Wynn Resorts Could Outperform as Macau VIP Trends Near Bottom

Posted on: January 3, 2022, 08:50h. 

Last updated on: January 3, 2022, 09:19h.

Like all Macau gaming equities, Wynn Resorts (NASDAQ:WYNN) is coming off a rough 2021. The operator of two integrated resorts in the world’s largest casino hub shed nearly a quarter of its value last year. But there’s hope for better things in 2022 if weakness in the VIP market abates.

Wynn Macau
Wynn Palace in Macau, shown here. An analyst believes the stock can rebound this year. (Image: CNBC)

That’s the sentiment of Stifel analyst Steven Wieczynski, who rates Wynn a “buy.” While Macau’s gross gaming revenue (GGR) climbed in December and the 2021 figure rose 44 percent, Wieczynski cautions the December number alone isn’t meaningful, and the Macau market remains turbulent.

We believe investors fully understand the market remains in disarray, given the uptick in virus cases on the Mainland, as well as the increased temporary travel restrictions that remain mostly in place” said the analyst. “To be as cautious as possible, our current estimates incorporate a longer recovery around virus issues, as well as continued uncertainty around the VIP segment.”

Macau, where Wynn operates Wynn Macau and Wynn Palace, accounts for two-thirds of earnings before interest, taxes, depreciation and amortization (EBITDA) for the company in normal operating climates. However, coronavirus-related travel restrictions, speculation of a heightened regulatory environment, and more recently, the likely end of the VIP junket industry are crimping concessionaires in the world’s largest casino center.

Wynn Waiting for Normalcy in VIP Trends

Wynn and Melco Resorts & Entertainment (NASDAQ:MLCO) are among the Macau operators most tethered to trends in the VIP segment. In the wake of the recent arrest of Suncity’s Alvin Chau, some market observers are penning obituaries on the Macau junket industry.

“We continue to believe the biggest unknown revolves around the VIP business, and if/when that will recover, especially if the government continues to interfere. The VIP market remains a total black box,” adds Wieczynski.

Combine that with the perception of tighter regulatory fears, and it’s not surprising analysts are bearish on Wynn and other Macau names. Some relief recently arrived on the regulatory front, as it now appears likely authorities in the special administrative region (SAR) could initiate the license renewal process ahead of the June deadline. It’s now more clear the six current concessionaires, including Wynn, will retain their permits.

Regarding the fortunes of Macau operators targeting high rollers, some analysts argue the eradication of the junket model is priced into shares of concessionaires. That’s a slight positive. But in 2022, it will be incumbent upon Wynn to pivot toward premium mass players to buffer against VIP weakness.

Wynn Stock Requires Patience

Following the aforementioned rough 2021, shares of Wynn aren’t alarmingly expensive. But the stock isn’t cheap relative to long-term valuations, either. To that end, the name is likely to require patience on behalf of long-term investors.

“From a longer-term perspective, we continue to expect WYNN’s commitment to investing in its people and physical plant to directly accrue to shareholders’ benefit,” concludes Wieczynski. “Additionally, as operating trends normalize, we continue to see a path to more prolific direct returns of capital materializing (even with government oversight), further strengthening the shares’ ownership case.”

There’s also chatter that amid executive change at Wynn, the operator could be a player in 2022 casino industry mergers and acquisitions — either as a buyer or seller. If that scenario comes to pass, it could be a significant catalyst for the stock.