Why Wynn Macau Trumps Its Parent

01/11/2011 3:51 pm EST


Yiannis Mostrous

Editor, The Capitalist Times

The casino operator’s Hong Kong stock is a better bet than the US-listed Wynn Resorts, writes Yiannis G. Mostrous in The Silk Road Investor.

Wynn Macau’s (Hong Kong: 1128) eponymous resort and boutique Encore hotel have become the ultimate luxury gaming destinations in Macau, if not all of Asia. For investors, the appeal is the company’s high-quality management and relatively conservative approach, not to mention the Greater China region’s growing affinity for gaming.

We prefer Wynn Macau to parent company Wynn Resorts (Nasdaq: WYNN) because it represents a pure play on secular growth in Asian gaming. Wynn Macau’s revenue is more than double that of its parent’s Las Vegas operations.

Macau, a small 10.9-square-mile Special Administrative Region (SAR) of China, is a premier gaming destination, replete with posh hotels, boutiques, and restaurants.
Macau has always been the closest place for mainland Chinese to gamble. Today Macau is the largest and fastest-growing gaming market in the world. In 2006 the SAR recorded gross gaming revenue of $7 billion, surpassing the Las Vegas strip in absolute terms for the first time.

The growth didn’t stop there. Macau’s 2010 revenue totaled $17 billion through the third quarter, and industry observers expect gaming revenue to reach $25 billion in 2011. Seventy percent of Macau’s gaming revenue comes from so-called high rollers.

Wynn Macau pays roughly 3% of its gross revenue to its parent as a royalty fee. The firm boasts a return on equity that exceeds 50%, reflecting its status as one of the best-run operations in the market. Even after Wynn Macau pays the aforementioned royalty fee (roughly 15% of earnings before interest, taxes, depreciation, and amortization) to its parent, the company’s returns and margins are still among the region’s best.

Recently Wynn Macau announced its first special dividend. Management has indicated that it may institute an annual dividend that would amount to a yield of 1% to 3%.

Such a move underscores the company’s financial strength—its net debt is less than $13 million—and would further distinguish the outfit from its peers. This announcement is particularly impressive because the firm is building a new property in the Macau, Wynn Kotai, which should be completed in 2014-15. Wynn Macau is a buy up to HKD20. [Shares closed at HKD20.75 in Hong Kong Tuesday—Editor.]

[Mostrous is also a fan of Las Vegas Sands (NYSE: LVS), the operator of a landmark new casino complex in Singapore that was recently recommended by Nicholas Vardy—Editor.]

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