December 19, 2012 - 11:38am EST by
2012 2013
Price: 114.20 EPS $5.43 $6.06
Shares Out. (in M): 101 P/E 21.0x 18.8x
Market Cap (in $M): 11,486 P/FCF 0.0x 0.0x
Net Debt (in $M): 3,479 EBIT 1,051 1,166
TEV ($): 15,266 TEV/EBIT 14.5x 13.1x
Borrow Cost: NA

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  • Founder Operator
  • Gaming
  • Gambling
  • China
  • Travel


Short Idea: WYNN $114.59 based on the Chinese crackdown on money laundering through Macau casinos.  Macau has been the most successful re-launch of a gambling mecca ever.  Its gambling revenues are now five times the size of Las Vegas and growing at double digit rates.  However, there is trouble on the near term horizon which could negatively affect revenues and EBITDA.  WYNN Macau (1128 HK) is 73.3% owned by WYNN and represents $10.5 billion of WYNN’s $15.3 billion in enterprise value.  WYNN Macau generates approximately $1 billion of WYNN’s $1.5 billion of EBITDA.  Depending on the length and severity of this crackdown, I believe WYNN’s stock could quickly lose 20% to 40% of its market value.  If it turns out that the anti-corruption was a temporary publicity stunt by the Chinese government then the risk is that WYNN continues to trade at its premium valuation relative to other casino operators.

China finished its Congress in mid-November where it elected a new central committee.  The Party is now led by Xi Jinping, who has come out publicly to say that the biggest threat to one party rule in China is the epidemic of corruption.  The highly publicized scandal around Bo Xilai and other high ranking party officials has led to very visible crackdowns on numerous party officials and others financing corruption including at least six high profile arrests of junket operators at the WYNN casino in Macau.  Currently, there are estimates that about $500 billion a year is leaving the country through illegal money laundering.  There are numerous schemes being utilized to transfer money above the annual $50,000 legal limit.  Simple ones involve the transfer pricing of equipment being sold or purchased abroad, buying expensive jewelry (think watches) and wearing it out of the country to be sold abroad and gambling and withdrawing large sums of money in Macau casinos which is financed by gaming promoters who hire junket operators to find these patrons.  Most US investors are unfamiliar with junket operators since US casinos do not need a middle man to “know” and finance their customers.  As a matter of fact, the US casinos face the same issues as hedge funds in making sure their customers are not laundering money.  Macau, however, is a very different story.  A great portion of gambling in Macau casinos occurs in back rooms owned by gaming promoters who pay commissions to junket operators (allegedly criminal organizations know as Triads) and to casino operators to use their facilities and employees for their customers.  The casinos do not “know” the customer directly and do not earn normal hold (win) percentages on these customers.


Macau, more than any other casino market, relies on high-end international customers.  These customers predominately come from China and are introduced into the casinos by gaming promoters.  The law in Macau permits VIP gaming promoters to extend credit to junket agents, who act as patron representatives.  The junket operators provide credit in China to the patrons that allows these “whales” to gamble in Macau without worrying about the currency restrictions of the Chinese government.  The gaming promoter owns a VIP gaming salon in the casino and provides credit to the junket operator for the patron to gamble.  The casino provides gaming equipment and staffs the VIP room with employees who give the gambler his chips which the gaming promoter has purchased from the casino.  The junket operator determines the amount of “credit” for the trip that the player has in the VIP room.  After the gambling is finished the VIP promoters pays the casino and junket operator a percentage of the win.  Therefore, if a crackdown on and arrest of junket operators were to continue it would incentive junket operators to walk away from their debts to the gaming promoters which would have a material adverse effect on Macau’s casinos.  All casino operators in Macau receive a “significant portion” of their revenues from VIP gaming operators.  In an article titled “China moves to stem money laundering through Macau casinos” (http://www.vancouversun.com/mobile/business/asia-pacific/Jonathan+Manthorpe+China+moves+stem+money/7673993/story.html) it is estimated that two thirds of revenues come from these gamblers.  While this number may be off a bit, it jibes with WYNN’s and LVS risk factors in their 10-K’s about it being significant.  There is also concern that the junket operators may be operating in contravention to US gaming laws, which could endanger WYNN’s US casino licenses. 

To get an understanding of this risk it helps to look at the balance sheet of a public gaming promoter called Asia Entertainment and Resources LTD (AERL, $3.13 NASDAQ)  which is headquartered out of Hong Kong.  AERL has a balance sheet with $237MM of markers receivable out of $392MM of total assets.  It has a warning in its footnotes that states the following:


The Group may not be able to collect all of their markers receivable from the junket agents. Management expects that the Group will be able to enforce these obligations only in a limited number of jurisdictions, including Macau and Hong Kong. To the extent that junket agents of the Group, through the Promoter Companies, are from other jurisdictions, the Group may not have access to a forum in which they will be able to collect all of their markers receivable because, among other reasons, courts of many jurisdictions do not enforce gaming debts and the Group may encounter forums that will refuse to enforce such debts. The Group’s inability to collect gaming debts could have a significant negative impact on their operating results.


WYNN spends a significant part of its risk section detailing the issues of VIP gaming operators and the junket agents they employ.  To get an highlight how these risks are viewed by the casinos I have excerpted the following risk factors from WYNN and Las Vegas Sands 10-K’s.


