The valuation disparity between WYNN and HK1128 is pretty wide. It’s not justifiable in our opinion.
Steve is smartly considering moving corporate headquarters to Asia. While it may happen, either way, you can bet that if the US starts taxing non-repatriated income at the US corporate rate, Wynn will make the move faster than you can say tax dodge.
So Steve likes Asia. So do we. So why is there such a huge valuation disparity between Steve’s two stocks? On our estimates, WYNN trades at a 3x EV/EBITDA multiple premium to HK1128. Is this reasonable? We don’t think so but here are the pros and cons:
Why WYNN should have a 3x multiple premium
- Control – The parent company has it
- Liquidity – Bigger, more liquid US listed stocks usually command a premium
- Depressed EBITDA in Las Vegas – More growth off the bottom, although we are valuing both stocks on 2011 EBITDA
- Royalty stream valued at high multiple – WYNN receives a royalty stream from Wynn Macau that is more predictable than the EBITDA generated by HK1128 and should be valued a higher multiple (since it is based on the top line)
Why premium should be less
- Tax differential – Profits from gaming operations are not taxed in Macau vs. US profits taxed at close to 40% (state and federal combined). Obviously, the tax benefit of a pure play Macau operation is not factored into a straight EV/EBITDA comparison
- Higher Macau multiple – All things held constant, Macau deserves a big premium multiple to Las Vegas operations due to higher long-term growth. There is excess demand for the Macau product as evidenced by strict visa restrictions in place
- Macau estimates are potentially understated – given that is likely that direct play mix should increase nicely if Encore's tables stay unencumbered by junket operators
- Cotai option – Our 2011 estimates do not include any contribution from Wynn’s Cotai development. Unless one thinks Cotai won’t add shareholder value, more value accrues to the HK1128 Macau pure play.
We come out on the side of a smaller premium, if any at all. The Macau tax advantage is directly quantifiable and Macau offers much more growth longer term than mature Las Vegas. We are a little cautious in general on Macau over the near-term given the tougher 2H comparisons, high expectations, and potential for government tightening both in the area of visa restrictions and liquidity/credit on the mainland. However, we remain cautious on Las Vegas as well, but with a longer duration.