2016 was something of a transition year for Wynn Resorts Limited (NASDAQ: WYNN). Its largest market, Macau, went from a steep two-year decline in gaming revenue to posting five straight months of year over year growth to end the year. Depending on how you look at it, that could be a good or bad thing. Wynn also opened its most expensive resort ever, the $4.4 billion Wynn Palace in the Cotai region of Macau, which should eventually bring hundreds of millions of cash into the business each year.
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But overhanging the new resort is the fact that Macau's gaming market is going through a huge expansion, so the new property may not be as profitable as once expected.
Amid all of these changes, there was one area that stuck out as a disappointment for Wynn in 2016 -- and, as you might guess, the challenge lies in Macau.
Image source: Wynn Resorts.
Wynn Macau's bad year
Revenue at Wynn Macau declined 7.4% in the first three quarters of 2016 to $1.77 billion, and adjusted EBITDA fell 2.9% to $532.6 million. And these declines were despite a very lucky second quarter at the tables. VIP volume was down 19.2% in the quarter, which is a better judge of how well the casino did during the year.
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There were a couple of challenges facing Wynn Macau which the company couldn't really control. The first was the decline in Macau's gaming market overall. In the first three quarters of the year, gaming revenue fell 7.5%, which is bad, but when you compare that to the volume numbers above, Wynn lost market share for the year. And for the full year, Macau's gaming was down 3.3%. There have been signs of growth in the last few months, but with new resorts opening there's still concern that revenue and earnings will be under pressure.
The second big challenge was the table game limit for the new Wynn Palace resort. The government only allowed 100 new tables for the new resort, so Wynn moved 250 tables from Wynn Macau to Wynn Palace. The company got another 25 tables on January 1, 2017 and will get another 25 next January 1, but there's clearly a limit to the table game supply, and that will hurt Wynn Resorts long-term.
Wynn Palace has a disappointing open
It's always difficult to gauge how well a new resort will perform early in its life. Las Vegas Sands' first resort in Macau made enough in EBITDA to pay for its construction, which is incredible, but most of the time the first year is disappointing as operations ramp up.
In the first 40 days of operation, Wynn Palace generated $164.6 million in revenue and $25.5 million in EBITDA. Extend that to a year and you get $1.5 billion in revenue and $233 million in EBITDA. For a resort that should generate well over $500 million in EBITDA when it's fully operational, the results may seem disappointing, and in a way they were.
What you need to remember is that there are always growing pains with a resort's opening, and Wynn Palace faced some unique challenges. Notably, the property was almost completely surrounded by construction, making entry more difficult than usual, and the light rail station in front of the property was under heavy construction. When completed, the light rail line should be a big help for Wynn Palace, bringing customers from ferry terminals and the airport directly to the casino's front door. And it's the first stop, so Wynn has an advantage over competitors with its location.
But for the first month of operations, Wynn Palace was a disappointment just like Wynn Macau was in 2016. Management, and investors, are hoping that Macau's growth and Wynn Palace's operations going forward will bring a brighter future to Macau's operations in 2017.
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