WYNN risks:

“Our business relies on high-end, international customers. We often extend credit, and we may not be able to collect gaming receivables from our credit players or credit play may decrease.

General. A significant portion of our table games revenue at our resorts is attributable to the play of a limited number of international customers. The loss or a reduction in the play of the most significant of these customers could have a substantial negative effect on our future operating results. A downturn in economic conditions in the countries in which these customers reside could cause a further reduction in the frequency of visits by and revenue generated from these customers.

We conduct our gaming activities on a credit as well as a cash basis. This credit is unsecured. Table games players typically are extended more credit than slot players, and high-stakes players typically are extended more credit than patrons who tend to wager lower amounts. The collectability of receivables from international customers could be negatively affected by future business or economic trends or by significant events in the countries in which these customers reside. We will extend credit to those customers whose level of play and financial resources, in the opinion of management, warrant such an extension.”


We depend upon games promoters for a significant portion of our gaming revenue. If we are unable to maintain, or develop additional, successful relationships with reputable games promoters, our ability to maintain or grow our gaming revenues could be adversely affected. Increased competition may result in increased pressure on commission rates.

A significant portion of our gaming revenue is generated by clientele of our games promoters. There is intense competition among casino operators in Macau for services provided by games promoters. We anticipate that this competition will further intensify as additional casinos open in Macau. Other operators in the market have increased commissions and advances to games promoters, in some cases dramatically, in an effort to increase market share. These types of actions by other casino operators have further intensified competition for the services of games promoters. While we believe that we currently maintain good relations with our existing games promoters, there can be no assurance that we will be able to continue to maintain these relationships. If we are unable to maintain, or develop additional, successful relationships with reputable games promoters, or lose a significant number of our games promoters to our competitors, our ability to maintain or grow our gaming revenues will be adversely affected and we will have to seek alternative ways of developing relationships with VIP customers. In addition, if our games promoters are unable to develop or maintain relationships with our VIP customers, our ability to maintain or grow our gaming revenues will be hampered.

Certain games promoters have significant leverage and bargaining strength in negotiating operational agreements with casino operators. This leverage could result in games promoters negotiating changes to our operational agreements, including higher commissions, or the loss of business to a competitor or the loss of certain relationships with games promoters. If we need to increase our commission rates or otherwise change our practices with respect to games promoters due to competitive forces, our results of operations could be adversely affected.

The reputations of the games promoters we deal with are important to our own reputation and to our ability to operate in compliance with our concession, Macau gaming laws and other gaming licenses. While we endeavor, through contractual protections and otherwise, to ensure that our games promoters comply with the high standards of probity and integrity under Macau gaming laws, we cannot assure you that our games promoters will always comply with these high standards. In addition, if we enter into a business relationship with a games promoter whose probity is in doubt, this may be considered by regulators or investors to reflect negatively on our own probity. If any of our games promoters violate the Macau gaming laws while on our premises, the Macau government may, in its discretion, take enforcement action against us, the games promoter, or each concurrently, and we may be sanctioned and our reputation could be harmed. If our games promoters are unable to maintain required standards of probity and integrity, we may face consequences from gaming regulators with authority over our operations.”

“The financial resources of our games promoters may be insufficient to allow them to continue doing business at our resort.

Our games promoters may encounter decreased liquidity, for a variety of reasons, limiting their ability to grant credit to their patrons and thereby decreasing gaming volume at Wynn Macau. Furthermore, credit already extended by our games promoters to their patrons may become increasingly difficult for them to collect. This inability to grant credit and collect amounts due can negatively affect our games promoters’ operations, and as a result, our results of operations could be adversely impacted.”


LVS risks:


We are dependent upon gaming junket operators for a significant portion of our gaming revenues in Macao.

Junket operators, which promote gaming and draw high-roller customers to casinos, are responsible for a significant portion of our gaming revenues in Macao. With the rise in gaming in Macao, the competition for relationships with junket operators has increased. While we are undertaking initiatives to strengthen our relationships with our current junket operators, there can be no assurance that we will be able to maintain, or grow, our relationships with junket operators. If we are unable to maintain or grow our relationships with junket operators, or if the junket operators experience financial difficulties or are unable to develop or maintain relationships with our high-roller customers, our ability to grow our gaming revenues will be hampered.

In addition, the quality of junket operators is important to our reputation and our ability to continue to operate in compliance with our gaming licenses. While we strive for excellence in our associations with junket operators, we cannot assure you that the junket operators with whom we are associated will meet the high standards we insist upon. If a junket operator falls below our standards, we may suffer reputational harm, as well as worsening relationships with, and possible sanctions from, gaming regulators with authority over our operations.”



WYNN is a well-run casino company that is heavily exposed to Macau.  If the current crackdown on corruption in China continues it will negatively impact all casino operators in Macau including WYNN.  There is also some risk to these operators if China experiences an economic slowdown, however I believe the change in leadership presents the largest near term catalyst.  Longer term each casino operator faces the issue that they don’t actually own their casinos and will be forced to effectively re-buy their casinos from the Chinese government when their concessions end in 2022.  The Chinese government can end the concessions with a payment to the operators in 2017 or for no cost to the government in 2022. 


I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.


1. The continued crackdown on corruption in China.
2. A slowdown in the Chinese economy.
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