Macau Casinos Make Wynn’s Investors Most Bullish EverInyoung Hwang and Namitha Jagadeesh
A surge in gambling revenue from the world’s biggest casino hub has driven bullish wagers on Wynn Resorts Ltd. to their most expensive prices ever.
Options that appreciate when the stock rises cost the most since data going back to 2005 relative to bearish contracts, even after the shares slumped 14 percent from an all-time high last month. Wynn shares rallied 73 percent in 2013, fueled by a jump in Macau revenue.
Investors are betting that gamblers in the former Portuguese enclave will ride out the slowest Chinese economic growth in 24 years. Analysts estimate Wynn will post an 8 percent sales jump in the first quarter for the biggest increase in three years for that period, data compiled by Bloomberg show.
“The stock’s been volatile because the perception of China’s economy is volatile,” Mitch Rubin, chief investment officer at RiverPark Capital Management LLC in New York, said by telephone. His firm manages about $3 billion. “But when you think about the velocity of gaming in Macau, it’s been straight up with a few hiccups.”
Total casino revenue in Macau, the only site in China where gambling halls are legal, rose 13 percent in March from a year earlier to 35.45 billion patacas ($4.44 billion), according to data released April 1 by the city’s Gaming Inspection and Coordination Bureau. A jump in the number of visitors from mainland China during the country’s new-year celebrations boosted February revenue by 40 percent to a record, data showed.
Wynn grew its Macau sales to 72 percent of total revenue last year, up from less than 21 percent in 2006, according to data compiled by Bloomberg. Nevada’s contribution to total sales declined to 28 percent from 80 percent in the same period.
For rival Las Vegas Sands Corp., Macau made up 64 percent of sales last year, while Singapore’s Marina Bay Sands accounted for 21 percent and the U.S. for 14 percent, data compiled by Bloomberg show. The majority of revenue for MGM Resorts International came from its U.S. assets, the data show.
“This is a 20-year theme that we’re six or seven years into,” RiverPark’s Rubin said, referring to gaming in Macau. His firm owns shares of Wynn and Las Vegas Sands.
Wynn options with an exercise price 10 percent below the shares cost 1.32 points more than calls betting on a 10 percent gain, according to three-month implied volatility data compiled by Bloomberg. The price relationship known as skew fell to 0.96 point on April 3, the lowest ever, the data show. That’s 80 percent below the historical average.
Michael Weaver, a spokesman for Wynn in Las Vegas, declined to comment on the options trading.
Wynn has more at stake when it comes to Chinese growth because of its reliance on VIP clients and the upcoming opening of the $4 billion Wynn Palace on the Cotai Strip, according to Chad Beynon, an analyst at Macquarie Group Ltd. He has a neutral recommendation on the company and a one-year price estimate of $226 a share.
Economists forecast growth in China will be 7.4 percent this year, the slowest rate since 1990, according to a survey of estimates compiled by Bloomberg. A manufacturing gauge for the nation declined in March for the fifth straight month, while reports showed retail-sales growth and industrial output cooled in the first two months of the year more than projected.
“It really comes down to the VIP market in China,” New York-based Beynon said by phone. “If you believe this is a short-term blip in the China macro picture, then it’s a buying opportunity. If you think this is a trend that’s only beginning to gain steam, then it’s probably worth staying away until we figure out what’s going on in China.”
Wynn is building its second Macau casino on the Cotai Strip, the Asian equivalent of the Las Vegas Strip. The resort is scheduled to open in January 2016. Analysts estimate profit that year will surge 27 percent to a record $11.73 a share. That’s also 42 percent above projected earnings for 2014. The company will complete a second phase of the project two years later that could bring total spending there to $9 billion, Steve Wynn, founder of the company, has said.
The ratio of outstanding puts giving the right to sell Wynn shares versus calls to buy fell to 1.43-to-1 on April 7 after reaching a high of 3.83-to-1 on Jan. 17, data compiled by Bloomberg show. Contracts betting on a 17 percent gain to $250 by September had the largest ownership, according to the data.
The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options prices known as the VIX, fell 2.7 percent to 14.49 at 12:06 p.m. in New York today. Its European counterpart, the VStoxx Index, slid 3.8 percent to 16.93 at the close in London.
Investors are also looking to the potential legalization of casinos in Japan as the next driver of growth, Rachael Rothman, an analyst at Susquehanna Financial Group LLLP, wrote in a note last month. Tokyo’s selection to host the 2020 Olympic Games has boosted expectations that gambling resorts, under discussion for a decade, will be made legal. Wynn has said it is willing to invest more than $4 billion in what CLSA Ltd. estimated could become Asia’s second-largest gaming market.
While credit conditions are deteriorating in China, signaling the VIP-customer business may struggle, Wynn has progressed in focusing on the mass market and its developments on the Cotai Strip, according to Cameron McKnight of Wells Fargo & Co. He has an outperform rating on Wynn, similar to a buy.
“Wynn is increasing its focus on the premium mass segment which could help improve results later in the year,” New York-based McKnight wrote in an April 4 note. “We continue to like Wynn’s strong earnings and dividend growth pipeline.”