some retired. These are men and women who can read a casino floor with uncanny precision just by walking around, observing gaming position occupancy, junket room activity, general footfall on the casino floor and key areas at check-in, dining outlets, and shopping malls. We evaluate their "human intelligence" samplings by shift and day against our own internal, historic Macau metrics and derive our own estimate as to where a given month's GGR may be trending.We stress that these are eyeball estimates of pros who have run casino floors as VPs or shift managers over many years. They have proven fairly accurate each month. Of course, all estimates are subject to the recurring hold percentage factor implicit in baccarat play in particular. We have all experienced solid months that were disrupted in the final days by the big wins of a handful of huge VIP players. With that in mind as a caveat, we believe August will indeed show a nice upside on GGR. We are looking for a range of 15% to 18%. If achieved this will break the declining trend of the last 90 days and reset growth to the mid to upper teens between now and the end of the year. If that holds, it would bring 2018 GGR up over the US$40bn mark, for the first time since the pre-crackdown year of 2013. Because of its dominance in VIP and premium mass we see WML at an enticing entry point before the August numbers are released.Capsule Look: Wynn Macau Ltd. Note: All numbers here shown in HKDAt writing: $20.901 year high: May2: $30.90 52 wk high" $31.35Market cap:106.8bn. P/E: (ttm) 21.33 EV/EBITDA: 14.53EPS (ttm) $0.98 Gross margin: 42.06% Operating margin: 24.51% FCF for 2017 was: 103.4bn.Wynn Palace leads the market in VIP win per unitRationaleDue to property richness relative to sector peers, long a hallmark of Wynn properties, the revenue stream is heavily weighted to the upper middle to upper VIP segments producing strong operating margins. Wynn Palace, for example, has a win per unit per day that runs 30% higher than the citywide average. The mass segment likewise led the city with a 47% above average win per unit per day. The edge provided by property richness and its consequent impact on customer perception results from what I have named, "the aspirational free business customer" arrivals. That's the secret sauce of Wynn properties outperforming its peers. And that's what creates the edge for WML.The Wynn Marketing EdgeWynn Macau experienced minimal migrationWynn property richness is a quality some analysts in the past have characterized as overkill. (Read some of the bank analysts appraisals of Wynn Palace prior to opening that questioned its cost). Yet actual results over time in its performance in Nevada and New Jersey has proven that despite higher average room rates. dining costs entertainment offerings and shopping choices, the RevPar of Wynn properties run higher than its peers. Thus the properties tend to attract more affluent patron bases both on the casino floor and in the dining, shopping and entertainment amenities. This upscale clientele, in turn, acts as an aspirational magnet for status-conscious patrons who may not by definition, be VIPs or even upper-level premium mass patrons.Furthermore, Wynn properties, usually bearing the ne plus ultra status in its markets likewise attracts mass "look-see" footfall and in turn, builds gaming and non-gaming revenue at no defacto cost. One sees this at the masses of gawkers leaning at the rails of the baccarat games in casinos all over the world. But those gawkers at Wynn I have observed over a long career translate far more readily into revenue as they either find lower limit games on the floor, migrate into popular priced dining outlets and yes, buy lots and lots of t-shirts and mugs to show friends and relatives back home that they'd been at a Wynn property. As a result, Wynn properties do not have to "buy business" by deep discounting.They do of course, manage room rates down like all peers during soft periods, but they always start from a higher base. As Wynn once told me, "Folks who visit these places want to ooh and ahh. And the more you give them to ooh and ahh about and tell their friends, the more cheap, if not free marketing you are buying." This is a proven case at Wynn Macau's two properties, particularly Wynn Palace. This sampling revenue comparison below shows how this edge works in Las Vegas is instructive to give color to our assertion here that all Wynn properties sustain their marketing edge over time.Note: The following numbers TTM shown in USD:Property:                     Revenue       EBITDAWynn?Encore                $1.69bn          $532mBellagio:                         $1.36bn            $515m       Note: Bellagio now owned by MGM International Resorts (NYSE: MGM) was conceived, developed and built by Wynn and opened in 1998.  It continues to benefit from Wynn's contention to the writer that "the best marketing of all is built into the walls of a property." Venetian/Palazzo:        $1.61bn          $338m.MGM Grand:              Lt    $1.13bn        $373.mConclusionWynn Macau Ltd's parent Wynn Resorts Ltd and its peers in Las Vegas have reduced expectations for Q3 due to slowed bookings of general tourist business and conventions and no major one-off events like the highly touted fight last year. While Q4 in Las Vegas is expected to rebound there are lagging issues which could tamper bullish sentiment on the parent's shares. This is not the case with Wynn Macau Ltd. The only headwinds that impaired its 1Q numbers were attributed to a temporary migration of some key junkets that will be mitigated going forward and the perception across the investing community that the three consecutive months of slowing Macau GGR growth presaged a continuing maturity of the recovery and lowered earnings expectations ahead. Too many analysts often forget the Warren Buffet admonition that "trees do not grow to the skies" when commenting on monthly GGR results. The built-in depth of the Macau gaming market bears the entire final word on its performance. In reviewing our sources and metrics we look for a nice northward move for August GGR and see that as an entry point for the shares of Wynn Macau Ltd. which we believe at their current trade, are undervalued.As usual our caveat: Black swans swim, headwinds blow that do not show up on advance weather reports and the game of baccarat has a mind of its own. So we are tracking a month we still believe will show a spike an provide a smart entry point for Wynn Macau Ltd at its current price, over 30% off its high.

Wynn Macau Ltd: August GGR Headed for Upside Calls It a Buy Now: It's 30% off Its High