1. Important disclosures appear on the last page of this report.
The Henry Fund
Henry B. Tippie School of Management
Liana Tamakloe [liana-tamakloe@uiowa.edu]
Wynn Resorts Ltd (WYNN) October 20, 2015
Consumer Discretionary – Hotel and Gaming Stock Rating No Action
Investment Thesis Target Price $65 – $69
Wynn Resort designs, develops and operates luxury casino resorts in the US
and Macau, China. Wynn performed well throughout the recession but recent
events in Macau has led to significant reductions in quarterly revenues and
there still is widespread uncertainty in the region. With a target price that
yields just about 3% upside potential, we recommend that ‘No Action’ be
taken.
Drivers of Thesis
Wynn resorts is set to open Wynn Palace in Cotai in the region of Macau.
This 1700-room resort will provide an additional avenue to generate
revenues for the company, resulting in forecasts of 5% increase in revenues
for an industry expected to grow by merely 1.25%.
Wynn has a pragmatic approach to setting up in advantageous locations
where there is potential for increased demand such as in Macau and the
upcoming developments in Cotai and Everett, MA. This also reduces risk as
the company spreads its operations across different geographic and
economic regions.
Risks to Thesis
There is a lot of uncertainty over actions that the Macau government will
take in the immediate future that may impact operations of casinos.
Currently revenues have reduced significantly since the government
started its anti-corruption and anti-money laundering campaign.
Wynn has an equity deficit on its balance sheet which has been there since
2012. Considering that the company has not been able to eliminate this,
the decline in its Macau revenues will create more challenges in the future.
The law suits brought against the company and its board by ex-board
members is creating negative publicity and taking attention away from the
important aspects of running the business.
Henry Fund DCF $49.98
Henry Fund DDM $32.33
Relative Multiple $92.80
Price Data
Current Price $66.92
52wk Range $50.96 – 192.45
Consensus 1yr Target $88.39
Key Statistics
Market Cap (B) $7.40
Shares Outstanding (M) 101.5
Institutional Ownership 87.4%
Beta 1.63
Dividend Yield 2.7%
Est. 5yr Growth 7.4%
Price/Earnings (TTM) 37.99
Price/Earnings (FY1) 18.84
Price/Sales (TTM) 1.76
Price/Book (mrq) -
Profitability
Operating Margin 23.43%
Profit Margin 13.46%
Return on Assets (TTM) 8.39%
Return on Equity (TTM) -
Earnings Estimates
Year 2012 2013 2014 2015E 2016E 2017E
EPS $4.87 $7.25 $7.25 $2.85 $2.86 $3.03
growth -1.4% 48.9% 0.0% -60.7% 0.4% 5.9%
12 Month Performance Company Description
Wynn Resorts Limited is a Nevada incorporated
developer and operator of destination casino
resorts in two main locations; Las Vegas, Nevada
and Macau in China, and thus reports its activities
in these two segments. The company’s integrated
resort offerings provide accommodation, casino
games, fine dining, premium retail, entertainment
and convention facilities and services. Mr.
Stephen Wynn, Board Chair and CEO, has a
reputation in the design, development and
operation of casino resorts, therefore his
involvement brings established brand status.
38.0
13.5 12.8
26.1
5.4
13.7
20.9
7.1
11.2
0
10
20
30
40
P/E Net Margin EV/EBITDA
WYNN Industry Sector
-80%
-60%
-40%
-20%
0%
20%
O N D J F M A M J J A S
WYNN S&P 500
Source: Factset
Source: Yahoo Finance
2. Page 2
EXECUTIVE SUMMARY
Wynn Macau is a luxury casino resort developer, operator
headquartered in Las Vegas, Nevada with integrated
resort facilities in Las Vegas and Macau in China. The
company reports on its operations in these two locations
but derives revenues from 4 streams; casino, rooms, food
& beverage and entertainment & retail. The company has
performed appreciably well in its Las Vegas locations
growing revenues steadily over the period. In Macau,
revenue growth has been very impressive, but declined by
over 37% in its last earnings report for the 3rd
quarter of
2015, giving cause to wonder what the future prospects of
the company is.
In the Industry, there is a wide shift towards setting up in
locations outside of the Las Vegas area which has
historically been the main center for casino developments.
New development areas include Macau which is the
second most popular location for casinos after Las Vegas.
A number of reasons however have seen revenues decline
in this region. It is forecasted that reductions in revenues
for the entire Macau industry for 2015 may reach 30%.
Other popular destinations include Malaysia, Singapore,
Thailand and the Philippines. Global expansion by US
corporations has been necessitated by reducing revenues
and increasing competition in the US. Besides global
expansion, other avenues by which operators seek to
generate revenues is to diversify into other non-casino
revenue streams such as retail, spa services, golf courses,
etc. There also is growing interest in online gaming and for
which reason regulators have started working to institute
laws to manage the emerging industry.
Wynn has a good portion of its revenues coming from its
casino services. Among its locations, the Macau region
generated more than 5 times the revenue from the Las
Vegas operations. With the recent declines in revenue, this
may have a far reaching impact on Wynn. Also, Wynn has
had an equity deficit on its balance sheet for the past 3
years and this is thus not attractive to potential investors.
Finally, a couple of high profile legal cases have thrown the
company in negative public light. With a target price point
between $65 - $69, yielding a potential downside or upside
of -2.87% and 3.11% respectively, we recommend that no
action be taken on Wynn as it has too much uncertainty
surrounding its operations, especially in Macau.
COMPANY DESCRIPTION
Wynn Resorts was formed in 2002 in Nevada and currently
operates through its subsidiaries, Wynn Las Vegas and
Wynn Macau, owning 100% and 72% of each business
respectively. The company reports periodically through
these segments but derives revenue from 4 different
streams; casinos, rooms, food and beverage and
entertainment, retail & others. Below is a breakdown of
revenue contribution from each of these.
Wynn Macau opened in September 2006 whereas Wynn
Las Vegas opened to the public in April 2005. The first year
of full revenues comparable between each location
therefore is 2007, when Macau generated about 7.5%
more in total revenues than Las Vegas. Over the years, this
trend has continued with the Macau operations far
outstripping the Las Vegas operation. In 2014, Wynn
Macau generated approximately 132% more in revenues
than Las Vegas. The graph below pictorially represents the
growth in revenues of both segments from 2007 to 2014.
