CALL TO ACTION
Due in part to what we believe is sluggish mass growth thus far in Q3, we’re going to be more selective in our Macau stock picks. We’re still generally positive on Macau and the stocks but we’ve removed MLCO from the Hedgeye Best Ideas list. That leaves WYNN as the only Macau stock on Best Ideas. The Hedgeye Mass Tracker suggests only mid-single digit YoY growth in the mass segment in August. Certainly, the typhoon probably shaved off up to 5% of mass growth, but growth was already slowing in July. MLCO’s core business remains premium mass and all indicators suggest that premium mass slowed considerably in August. If we’re right on ~5% August mass growth, that implies VIP grew a whopping ~40% YoY. The VIP comps is more difficult for September but overall with think Q3 VIP growth could also approach 40% YoY. That’s great news for WYNN, the premier VIP operator – highest exposure and flow through. WYNN’s Q3 continues to look better and better.
Despite the lack of sequential growth and sluggish YoY mass growth in August, we continue to expect GGR to exceed expectations and September mass to bounce back. But for now, we’ll stick with our lead horse – WYNN.
MASS TRACKER | TYPHOON CONTRIBUTES TO AUGUST DECEL
The data is in and the model points to a sharp deceleration in YoY mass revenue growth in August to around 5%. We’ll await the Macau visitation numbers due out late next week, which could sway the results. Overall visitation tends to correlate more heavily with base mass. We’ve already seen mass win per visitor slow in Q2 (see below) and could continue to slow due to a tough Q3 comp, but the more visitation the better generally. We estimate the typhoon that struck late in the month may have shaved up to 5% off of the YoY growth rate. So August wasn’t awful but we’ve definitely seen a deceleration from Q2’s strong 14%. With July up in the high single digit range, Q3 will no doubt fall short of Q2 in terms of growth. That’s not a shocker – the Street is already forecasting deceleration in mass and overall GGR.
All of the observational data we track turned down in August versus July, particularly in the premium mass segment. Again, a lot of that is related to the typhoon but it does suggest that the upside may be limited for mass and premium mass centric companies such as MLCO. The upshot here is that VIP is performing even better than expected. From a profitability perspective that’s not a great trade for the Macau casinos in general. However, for VIP centric WYNN it should be a net positive. Moreover, we think the Street’s overall GGR forecasts for September, the rest of 2017 and all of 2018, are too low. We can talk deceleration all we want but if the Street is already forecasting it and the buy side expects it, the critical driver will be whether GGR and EBITDA exceeds expectations. We think both will, with WYNN leading the way over the near term.
MLCO | REMOVING FROM BEST IDEAS LIST
With the stock performing well and the possibility of potentially disappointing Q3 earnings (limited upside), we think it’s prudent to move to the sidelines on this name. Our observational data seems to suggest sluggish mass performance at both City of Dreams and Macau Studio City (MSC), certainly worse than Q2. The comps should prove more difficult at MSC as that property began to ramp in 2H of 2016. Partially offsetting the mass weakness, MSC continues to drive excellent VIP growth – unfortunately, not a favorable mix shift. We still like the long term Macau outlook and are likely to add a long rather than a short to the Hedgeye Best Ideas list over the next few months. MLCO will certainly be a candidate.
WYNN | UPSIDE REMAINS
When all is said and done, we expect VIP to significantly exceed expectations in Q3 and Q4. WYNN should be the primary beneficiary as the company maintains the highest exposure to this segment and also drives the highest flow through on VIP revenues (lower commissions/player rebates and higher unit volumes). Moreover, WYNN was the only company that seemed to show mass improvement thus far in Q3 vs Q2, per our observational data. As previously discussed, the July mass observational metrics looked solid for WYNN, bouncing back from a disappointing mass quarter at Wynn Palace – disappointing at least relative to the Q1 run rate. Overall, we expect mass revenues to meet or exceed Street forecasts and VIP to beat handily; translating into a solid Q3 EBITDA beat of 5%. Moreover, Street estimates for 2017 and 2018 remain too low, in our opinion, and earnings beats and positive earnings revisions should continue to drive the stock higher and outperform the group.
AUGUST MASS | OTHER COMPANY SPECIFIC OBSERVATIONS
Per the observational data, overall mass seems weaker than expected in August with the typhoon impact partially responsible. Other than the Wynn properties, each and every casino looks worse on virtually every observational metric in the QTD versus Q2. Total GGR is better than expected, however, so we’re not expecting material Q3 misses for LVS, Galaxy, and MGM. Additionally, better than August visitation metrics will certainly boost our base mass projections. That data should be available at the end of this week.
CONCLUSION | SLIGHTLY DISAPPOINTING MASS BUT REMAIN BULLISH ON WYNN
The Mass Tracker results were disappointing for July and now August. While the typhoon no doubt impacted the mass segment, and growth should improve in September, the mix is unfavorable from a profitability perspective. We had been forecasting Q3 upside for mass centric MLCO but that appears unlikely at this point. With a higher valuation and still no imminent buyout of the minority ownership of Studio City, it’s no longer an attractive buy at this point and no longer appropriate for the Hedgeye Best Ideas list. On the other hand, VIP focused WYNN should benefit from the market shift and post another strong quarter. Estimates remain too low and should go higher as we get closer to the Q3 earnings announcement.
