Going into its earnings release on Tuesday, April 26th, I remain negative on Wynn Resorts (NASDAQ:WYNN) and am contemplating buying puts on the company even after its 3.6% drop Thursday in sympathy with Las Vegas Sands (NYSE:LVS), which dropped over 9% on a 9.6% year-over-year revenue decline.
The reason for the topline weakness is unsurprising: Macau. Gross revenues fell 5.1% (net revenues were down 4.9% due to a 10% decline in promotional allowances). Management rightfully patted itself on the back for a 150 bps improvement to EBITDA margin and a 1.8% year-over-year growth in operating income for its Macau operations, but I still don't want to ride a boat with a good captain in the middle of a hurricane.
Big Trouble in Little China
And that's what Macau is and remains to be: a nightmarish storm. I fear many investors in both LVS and WYNN have never been to Macau and haven't seen just how empty the casinos are relative to a few years ago.
Six months ago, I wrote about my visit to Macau, including pictures of the empty Wynn casinos. The Venetian was hardly doing much better. Things have not improved since then, which is partly by design.
China has famously been restructuring its operations in ways that hurt Macau. One of the country's tactics has been to shut down the money laundering pawn shops that are a crucial driver of Macau tourism (unlike Las Vegas, many people go to Macau not to gamble, drink, and eat at buffets, but to move large masses of capital first, and party later). The underpinnings of how Beijing is doing this are well summarized here.
Why is China doing this? For one, the country has finally gotten rich enough that it can crack down on middle-tier corruption that has been a big loss of face for the Asian giant for decades (top tier corruption won't be going away anytime soon, of course). For another, the country is looking to stem the tide of currency outflows even as it continues to devalue its currency. Ensuring large sums of money don't run out the door through Macau is one of many battles in this bigger war.
The Popular Silver Lining
Unfortunately for WYNN and LVS, they are collateral damage in this game. But the market hasn't yet realized that Wynn is the bigger victim.
This is in part because WYNN is more heavily exposed to Macau than LVS, but Steve Wynn has also focused on the upper tier market of China. I don't know why, but it was a bad decision. This income stream depends on Chinese corrupt officials coming to Macau to launder their ill-gotten gains and have a bit of fun on the side. Such a business model is hardly sustainable.
Yet the only part of Macau that is showing strength is the "mass market" side of the region, as LVS said in its earnings release:
"The operating environment in Macao remained challenging during the quarter; but we do see signs of stabilization, particularly in the mass market," management said.
Mass market revenue per day grew 5% year-over-year, an improvement over 2014 and 2015. But that was offset by a 10% year-over-year decline on everything else. Adelson's response to this is distressingly simplistic:
"The mass market has increased. It's performed better, and I think we can look forward to more of that. And as far as the non-gaming is concerned, people have to eat, they have to sleep, they want to be entertained, there are the non-gaming elements that I think will pick up again and do better in the future."
Chinese tourists come to Macau for three reasons: to launder money, to shop, and to gamble. Their priorities are in that order. Weakness in the first two cannot be offset by the last one, because gambling is just not as important to Macau as it is to Las Vegas. Adelson surely knows this, but isn't addressing it.
Wynn is even more exposed to the laundering/shopping side of the market, as the VIP side gambles significantly less. If that's where the tiny sliver of hope in Macau lies, Wynn has less of it than Sands. Yet WYNN's P/E ratio is double that of LVS. That cannot last.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in WYNN over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.