Stephen A Wynn is a developer who has built some of the most luxurious casino resorts in the world. Moreover, he has revolutionized the casino business, just as Apple’s Steve Jobs did with electronic products. Wynn’s first taste of success came in 1977 when he converted a gambling hall in downtown Las Vegas into the highly profitable Golden Nugget casino resort. Too, his controlling interest garnered a healthy profit. The philosopher Albert Camus declared, “an achievement is a bondage. It obliges one to a higher achievement.” Indeed, Steve Wynn was just getting started.
In subsequent projects, Mr. Wynn was entrusted with the development of resorts that would eventually redefine luxury. Nowhere was that more apparent than at the Mirage, a resort on the Las Vegas “strip’’. At that time, the $630 million project was the most expensive and grandiose development attempted in the city. The venture was also considered risky by most investors, except financier Michael Milken. In fact, it was Mr. Milken’s “junk” bonds that helped finance the project. Mr. Wynn’s bet paid off, much to the chagrin of critics and competitors. Subsequent projects, especially the Bellagio (also on the strip), were immensely successful. In the process Mr. Wynn helped turn Las Vegas into America’s entertainment capital.
In 2002, Stephen Wynn formed Wynn Resorts (WYNN) with the goal of raising the bar for opulence even further. After years of careful design and planning, the company unveiled plans for the $2.7 billion Wynn Las Vegas. When completed in 2005, the resort’s exceptional accommodations (gaming, lodging, retail, dining, entertainment, golf course, Ferrari dealership) and amenities drew crowds in droves. Too, the property benefited from a period of extraordinary growth in the gaming industry. In fact, its success prompted the gaming behemoth to build the $600 million Encore in 2008, an expansion of Wynn Las Vegas.
The timing of Encore, though, was unfortunate, as its completion coincided with the most turbulent economic period since the Great Depression. To make things worse, the aforementioned period of growth prompted competitors to build numerous projects, which added to Wynn’s woes since the market was unable to absorb the additional supply. Moreover, many of these properties were built to lure clientele Wynn has long attracted, high rollers and middle-market players eager to experience the high life. The confluence of these factors, along with tight credit markets and reduced consumer spending, led to lower-than-historical hotel occupancy rates and casino volumes at Wynn Resorts. While the market is now showing signs of stabilizing, it is unlikely to experience a meaningful recovery until U.S. employment rebounds and the frequency of conventions in Las Vegas bounces back. Too, the legalization of gambling in various U.S. states other than Nevada poses another problem.
Meanwhile, conditions at the company’s properties in Macau, China (also known as the Monte Carlo of the Orient) couldn’t be stronger. Since the opening of the $1.2 billion Wynn Macau in 2006 (and the subsequent expansion with Wynn Encore), Wynn Resorts has benefited from the market’s blazing growth. Gaming revenue in Macau grew from $7.0 billion in 2006 to approximately $15 billion in 2009. This figure may well reach $22 billion to $25 billion this year. Moreover, growth here has helped the company mitigate weakness in Las Vegas. In fact, Macau’s importance continues to grow since it now accounts for a major portion of the company’s revenue and operating income.
Fueling this growth is the hot spot’s geographic location. Specifically, Macau’s close proximity to 1.3 billion people in China, as well as 400 million people in Southeast Asia, gives it an advantage. Also, Macau is fortunate to be the only location in China where gambling is legal.
In order to stand out from the crowd of casino resorts in Macau, Wynn has sought to attract high rollers (just as it did in Las Vegas). These clients stay for longer periods of time and wage larger amounts. In May 2010, gaming revenues in Macau nearly doubled from the year-earlier period, to $2.0 billion. While gaming volume growth among the mass-market gamblers was up 58%, activity among the VIP segment advanced more than 120%. This niche has enabled the company to garner a 15% market share, despite the fact that its number of properties is relatively small.
What’s more, the market still offers plenty of potential. Wynn Resorts derives a considerable portion of revenue in Macau from gaming activity. Conversely, in Las Vegas, a significant amount of business is generated through other channels including hotel rooms, restaurants, conventions, and shopping malls. These sources will take on greater importance at Wynn’s Macau operations as disposable income of Chinese citizens continues to grow. In fact, the destination’s bright future has led Mr. Wynn to declare his intentions to build another resort on 52 acres his company owns in Macau.
Whereas competitors have historically taken on high amounts of leverage to expand, Wynn Resorts takes a more conservative approach. In fact, Wynn’s business model calls for the development of one property at a time. While competitors such as MGM Mirage (MGM) and Las Vegas Sands (LVS) teetered on the brink of insolvency during the recent recession, there were no liquidity concerns at Wynn. This along with Mr. Wynn’s steady leadership and marquee brand name, explains why Wynn shares typically trade at an above-average industry P/E multiple.
What does Mr. Wynn have up his sleeve? Wynn Resort’s solid financial position enables the company to pursue development opportunities anywhere gambling is legal. After a brief flirtation with Philadelphia, the company has, instead, redirected its focus on Asia. Besides Macau, the company could pursue the development of a resort in Korea’s Jeju Island. While the destination has eight casino resorts, none of them has the cache or the ability to attract an international crowd like Wynn Resorts. Other potential destinations include Japan and Taiwan, where the governments are contemplating the legalization of gambling.
Our outlook for the company, which is bright due to expectations of continued strength in Macau, may prove to be conservative if Wynn Resorts establishes operations elsewhere. One thing is certain, Mr. Wynn has been successful wherever he has planted his flag.