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Higher direct play, lower "all in" commissions, and hold percentage drives margin and EBITDA upside in Macau.  Estimates need to go higher.

While Vegas was almost exactly in-line, WYNN put up a blockbuster quarter in Macau. A lot of it is sustainable. Net revenues were higher than we projected in Macau but the real story was margins. Part of the higher margins was related to better than expected hold percentage on both VIP and Mass. However, direct play was better and the rebate percentage was lower, both of which skewed our margins. We were using a 44% rate to model “all in commissions” which doesn’t take into account the direct play that gets rebated at a much lower rate – let’s say roughly 30%. If we adjust our model to reflect the direct play rebates, our 2010 Wynn Macau EBITDA estimate could go to a range of $650-700 million.

Here are the details:

  • Our net revenue estimate was $36MM below what Wynn Macau reported – the entire difference was due to the rebate rate being 0.8% vs. our estimate of 0.9%.
    • The rebate rate is meant to be an estimate of the commission rate that actually goes back to players in the form of a rebate versus the part of the commission that goes to junkets.  In 2009, the rebate rate was 88bps. However, it was skewed by a 1.13% rebate rate in 1Q09 that resulted from the huge 3.6% hold that property experienced.
    • Rebates averaged 30.3% of win in 2009 up from 28.5% in 2008 and 27.8% in 2007.
    • Assuming a normal hold rate of 2.85%, rebates should theoretically be 86 bps.
  • RC volumes were $20.2BN vs. our estimate of $20.6BN.  Therefore, our hold percentage estimate was 10 bps light of the Wynn actual hold rate.
    • We estimate RC volumes using our proprietary database and adjust for the historical difference between those numbers and what Wynn reports. Usually all or part of direct VIP play is excluded from the numbers we receive – so there is always some guesswork involved in calculating the correct RC and hold %.
    • The net effect was that we estimated $536MM of gross VIP win and it was closer to $545.
  • Our estimate of Mass win was spot on but the hold percentage was better, hence better flow-through to the bottom line.
  • Most of the upside came from a total commission rate of 40% vs our estimate of 44% - Higher mix of direct play certainly helped, but the bigger picture is that we need to consider going forward that given Wynn’s high percentage of direct play (guessing around 20-25%), that even if they are paying 44% or more on revenue share deals to junkets, the rate on direct play is considerably lower and therefore the blended rate should probably be closer to 40%.
  • The increase in retail, which is almost all cash business (i.e. not comped) also helped EBITDA by a few million.