0
1,000
2,000
3,000
4,000
5,000
2007 2008 2009 2010 2011 2012 2013 2014
Revenues-$m
Revenue Trend by Business
Segments
Macau Operations Las Vegas Operations
73%
9%
10%
7%
Revenue Streams - FY 2014
Casino
Rooms
Food & beverage
Entertainment, retail &
other
Source: WYNN 2014 10K
Source: WYNN 2014 10K
3. Page 3
Interesting to note in the graph above is that revenues did
not significantly reduce during the recent Great Recession.
In fact, in Las Vegas, there was an increase in revenue,
whereas there was only a marginal decrease in revenues
for the Macau operations.
Wynn Las Vegas
Wynn Las Vegas started operations in 2005 providing
clients luxury integrated hotel and casino resort services to
clients from within the US and other travelers to Las Vegas,
Nevada. In addition to these services, patrons enjoy fine-
dining, exciting entertainment, a pristine golf course, spa
treatment, salon and luxury shopping experiences.
The hotel complex is built on 215 acres of land at the
intersection of the Las Vegas Strip and Sands Avenue. The
operations is made up of two hotel towers, the Wynn Las
Vegas and the Encore at Wynn Las Vegas. Together, both
facilities offer 4748 spacious rooms, suites and villas. The
destination offers 186,000 sqft of casino space that
operates 24 hours with 34 different restaurants featuring
signature chefs. Among the retailers located on the
development are Alexander McQueen, Brioni, Cartier,
Chanel, Chloé, Chopard, Dior, Givenchy etc. The facility
also boasts of Ferrari and Maserati auto dealership within
the location.
Wynn Las Vegas serves customers from within the US and
abroad. Even though the company does not provide
information on what portion of its revenues is derived
from international customers, it does indicate that its
business will be significantly impacted in the event of a
negative trend in visits by these international clients.
Among the local clients within Nevada and other
surrounding states, many tend to be small stake machine
gamblers, underscoring the importance of the high-stake
players who often are foreigners.
A driving force of revenues for resort operators is
discretionary spending, and therefore forms the basis of
majority of our revenue projections. In our model we
forecast growth in discretionary spending in the US to
average approximately 0.63% over the 5 year forecast
period for the revenue segments Rooms and
Entertainment, Retail & Other. For the Food and Beverage
section, growth in revenue will be mostly driven by
inflation which project in the long-term to be about 1.5%.
For Casino revenues, we forecast a growth in gross wagers
(also known as ‘Drop’) to be 0.63% in line with our
expectation for discretionary spending growth. Win
percentage, the portion of gross wagers of table games
recognized as casino revenues, is expected to averages
between 21% and 24% for its Vegas operations. Over the
past 5 years, the win percentage recognized was 23.7% on
average. This was therefore used to determine casino
revenues for each forecast period as a product of the win
percentage and gross wagers/drop. For slot games,
revenue growth was forecast at 0.63%. Over the forecast
period, this translates into a CAGR of 0.625% per annum
for casino revenue growth.
Wynn Macau
Macau is a specially governed administrative region in
China, sitting on a peninsula about 37 miles southwest of
Hong Kong. The region is most popular for its destination
casinos which have been in operation since the 1850s
when only Chinese games were played. Recently, laws
were revised to allow other casino operators into the
market as a revenue generation strategy for the region.
Wynn Macau started operation in September 2006 and in
2010, expanded to include the Encore at Wynn Macau.
Together, this facility boasts of two luxury hotel towers
providing 1008 guest rooms and suites, 284,000 sqft of 24-
hr gaming service, 8 fine dining locations and host of other
amenities pretty much like the Las Vegas operations.
Notably absent are the 18-hole golf course and the luxury
vehicle dealerships. Another differentiation between the
Vegas operations and that in Macau is segmentation of the
casino revenues into VIP and main floor revenues. The VIP
revenues are from individuals who bid high-stakes at table
games and sometimes have reserved VIP rooms where
they operate from.
For the Macau operations, the majority of patrons come
from mainland China and Hong Kong. Also, other visitors
from the eastern parts of the globe including Taiwan,
South Korea, Malaysia, and the Middle East. Wynn’s
facilities in this location however competes intensely with
other casinos located across the region in Malaysia,
Thailand and Australia. With the heavy influence the
Chinese government has over activities under its territory,
business at Wynn Macau is susceptible to government
actions that would seek to control movement of people
across mainland China to Macau, who account for about
90% of visitors to the area.
4. Page 4
In our model, the main differentiating factor is our
expectation for discretionary spending outside the US. We
forecast all aspects of the revenue segments to grow at the
same rate of inflation as in the case of the Las Vegas
operations but with the exception of casino revenues. In
the year 2015, our expectation for revenue growth is
expected to decline owing to slowing growth generally in
the Chinese economy, recent land concession issues faced
by casino operators in the Macau region, and the
government’s efforts to crackdown on corruption and
money laundering. This should set the industry’s revenue
levels to a new ‘normal’.
After the forecast 20% decline in 2015, we expect gross
wagers to increase by 3% and 5% respectively in the
following two years after that, after which we anticipate
wager growth to normalize at about 1.5% growth in the
remaining years of our forecast horizon. With continued
stimulus activity by central banks in global markets,
including China, we believe our forecast is achievable as
disposable incomes will be available to patrons of casinos.
At a wager growth rate of 1.5%, we forecast win
percentage to be 2.9% for the VIP section and 44.8% for
the main-floor section. CAGR revenue growth for the
Macau region therefore is 2.34% per annum which
happens to be higher than the Vegas operations because
revenue growth starts from a lower base in 2015 as a result
of huge revenue declines in that year.
Company Analysis
Wynn resorts provides premium services to its clients and
therefore has a customer base largely made up of high net-
worth individuals. These people spend much on their visits
to the resorts and for this reason, the business is highly
dependent on repeat purchases by these customers. In its
marketing activities, it mostly employs database
marketing techniques, and the other more traditional
forms such as mass media advertisements and offering
guest incentives. The company believes service delivery is
the most important factor to attract and maintain its
customers as it depends heavily on repeat visits from these
guests. It therefore invests in staff training to equip them
with the skills to provide the premium level of service
quality clients enjoy.
