History shows that new Macau properties cannibalize a company’s existing core property. The sell side doesn’t appear to be reflecting that in their WYNN price targets.
On its Q3 conference call, WYNN pushed back the opening of its Cotai development to 2015. That should’ve resulted in lower price targets given the time value of money. It didn’t. More importantly, we don’t think analysts are incorporating the likely cannibalization of Wynn Macau/Encore from Wynn Cotai. The argument against cannibalization is that Wynn Cotai will be more of a Mass property and its location on the Cotai Strip will attract a different customer than that of the existing Wynn Peninsula properties.
Really? Circumstances were very similar when LVS opened Venetian in 2007 and MPEL opened City of Dreams (CoD) last year. As the following chart shows, 70% of Venetian’s 15% market share came from Sands and Altira donated more than 60% of CoD’s 8% share.
On a year over year basis, revenues at Sands (post-Venetian for 12 months) declined 27% while revenues at Altira (post-CoD for 12 months) fell 20%, versus the same store revenues for the market gaining 24% and 34%, respectively, over those same time periods.
So how much cannibalization would this mean to WYNN? Assuming, the market grows to $30 billion in 2015 and consensus gross gaming revenues for Wynn Cotai of $3 billion are accurate, the property will capture a 10% share. If history holds, Wynn Macau/Encore will suffer a share loss of 600-700 bps. Given the maturity of the market that seems excessive. However, even if we assume 325bp share loss (half of of the midpoint), that translates into almost $1 billion in lost gross gaming revenues which we estimate would cost Wynn Macau/Encore about $250 million in EBITDA. Think that sounds extreme? Sands Macau EBITDA declined $216 million (from $457m) in the 12 months following the opening of Venetian which, incidentally, generated $504 million in EBITDA.
Consensus EBITDA estimates for Wynn Cotai are in a $550-650 million range. The analysts seem to be applying a 13-14x multiple on that cash flow and discounting it back at a 10-15% rate. This analysis produces $15-25 of incremental target price value after subtracting out the $2.5 billion investment cost and the minority interest. Indeed, all of the price target derivations we reviewed were in the $15-25 range.
However, we don’t think these analysts are factoring in the potential $300 million loss of EBITDA at Wynn Macau/Encore as a result of Wynn Cotai cannibalization. Using the same multiples and discount rates on the cannibalization yields offsetting negative value of $10-14 per share. Wynn Cotai looks a lot less valuable under this more realistic lens.