Macau-based casino operator Wynn Macau Ltd swung to a third-quarter loss, in part tied to the opening of its latest casino, Wynn Palace, located in Macau’s Cotai district. The results include 40 days of operations of Wynn Palace.
The company posted a US$8.6 million loss for the three months to September 30, compared to US$62.1 million profit in the prior-year period, the firm said in a filing to the Hong Kong Stock Exchange on Thursday.
On a U.S. GAAP (generally accepted accounting principles) basis, Wynn Macau Ltd’s net revenues were US$682.7 million in the third quarter of 2016, up by nearly 17 percent year-on-year, said Wynn Resorts Ltd, the parent company of Wynn Macau Ltd. Wynn Palace recorded net revenues of US$164.6 million for the period, while Wynn Macau property on the peninsula recorded revenues of US$518.1 million, a decline of US$67 million from a year earlier.
Adjusted property earnings before interest, taxation, depreciation and amortisation (EBITDA) from the Wynn Macau legacy property on the city’s peninsula were US$151 million for the three months to September 30, a 7.3-percent decrease from the prior-year period. Adjusted property EBITDA from Wynn Palace were US$25.5 million.
“Company-wide [Wynn Macau Ltd] net revenue of US$683 million [including non-gaming] compared to consensus of US$734 million, while luck-adjusted property EBITDA of US$172 million was below our estimate of US$192 million and consensus of US$195 million,” said Union Gaming Securities Asia Ltd analyst Grant Govertsen in a note on Thursday.
Casino revenues for Macau operations for the three-month period stood at US$635 million, with Wynn Palace contributing US$146.7 million. Casino revenues at Wynn Macau property fell by 10.9 percent year-on-year to US$488.3 million.
Commenting on the cannibalisation aspect, Ian Coughlan, president of Wynn Macau Ltd, said: “Pretty much what we perceived was going to happen has happened. There’s been a fairly significant impact on our direct VIP downtown because we have a lot of Wynn players that wanted to come and experience the new property.”
“The junkets have managed to backfill downtown [Wynn Macau] very effectively. On the mass, we’re less affected. Our customers downtown seem to be very ‘peninsular-downtown’ centric. While some of them have experienced our new property they’ve been very sticky downtown,” added Mr Coughlan.
“We believe that near-term pain of slower ramp at Cotai due to accessibility issues and peninsula [Wynn Macau] facing cannibalisation was visible in this quarter as anticipated and may continue in fourth quarter of 2016,” said analysts Praveen Choudhary, Alex Poon and Thomas Allen of investment bank Morgan Stanley.
“However, remedial actions taken by management and high operating leverage in the business should ensure strong EBITDA growth in 2017/18,” they added.
Slow ramp up
Ongoing construction work around the perimeter of Wynn Palace casino resort is negatively affecting the property’s ability to ramp up its business, said Wynn Resorts’ management during a conference call with investment analysts following the firm’s third quarter results announcement.
“What we have is an anomalous situation where all four sides of our property are currently being enclosed by either barricades or construction blockades. It has tended to isolate our property on all four sides and it’s made access to the Palace temporarily highly encumbered,” said company chairman and chief executive Steve Wynn.
Wynn Palace started operations in Macau’s Cotai district on August 22. It is next door to the under-construction MGM Cotai and Grand Lisboa Palace, properties developed respectively by MGM China Holdings Ltd and SJM Holdings Ltd.
The Wynn Palace site is also next to a section of the under-construction Macau light rail transit system. The Taipa portion of the system – including a loop serving Cotai – is likely to be operational only by 2019, according to the latest government estimates.
“We have worked in the last month or so in conjunction with the government in trying to mitigate these substantial barricades that enclose our property,” Mr Wynn said.
“The government has been understanding and sympathetic to our situation and has promised to ameliorate the situation in the next several months. But it is at the moment handicap for us, and one we’re forced to deal with,” he added.
On September 30, Wynn Macau Ltd announced that Gamal Abdelaziz had resigned as president and executive director of the company. The firm said Mr Aziz had left “in order to pursue other opportunities”.
Matt Maddox, president of Wynn Resorts, said the ramp up of Wynn Palace “is taking a little longer” than anticipated.
He added: “But when we look at what’s going in Macau, comparing September at Wynn Palace – which was our first full month [of operation] – and October, that we just completed, we’ve seen in our volume metrics that turnover, mass drop and slot handle … increased sequentially … by about 20 percent, which was in line with the market.”
Although the ramp up process of Wynn Palace “is taking longer, we are maintaining our market share [in Macau],” said Mr Maddox.
On Thursday, Wynn Resorts confirmed that the total Wynn Palace investment increased to US$4.4 billion, reflecting a US$300 million increase to the guaranteed maximum price payable to Leighton Contractors (Asia) Ltd.
The company additionally said that its operational expenditure in Macau is higher than expected. The Wynn Macau daily run rate is now about US$1.1 million, and Wynn Palace is in the neighbourhood of US$1.5 million – higher than the US$2.1 million the company had modelled.
“We are looking at rationalising some of those expenses but I wouldn’t expect a very large decline from that level. In particular, as sales ramp up and in the retail outlets and everywhere else you’ll start to see the variable costs ramp up. So I think that those numbers will likely be in line,” said Mr Maddox.
Mr Coughlan said on the conference call that the company is currently “very focused” on ramping up its premium mass business. He additionally said the company would be adding a new junket operator at Wynn Palace on November 5, as well as introducing some casual junkets.
“When we look at VIP turn for the two properties over at Wynn Macau and Wynn Palace, we’ve actually doubled our VIP turn versus the previous 60 days since we opened,” said Mr Coughlan.
On Thursday, the parent Wynn Resorts reported group-wide revenues of US$1.11 billion for the third quarter of 2016, up by 11.4 percent from a year earlier. The company however posted a net loss of US$17.4 million, or US$0.17 per diluted share, for the third quarter of 2016, compared to a net profit of US$96.2 million, or $0.95 per diluted share, for the same period of 2015.
Net revenues for its Las Vegas operations stood at US$427.1 million for the third quarter of 2016, a 3.9 percent increase from a year earlier.
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Analyst at Roth Capital Partners