In light of this, the company has earned several Forbes
five-star distinction awards for its service offerings. In
total, it has in excess of 50 of such awards for all of its
services in both the lodging and retail categories. Based on
the company’s comments and past history, they seek to
make improvements in their facilities and we believe this
will ensure they maintain their high-rank status well into
the future.
The company makes money by charging for the services
offered. For hotel, food and entertainment, revenues are
recognized when the service is provided, or a contractual
obligation to provide that service is made. Rental income
from operators of the retail shops located on the facilities
also contribute to income. Some customers make advance
deposits on rooms and tickets for entertainment shows.
These are noted as customer deposits until the service is
rendered and the revenue, recognized. Over the years,
rooms’ revenues have been growing steadily in the Las
Vegas locations, and more rapidly in the Macau locations.
Interesting to note however is that whereas occupancy
rates in the US has bounced around a bit, that in Macau
has maintained a steady upward climb. In the time of the
recession, occupancy decreased significantly in Las Vegas,
with an expected decrease in revenues, whereas in Macau,
occupancy rates remained relatively flat with steady
increases in revenue. Going forward, we expect revenues
to remain somewhat flat due to factors reduced
occupancy, fueled by the Chinese government’s moves to
crackdown on corruption and money laundering and
restrictions on visas to citizens of Mainland China who
wish to visit Macau.
The Macau gaming operations is divided into two groups,
the VIP section and the Mass Market section. The VIP
Source: WYNN Annual Reports
0
50
100
150
200
250
300
350
75.00%
80.00%
85.00%
90.00%
95.00%
100.00%
Avg.DailyRev.-$
OccupancyRates
Occupancy Rates Vs. Revenues
Macau Operations Las Vegas Operations
Macau Las Vegas
5. Page 5
section has dedicated rooms to meet the taste and
expected standards of this section of guests who are often
high-stake gamers. The VIP customers purchase non-
negotiable chips (rolling chips) from the casino cage, and
use those to make wagers in games. Upon winning wagers,
cash chips are issued to winners which are then exchanged
for cash. For the mass market, customers purchase cash
chips from the gaming tables and used to wager in games.
These different methods affect how volumes are tracked
in both casinos. An interesting thing to note about the
gaming operations is that credit is extended to some
customers whose level of play and financial resources are
satisfactory to the casino management’s approval for
credit. This presents risks to the business in the event
where debts are to be collected, especially for
international guests since not all countries enforce
collection of gaming debts unlike is done in all states in the
US.
The company’s Chairman and CEO Steven Wynn is a key
component in the company’s success and brings
unmatched reputation and brand name to the table,
lending the company a competitive advantage. Steven
Wynn built his reputation by managing his deceased
father’s bingo parlors at the age of 21 and growing from
there to become business magnate of $2.4bn3
net worth
running affairs at Wynn resorts. The company anticipates
that his association with the business provides
considerable brand recognition.
The operations of the Wynn Macau properties is through
a concession agreement with the government of Macau
which expires in June 2022, with the option to the
government to redeem it in June 2017. The company will
be given up to one year’s notice if this redemptive right is
to be exercised and will be eligible for compensation from
the government for the fair value of revenues lost for the
remaining years to the end of the concession expiry.
Currently, the company is in the process of working for an
extension of the concession.
RECENT DEVELOPMENTS
New Resort Developments
In 2012, Wynn signed a 25-year concession agreement
with the government of Macau, for 51-acres of land in
Cotai, an area in the Macau region. This land is being used
for the construction of the Wynn Palace which is
scheduled to be opened in March 2016. This new
development is for a casino resort of 1700 rooms,
performance lake, casino, spas and other retail, dining and
such areas as is characteristic of the Wynn resorts in
Macau and Las Vegas. This project is far advanced and on
track to open as scheduled. Recent developments in the
region however is creating some uncertainties for the
company.
The Macau government, and by extension the Chinese
government is on a mass crackdown on corrupt practices.
As part of measures taken in this light, limits are being
placed on the number of gaming tables new casino resorts
can have in their developments. This has made planning
for the casino operators particularly difficult, especially
planning for human resources and has been a source of
frustration for many companies. Steven Wynn in his recent
delivery during the company’s Q315 broadcast made
public his frustrations with this issue and has thus drawn a
lot of public attention to the matter as the Macau
government issued a release reconfirming their position of
maintaining the right to dictate certain aspects of the
casino business in Macau and the need for operators to
comply with their directives.
The Massachusetts Gaming Commission granted Wynn
the Greater Boston Gaming License pursuant to which a
33-acre land was purchased at Everett, MA for the
construction of an integrated hotel with casino, spa,
convention space, retail and other high-end offerings
famous of the Wynn brand. This parcel of land is along the
Mystic River and so the development is anticipated to
feature a waterfront boardwalk. Work on this project is
expected to be completed in 2018. Preliminary work on
the MA hotel is still underway and at the time of writing,
no construction contracts had been awarded yet. We did
not factor this development into our forecast as we are of
the opinion that operation of this unit will not accrue to
the company over our forecast period.
Pending Lawsuits & Other Legal Issues
Wynn Resorts is currently in court, dealing with
counterclaims brought against the Board of the company
over a decision to redeem shares of Wynn held by Azure
USA Inc. Azure is indirectly owned by Kazuo Okada, a
former member of the Board of Wynn and indirect
beneficiary of shares owned by Azure. Mr. Okada was
determined by the board to be an unsuitable person
6. Page 6
according to article VII of the company’s Articles of
Incorporation. This followed from a report brought to the
Board’s attention by Freeh, Sporkin & Sullivan, LLP
accusing Mr. Okada of violations of the Foreign Corrupt
Practices Act (FCPA) of the US. A Promissory Note of
$1.94bn (representing his 20% stake in Wynn) was issued
to Mr. Okada as the Board’s estimation of the fair value of
his holdings in Wynn. The notes mature in February 2022
and have an interest rate of 2% per annum payable
annually in arrears. This mode of consideration for the
redeemed shares was because the company estimated
that it did not have $1.94 in cash for payment of shares.
