CALL TO ACTION
The Q3 earnings call was decidedly negative, even to the point where Steve Wynn called out the Macau government for the first time, at least in our collective memories. The likelihood of continued, rapid deterioration in the junket business is increasing and Wynn did nothing to dispel that notion. We see the investor focus continuing to shift back to Mass and for that reason we continue to prefer LVS as the top pick in our long Macau trade call. Please see our presentation from last week:
Wynn’s Q3 was weaker than expected at the property level but in line with our corporate EBITDA estimate, due to lower corporate expenses. However, as outlined last week in our presentation, we were 7% below the Street. Wynn management provided no comfort regarding a turnaround in Macau fundamentals although Mass commentary was relatively positive. Indeed, Mass revenues at Wynn Macau exceeded our estimate and gives us comfort that investors will increasingly focus on that segment which finally faces easy comps in October. Look for near term LVS outperformance fundamentally and from a sentiment perspective.
Q3: LIKES AND DISLIKES
As can be seen by the table below, WYNN managed to eke out a slight beat, driven by the 2nd consecutive quarter of corporate expense reduction. However, at the property level, Wynn was a disappointment all around, even relative to our below the Street projections.
WHAT WE LIKED:
- Mass performance in Macau – Sure it was down 28% YoY but it was up sharply QoQ and both volumes and revenue exceeded our estimate. Mass may or not have stabilized, but with the first easy Mass comp in October for the market, stabilization will likely be the narrative for investors and that should be good for the stocks over the near term, particularly LVS.
- Corporate expense reductions – For the 2nd straight quarter, WYNN vastly improved (reduced) its corporate cost structure, pushing corporate expenses down 40% YoY. The company is tightening the belts where it can, because it can’t do much at the property level in Macau. WYNN has always been kind to the executive suite but we think investor pressure is having an impact.
- Core table drop in Las Vegas – I know, the high end is struggling on the Strip. But that is well known and Wynn Las Vegas actually beat our estimate despite a 50% YoY decline in their high end gaming volumes in Q3. Base Mass in Vegas actually looked good
WHAT WE DIDN’T LIKE:
- Steve Wynn’s tone toward the Macau government – Sure he’s spot on. The government’s obsession with table caps makes little sense. Worse, the “late in the game” table allocations makes it impossible to design the casino floor and do any sort of labor planning. However, we wonder whether these discussions are better had outside the public forum? Until now, Steve Wynn has been the model citizen, always speaking highly of the Macanese and Chinese governments.
- Non-gaming across the properties – Despite the sell side cheerleading, non-gaming didn’t look that great in Las Vegas nor Macau, at least not to us. Every non-gaming category at each property fell short of our estimate. We realize that non-gaming is outperforming gaming but that’s not much of a reference point. In fact, F&B in Las Vegas was the only segment posting a material YoY gain. Macau was a disaster.
- Property level margins – Property revenues were actually higher than we projected in both LV and Macau, driven by more casino activity than our dire prediction. However, margins missed at both, despite better Mass revenues.
- Promotional activity – Higher than expected at both properties and much higher as a % of revenues. It’s a competitive environment in both markets and that’s hurting margins.
- Management very negative on the junkets – Steve Wynn’s comments on the junkets are probably what’s spooking investors. Mr. Wynn intimated that more junkets may go out of business and that Wynn will be pulling some credit from the junkets. The junket business is still deteriorating and WYNN maintains a lot of exposure still.
- Slots in Las Vegas – The slot segment is very high margin and a good proxy for the overall health of the Strip. Slot handle was worse than expected and without that segment performing well, it’s difficult to corroborate the U shaped Las Vegas recovery thesis
Yet another weak quarter at the property level, but it’s Steve Wynn’s comments that may be the problem for the stock today. WYNN has had a nice recovery off the bottom but LVS looks like the better long play over the near term. Investor focus should shift to the Mass segment which is obviously performing much better. Importantly, Mass faces the first negative comp here in October and while we’ll hold off on proclaiming that the segment has stabilized, mass stabilization should be the investor narrative and that will be good for LVS’s stock. Buy LVS on weakenss.