This issue has dragged on for long since 2012 and we
believe negative publicity surround such issues are the
causes of some declines in the company’s stock price over
the period.
Another legal matter being played out in the media is the
fight between the ex-wife of the Chairman, Elaine Wynn
and the company’s Board over her re-appointment to the
Board of Directors. Elaine Wynn sued her former husband
over divorce-settlement restrictions on her approximately
9% of stake in Wynn, and this suit has been ongoing since
2012. She seeks to rescind the restriction on her shares in
order to regain full control of those shares. Following the
long legal battle drawn against the Board’s Chair, the
nominating committee denied her nomination for re-
election to the Board and also indicated that she does not
contribute to discussions and the business of the
company. Ms. Wynn has set out to challenge this claiming
lack of diversity in the make-up of the Board, and touting
her prowess as a business savvy professional in the luxury
hotel industry following from her long associations with
Hotel development work carried out by her then husband,
Steven Wynn. We are unhappy to see these sorts of cases
play out in the public domain as we believe it creates
negative publicity for the company and further depresses
the trading price of the stock due to the uncertainties it
creates around the company and its management.
Q3 2015 Earnings Release
Wynn Resorts Q3 2015 earnings came in lower than
expected, leading to an 8.5% drop in market-value of the
firm on the day of announcement. Revenues came in at
$996m missing analyst estimates by $33.7m. The revenue
compared to the same period in 2014 was $1,370m and
this poor outcome was a result of a 37.9% decline in
revenues from the Macau operations, and a 3.9% fall in Las
Vegas. Reasons for this decline especially in the Macau
region is largely attributable to an over 50% decrease in
revenues from the VIP section of the casino business.
Reduced business for the VIP sector is being attributed to
a few factors; moves by the government to reign in
corruption and thus conducting excess scrutiny on game
players and their lifestyle, competition from other markets
in Malaysia and Thailand and new casinos opened within
the Cotai area in Macau, competing away these high-stake
clients and generally, a slowing down of growth in the
Chinese economy, reflecting on the expenditure of casino
guests.
We factor in this reduction in revenues in our forecast
model, where we project full year revenues for the Macau
casino operations to decline by 20%. Taken together with
other non-casino revenues and revenues from Las Vegas,
growth in earnings is forecast at a modest 3.56%, 2.16%
and 3.40%, for the next 3 reporting years starting in 2015,
and then stabilizes at 1.1% over the remaining 3 years.
EPS came in at $0.86 compared to $1.95 same time in
2014, and missing analyst estimates by $0.02. In addition
to reductions in revenues, higher labor costs in the Macau
region played its part in the events that caused Wynn to
show these lower than expected results. Agitations by
labor groups advocating for higher salaries and restrictions
on imported labor partly fueled this rise in labor costs.
Labor costs are estimated to make up about 60% – 70% of
controllable costs for casino operators in the Macau
region.
INDUSTRY TRENDS
A Shift Away from the Traditional Las Vegas
Locations
Las Vegas in Nevada has historically been the gaming
center of the world. Many resort operators have been
operating there for years but in recent times, there’s been
a shift to other locations, most notable of the new gaming
locations is Macau in China. Besides Wynn, casino
operators such as MGM Resorts International, Las Vegas
Sands and Melco Crown all have expanded to take a share
of the growing popularity of this market.
The move to have casinos in Macau was fueled by two
factors acting in sync. The government of Macau needed
to raise revenues to fund its government business and as
the location was already popular for playing Chinese
7. Page 7
games, the move to deregulate it further and allow foreign
partners into the area was highly beneficial. The second
reason that contributed to the growth of that industry
location was increasing number of wealthy individuals in
that part of the world, and the need to bring some of these
services closer to them. Also, as the local industry in the
US was not seeing much growth, a move to expand
internationally seemed like a good move.
Interesting to note here though is that not only are
operators going to Macau, but they are expanding their
reach to other states like Pennsylvania, Ohio, Maryland
and New York. This trend is positive for the industry as it
provides more avenues to generate revenue, and is good
for the local and state governments in these states due to
increased tax revenue from casino operations, not
forgetting the employment opportunities it will create in
the local communities.
Declining Revenues in Macau
As casino operators have been enjoying increased
revenues by expanding overseas into Macau, the location
has recently been hit by decreasing revenues in the last
couple of years. As discussed in previous sections of this
report, the decline in revenues in recent times is as a result
of measures to control corruption instituted by the
Chinese government, among which include debit card
tracking and imposition of travel restrictions on citizens of
mainland China and Hong Kong. These people require visas
to enter Macau so even though it is a Chinese
administered location, capping visa issues can seriously
hamper activities in casinos, which is evident based on
recent data. It is estimated that in 2015, revenues from
gaming in this region will reduce by a third.
Information on revenue collection from tax shows that
previously taxes raised from casino operations has
decreased from over 60% of revenue for the Macau
government at the beginning of the last decade when
gaming concessions were first issued to foreign operators
to just under 40%. Less reliance on taxes generated from
gaming will empower the government to take more ad hoc
decisions that could negatively impact the business
environment in the region. 40% is still a significant portion
of the government’s revenue stream and so we do not
expect to see any more drastic moves just yet. But when
dealing with an unpredictable government such as in
China, caution must be applied to reason. Also, the size of
the growing middle class we believe will continue to
generate demand for casino activity.
Other reasons for the decline in revenues are competition
from emerging gaming hubs in Malaysia, Thailand and
Philippines. Also, off-land casino operators who run their
operations on boats and ships around the Macau region
also present a threat. Finally, increasing staff costs goes a
long way to hurt bottom-line earnings and owing to the
recent protests for salary increases, this has contributed to
the unfavorable stories from Macau.
Expanding Non-gaming Offerings
Casino operators have started expanding their non-gaming
facilities to draw a wide range of visitors and people of
different ages. Amenities such as spas, and the luxury
shops will nicely draw female guests to their resorts
whereas more men will be drawn by the gaming facilities.
With the golf courses and luxury vehicle dealerships
located at resorts, even men who may not be keen on
gambling will be attracted. These are some innovative
means by which casino operators are ensuring that traffic
through their locations are high and make up for declining
revenues.
Strengthening of Online Gaming
With advances in technology, all traditional industries face
some form of threat to their operations and the gaming
industry is not spared in this trend. Reports show that
there is an increasing trend toward online gambling. This
will surely eat away the revenues of traditional brick-and-
mortar gaming locations unless they join the trend in
operating online gaming sites. The proliferation of mobile
Source: Market Realist.com
8. Page 8
technology has been a key driver in the popularity of
online gaming.
Governments around the world have been forced to enact
laws to regulate the growing online gambling industry
before activities get out of hand. Europe is the leading
region in regulating the sector, with Australia being
another popular destination for online gaming operators
due to the favorable regulatory environment there. In
many parts of Asia and Russia, online gaming is an illegal
activity and some operators of illegal sites in China and
South Korea have been arrested and prosecuted.
In the US only 3 states, Nevada, New Jersey and Delaware
have legalized online gambling with others such as
California, Illinois, New York and Pennsylvania considering
putting in regulations to manage this emerging sector.
MARKETS AND COMPETITION
For the gaming industry in the US, Nevada hosts about 50%
of the casino resort establishments and about 28.5% of
industry revenue earned there. New Jersey follows closely
having legalized gambling in 1976. Over time, other states
like Iowa, South Dakota, Maryland and Delaware have all
legalized gaming in their states to cash in on the tax
revenues generated by this industry. The map below
shows the distribution of gaming operations among the
states in US.
The casino management industry has significant labor
costs because as a service firm, it requires a lot of man
power to provide the hospitable services required to keep
guests satisfied to ensure repeated patronage. It is
estimated that labor forms about a quarter of the
industry’s revenues and this has grown slowly due to
automation of certain processes. Running a 24-hour shop
is another reason for the high labor costs. Our expectation
is that this trend/structure will not change significantly in
the next few years as guests will prefer to have people,
rather than machines attend to them in the hotels and at
the casinos. Excellent service deliver is what provides
some organizations a competitive urge over others.
Another huge chunk of operators’ budgets is purchases
such as food, souvenirs and alcohol. These items form
about 8% of total industry revenue and are the next
biggest component of costs after labor. The following
graph depicts the different components of industry costs
compared to the sector.
Casino operators compete on service delivery and
ambience of facilities. These are important to make guests
feel important to gain their loyalty and ensure repeat
purchases. The industry also competes with race track
Source: James Stocks & Co.
Legalized State
Considering
US Map of Online Game Legalization
US Map of Casino Locations
Source: IBIS World, Apr. 2015
9. Page 9
casinos (called racinos) and other kinds of non-
conventional casino operators such as river boats and
barges. Also, opening up of international markets has
added different dimensions to the competitive landscape.
Operators require gambling licenses before starting
business and states and foreign countries limit the number
of these licenses that are issued. And since casino resorts
are not legalized to operate in all states, it makes
competition a little fierce in areas where the business is
thriving. Online gaming, discussed above also presents a
new area of competition and with more states and
countries looking to enact laws to regulate this area,
traditional casinos will be negatively impacted in the
coming years.
There is an increasing trend towards leasing and managing
properties rather than owning them. This makes the start-
up costs for the business medium to low and so reduces
the barriers to entry in the industry. One interesting fact
of the industry in the US is that whereas US incorporated
casino companies operate in locations all around the
world, there are no foreign owned operators in the US
market.
Peer Comparisons
There are a number of hotel casino operators that can be
favorably compared to Wynn. Among the favorable
comparisons, Las Vegas Sands, Starwood Hotels and Hyatt
hotels are the better ranked competitors when looking at
net earnings.
Like Ceasars, Wynn has negative equity attributable to
Wynn Resort shareholders and therefore is not
comparable on the basis of return to shareholders.
On the lines of margins, the company compares favorably
to its competition but is however surpassed by Las Vegas
Sands with a net margin of 19.48%. Another favorable
candidate is Starwood Hotels with a net margin of 10.75%.
Among these three, that is Wynn, Starwood and Las Vegas
Sands, the latter is the most attractive investment
opportunity as it has a lower P/E of 16, compared to
Wynn’s 34.9, a profit margin of 19.48 and a low EV/EBITDA
of 10.57, compared to a margin of 13.46 and EV/EBITDA
of12.79 for Wynn. This is an indication of a stock that is
slightly undervalued in comparison to its peers as it has a
higher revenue generating capacity. Finally, the company
returns 16.63 of capital invested whereas Wynn returns
10.62.
ECONOMIC OUTLOOK
GDP & Disposable Income
Expenditure on casino gaming and resort stays is highly
discretionary and therefore is dependent on how much
disposable income consumers have. A portion of this
spending however, may be driven by a gamer’s addictive
habit to gambling and will therefore not vary considerably
as economic cycles change and discretionary income falls.
An individual’s disposable income correlates the economic
health of the country within which he/she operates. The
Company
MktCap
($m)
NetSales($) P/E(ttm) EPS($)
NetProfit
Margin(%)
LasVegasSandsCorp. 37,735 14,584 16.00 16.20 19.48
StarwoodHotels&ResortsWorldwideInc. 11,865 5,983 20.80 3.02 10.75
MGMResortsInternational 11,808 10,082 - (0.31) (1.49)
HyattHotelsCorp.(ClassA) 7,298 4,415 27.00 1.09 7.79
WynnResortsLimited 6,795 5,434 34.90 7.58 13.46
BoydGamingCorp. 2,042 2,701 - 0.01 (1.96)
CeasarsEntertainmentCorp. 1,158 8,516 0.20 (19.60) (30.43)
Company ROE(%) P/S P/B EV/EBITDA ROIC
LasVegasSandsCorp. 38.18 3.22 6.44 10.57 16.63
StarwoodHotels&ResortsWorldwide Inc.
26.33 2.52 9.18 13.70 14.32
MGMResortsInternational (3.60) 1.04 2.57 12.25 (0.86)
Hyatt HotelsCorp.(ClassA) 7.32 2.10 1.94 14.44 5.70
WynnResortsLimited - 2.79 - 12.79 10.62
BoydGamingCorp. (11.68) 0.52 3.19 8.38 (1.22)
CeasarsEntertainment Corp. - 0.26 - 15.69 (25.61)
US Disposable Income
Source: Trading economics
10. Page 10
US economy has made good progress in terms of GDP
growth all this year and we expect this trend to continue
in the near term. For the 2nd
Quarter of 2015, GDP growth
was 3.9% and our forecast is that this trend will decrease
to a growth pace of 2.98% over the next two years.
US GDP Growth Rate
Unemployment
As an indicator of economic conditions, unemployment
gives us an idea of what is happening in the economy.
When more people have jobs, the natural assumption is
that they would earn income and this confirms that the job
market is healthy. As more people earn income, their
share of disposable income catered to discretionary
spending will increase. As already indicated, disposable
income and discretionary spending drives demand in the
casino gaming and hotel industry. The US unemployment
rate currently stands at 5.1%. Recent developments in the
financial markets, and global uncertainties about growth
and stability leads us to forecast unemployment to rise
slightly to 5.32% in the long run.
US Unemployment Rate
Consumer Confidence
People’s spending habits is driven by their outlook on what
the future will look like. If consumers feel positively about
their future prospects, they are likely to spend more now
and not worry about saving for the future. However, a
negative outlook will cast doubts on future prospects and
lead consumers to limit their spending in the present time.
One expenditure item that is usually among leading
candidates for spending cuts in people’s budgets is
discretionary goods and services. People’s outlook of the
future will have an impact on Wynn’s business presently.
In the Henry Fund, we maintain that the positive trends in
consumer confidence will continue and remain at the
current 103 reading, increasing steadily as we progress.
Regulation & Arbitrary Govt. Action
The casino and gaming industry is highly regulated due to
the possibility of laundering money from fraudulent
sources. Several licensing requirements need to be fulfilled
by a potential operator to gain the license to begin
construction. Since it is difficult to forecast exactly what
new regulation may be passed by a governing body,
operators usually find themselves at the mercy of
regulators. Uniquely in the case of companies operating in
China, where government activity is less predictable,
Macau casino operators risk a lot by operating in that
environment, albeit it comes with its rewards of higher
revenues.
INVESTMENT POSITIVES
Wynn’s new development in Cotai will definitely
increase its revenue base. Even though revenues in
2015 are set to decrease significantly, going forward,
the uncertainty surrounding the Macau government’s
activities would die down and business in the vicinity
will return to normal.
Wynn as an organization is making good efforts to
diversify its operations to areas where there is growth
potential. Even though the company started with Vegas
as its home base, it has gone ahead to establish itself in
areas such as Macau and Massachusetts, carefully
avoiding locations like Atlantic City in New Jersey where
prospects for growth is almost non-existent.
Source: US Dept. of Commerce, 2015
Source: US Dept. of Labor, 2015
11. Page 11
INVESTMENT NEGATIVES
Having an equity deficit on its balance sheet is by no
means an attractive proposal for new investors. This
deficit has persisted since 2012 and the company has
still not been able to ratify it though generating enough
earnings, yet still dividends are distributed at the end of
each financial year. This calls for a cautious look into the
management practices of the company.
Steven Wynn spoke openly to the public about his
frustrations with the Macau government’s supervision
and restrictions in the area, emanating a response from
the government. These comments would render him
unpopular and may have negative repercussions for the
success of his business. Operating in China alone comes
with its own dose of uncertainty, and getting into a row
with regulatory officials will not be in the best interest
of the company’s future. Additionally, determining how
long the reductions in revenue from operating in the
area will persist would make one want to consider
moving his organization away from there.
The media publicity and legal wrangling surrounding
the removal of Mr. Okada from the Board and
redemption of his shares in the company will continue
to bring negative attention to the company and
interrupt effective management of the business.
Additionally the costs of legal battle over the matter
and the principal amount of the promissory note to be
paid upon expiration in 2022 will not auger well for buy-
and-hold investors.
VALUATION
Revenues
We forecast revenues along the company’s 4 main
revenue streams, but separating casino revenues into
revenues from Macau and that from Las Vegas.
For rooms revenue and entertainment revenue, we
forecast growth in both these segments to increase by
0.63% which is our conservative estimate for increases in
disposable income in the long run, which several other
analysts believe will be 2.5%. We recognize that not all
growth in disposable income will be spent on casino
operations and so causing us to estimate a much slower
growth of 0.63%. For the Retail section, we grew revenues
by 1.5% which is the long term CPI forecast for the US by
the Henry Fund. We believe this is representative of our
understanding of how the different revenue streams are
driven to contribute to total net revenues.
For casino revenues, we forecast growth in total wagers to
correspond with growth in disposable income for the US
operations at 0.63% and then applied an average win
percentage over the past 5 years being 23.7%. For the
Macau region, owing to news reports on drastic reductions
in revenues for the sector, we forecast total wagers to
decline by 20% in 2015, and then improve steadily over the
following couple of years and normalize at 1.25%, our
estimate of disposable income growth allocated to gaming
and other recreational activity. We then applied a win
percentage of 2.9%, being the 5-year average for the VIP
section and 44.8% being the same 5-year average for the
mass market.
Costs
Forecast of our cost items corresponds with the average
ratio of those cost variables driven by their corresponding
revenues.
WACC
In calculating WACC we used the risk-free rate of 2.94%
being the 30-year treasury rate for US government
securities and a market risk premium of 4.85% which is an
average of the 87-year Geometric average of stock returns
in excess of the 30-year Treasury bond yield. This yielded
a cost of equity of 10.86, applying a beta of 1.63. We are
confident this is representative of the company’s equity
cost considering the kind of industry it operates in and the
discretionary nature of its services which is subject to
market cycles.
Cost of debt was 3.83% after applying a tax rate of 35% and
an average yield spread on Wynn’s debt outstanding of
2.95%. Together, this generated a WACC of 7.2% for
WYNN.
Valuation
Our DCF model yielded a target price of $49.98 whereas
our DDM model resulted in a price of $32.33. The relative
valuation model generated a pricing of $92.80. From these
12. Page 12
three models, we base our target price on the DCF leading
to a price of $65 - $69.
We ignore the DDM valuation because Wynn recently
decided to reduce dividends paid out to shareholders. We
believe making this decision distorts the price arrived at as
it is an unusual corporate move and the DDM model is
based on the assumption of growth in dividends paid out.
Additionally, the sharp reduction in revenues for 2015
initiates dividends paid for that year at a lower than
normal level, significantly reducing the price reported for
the stock.
Even though the relative valuation came out at a price
closer to what the stock was trading at until its recent
earnings announcement, we believe the uncertainties of
events in Macau where a greater proportion of the
company’s revenues comes from is far from over and
therefore took a haircut to the stock price.
Our target price range leads us to conclude that there is
more potential decrease in the stock price by about 2.87%
or an increase of about 3.11%. This is not a significant
bargain for which we recommend no action for this stock.
KEYS TO MONITOR
Macau has become a very important region for the casino
resort and gaming industry. It will be interesting to see
how relations between the regulatory authorities in
Macau and the resort operators play out. Very obviously,
tightened supervision has negatively impacted the
business of operators and if the relationship between
Wynn and the Macau government especially continues to
deteriorate, it can have adverse effects on the business
going forward.
Generally, economic growth drives increases in income
which drives discretionary spending. On a global scale,
there are huge concerns over the direction and extent of
economic expansion to be achieved in emerging markets
especially. If these worries persist, it would cause us to
view the gaming industry negatively and could cause us to
change our forecast and recommendation.
REFERENCES
1. Wynn Resorts Websites and Annual Reports
2. IBIS World – Casino Hotels Industry Research, April
2015
3. Forbes 400 - http://www.forbes.com/profile/steve-
wynn/
4. Bloomberg Business -
http://www.cnbc.com/2015/10/16/steve-wynn-is-
talking-a-new-game-about-china.html
5. Bloomberg Business -
http://www.bloomberg.com/news/articles/2013-05-
02/wynn-resorts-okada-lawsuit-halted-for-criminal-
probe
6. The New York Times -
http://www.nytimes.com/2015/04/15/business/dealb
ook/fight-over-wynn-resorts-overshadows-question-
of-management.html?_r=0
7. Bloomberg Business -
http://www.bloomberg.com/news/articles/2015-03-
16/elaine-wynn-pitches-for-board-seat-vows-not-to-
toe-party-line-
8. Business Insider -
http://www.businessinsider.com/macau-responds-to-
wynn-stock-falls-2015-10
9. CNBC - http://www.cnbc.com/2015/10/16/steve-
wynn-is-talking-a-new-game-about-china.html
10. GGR Asia - http://www.ggrasia.com/macau-mass-
gaming-margins-not-so-robust-db/
11. Scotia Bank -
http://www.gbm.scotiabank.com/English/bns_econ/I
T_gaming.pdf
12. The Motley Fool -
http://www.fool.com/investing/general/2015/10/19/
why-steve-wynn-is-irate-at-macaus-
government.aspx?source=eogyholnk0000001&utm_s
ource=yahoo&utm_medium=feed&utm_campaign=a
rticle
13. Market Realist -
http://marketrealist.com/2014/12/macaus-visitors-
increasing/
IMPORTANT DISCLAIMER
Henry Fund reports are created by student enrolled in the
Applied Securities Management (Henry Fund) program at
the University of Iowa’s Tippie School of Management.
These reports are intended to provide potential employers
and other interested parties an example of the analytical
skills, investment knowledge, and communication abilities
of Henry Fund students. Henry Fund analysts are not
registered investment advisors, brokers or officially
licensed financial professionals. The investment opinion
contained in this report does not represent an offer or
13. Page 13
solicitation to buy or sell any of the aforementioned
securities. Unless otherwise noted, facts and figures
included in this report are from publicly available sources.
This report is not a complete compilation of data, and its
accuracy is not guaranteed. From time to time, the
University of Iowa, its faculty, staff, students, or the Henry
Fund may hold a financial interest in the companies
mentioned in this report.
14. Page 14
Wynn Resorts Limited
Key Assumptions of Valuation Model
Ticker Symbol WYNN
Current Share Price $66.92
Current Model Date 10/12/2015
Fiscal Year End Dec. 31
Pre-Tax Cost of Debt 5.89%
Beta 1.63221
Risk-Free Rate - 30 Yr. Treasury 2.94%
Equity Risk Premium 4.85%
CV Growth 1.10%
Current Dividend Yield 2.80%
Marginal Tax Rate 35.00%
Discretionary Income - Leisure spend_Non-US 1.25%
Discretionary Income - Leisure spend_US 0.63%
Long-run Inflation 1.50%
10-yr Treasury Yield 2.12%
Cost of Equity 10.86%
WACC 7.20%
Shares Outstanding 101,540
22. Wynn Resorts Limited
Weighted Average Cost of Capital (WACC) Estimation
Risk Free Rate 2.94%
Market Risk Premium 4.85%
Beta 1.63
Cost of Equity 10.86%
Risk Free Rate - 30 Yr US Treasury 2.94%
Average Yield Spread on WYNN US Debt Outstanding 2.95%
Pretax Cost of Debt 5.89%
Marginal Tax Rate 35.00%
After tax Cost of Debt 3.83%
Equity :
Stock Price $66.9
No. of Shares Outstanding 101,540
Market Value (Thousands) $6,795,057
Debt:
PV of Operating Leases 26917.9
Short Term Debt 0
Long term Debt 7345262
Total Value of Debt $7,372,179.9
Total Value $14,167,236.73
Equity Weight 48.0%
Debt Weight 52.0%
WACC 7.20%
Cost of Equity (CAPM)
Cost of Debt
Weights
23. Wynn Resorts Limited
Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs:
CV Growth 1.10%
CV ROIC 11.73%
WACC 7.20%
Cost of Equity 10.86%
Fiscal Years Ending Aug. 30 2015E 2016E 2017E 2018E 2019E 2020E
DCF Model
Free Cash Flow (615,359) 688,620 748,588 740,995 754,297 767,705
Continuing Value 12,035,477
Periods to Discount 1 2 3 4 5
Discounted Free Cash flow (574,033) 599,234 607,670 561,111 9,034,514
Sum of Discounted FCF 10,228,496
Add:
Excess Cash 2,073,491
Investment securities 240,140
Restricted cash & investment securities 11,150
Deferred financing costs, net 84,413
Investment in unconsolidated affiliates 4,243
Less:
Accrued interest 107,318
Long-term debt 7,345,262
ESOP 34,209
PV of Minority Interest 239,870
PV of Operating Leases 26,918
Equity Value 4,888,355
Shares Outstanding ('000) 101,540
Share Price @ Dec. 2014 48.14
Share Price Today 66.92
EP Model
Fiscal Years Ending 2015E 2016E 2017E 2018E 2019E 2020E
Invested Capital 5,307,224
Economic Profit 408,619 269,540 293,140 300,029 306,103 312,768
Continuing Value 5,130,571
Periods to Discount 1 2 3 4 5 6
Discounted EP 381,177 234,553 237,958 227,194 3,840,389.30
Sum of Discounted EP 4,921,272
Invested Capital 5,307,224
Add:
Excess Cash 2,073,491
Investment securities 240,140
Restricted cash & investment securities 11,150
Deferred financing costs, net 84,413
Investment in unconsolidated affiliates 4,243
Less:
Accrued interest 107,318
Long-term debt 7,345,262
ESOP 34,209
PV of Minority Interest 239,870
PV of Operating Leases 26,918
Equity Value 4,888,355
Shares Outstanding ('000) 101,540
Share Price @ Dec. 2014 48.14
Share Price Today $66.92
For Discounting:
Number of Periods
Today 10/13/2015
Next FYE 12/31/2015
Last FYE 12/31/2014
Days in FY 365
Days to FYE 286
Elapsed Fraction 0.784
R* 1.52%
Price Today ( 9 months time elapse) $48.71
Target Year-end Price (Dec. 2015) 49.98$
24. Wynn Resorts Limited
Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending Aug. 30 2015E 2016E 2017E 2018E 2019E 2020E
EPS 3.35$ 3.45$ 3.59$ 3.62$ 3.70$ 3.77$
Key Assumptions
CV growth 1.10%
CV ROE 24.10%
Cost of Equity 10.86%
Future Cash Flows
P/E Multiple (CV Year) 9.78
EPS (CV Year) 3.77$
Future Stock Price 36.92$
Dividends Per Share 2.00 2.25 2.50 2.75 3.00
Discounting Periods 1 2 3 4 5
Discounted Cash Flows 1.80 1.83 1.84 1.82 23.84
Intrinsic Value 31.13$
Target Year-end Price (Dec. 2015) 32.33$
![Important disclosures appear on the last page of this report.
The Henry Fund
Henry B. Tippie School of Management
Liana Tamakloe [liana-tamakloe@uiowa.edu]
Wynn Resorts Ltd (WYNN) October 20, 2015
Consumer Discretionary – Hotel and Gaming Stock Rating No Action
Investment Thesis Target Price $65 – $69
Wynn Resort designs, develops and operates luxury casino resorts in the US
and Macau, China. Wynn performed well throughout the recession but recent
events in Macau has led to significant reductions in quarterly revenues and
there still is widespread uncertainty in the region. With a target price that
yields just about 3% upside potential, we recommend that ‘No Action’ be
taken.
Drivers of Thesis
Wynn resorts is set to open Wynn Palace in Cotai in the region of Macau.
This 1700-room resort will provide an additional avenue to generate
revenues for the company, resulting in forecasts of 5% increase in revenues
for an industry expected to grow by merely 1.25%.
Wynn has a pragmatic approach to setting up in advantageous locations
where there is potential for increased demand such as in Macau and the
upcoming developments in Cotai and Everett, MA. This also reduces risk as
the company spreads its operations across different geographic and
economic regions.
Risks to Thesis
There is a lot of uncertainty over actions that the Macau government will
take in the immediate future that may impact operations of casinos.
Currently revenues have reduced significantly since the government
started its anti-corruption and anti-money laundering campaign.
Wynn has an equity deficit on its balance sheet which has been there since
2012. Considering that the company has not been able to eliminate this,
the decline in its Macau revenues will create more challenges in the future.
The law suits brought against the company and its board by ex-board
members is creating negative publicity and taking attention away from the
important aspects of running the business.
Henry Fund DCF $49.98
Henry Fund DDM $32.33
Relative Multiple $92.80
Price Data
Current Price $66.92
52wk Range $50.96 – 192.45
Consensus 1yr Target $88.39
Key Statistics
Market Cap (B) $7.40
Shares Outstanding (M) 101.5
Institutional Ownership 87.4%
Beta 1.63
Dividend Yield 2.7%
Est. 5yr Growth 7.4%
Price/Earnings (TTM) 37.99
Price/Earnings (FY1) 18.84
Price/Sales (TTM) 1.76
Price/Book (mrq) -
Profitability
Operating Margin 23.43%
Profit Margin 13.46%
Return on Assets (TTM) 8.39%
Return on Equity (TTM) -
Earnings Estimates
Year 2012 2013 2014 2015E 2016E 2017E
EPS $4.87 $7.25 $7.25 $2.85 $2.86 $3.03
growth -1.4% 48.9% 0.0% -60.7% 0.4% 5.9%
12 Month Performance Company Description
Wynn Resorts Limited is a Nevada incorporated
developer and operator of destination casino
resorts in two main locations; Las Vegas, Nevada
and Macau in China, and thus reports its activities
in these two segments. The company’s integrated
resort offerings provide accommodation, casino
games, fine dining, premium retail, entertainment
and convention facilities and services. Mr.
Stephen Wynn, Board Chair and CEO, has a
reputation in the design, development and
operation of casino resorts, therefore his
involvement brings established brand status.
38.0
13.5 12.8
26.1
5.4
13.7
20.9
7.1
11.2
0
10
20
30
40
P/E Net Margin EV/EBITDA
WYNN Industry Sector
-80%
-60%
-40%
-20%
0%
20%
O N D J F M A M J J A S
WYNN S&P 500
Source: Factset
Source: Yahoo Finance](https://image.slidesharecdn.com/e6f3bc34-0b1e-4e8a-9811-c49a84c40b28-160124230522/85/wynnltamakloe2015-1-320.jpg)
