A “Wynning” strategy of betting on VIPs

By Wei Gu
October 7, 2009

Top-tier casino operator Wynn has always bet on VIP gamblers. Now it is adopting the same approach with its stock market flotation. Wynn is trying to trump half a dozen recent poor Hong Kong market debuts by shunning fickle retail investors and handpicking money managers who are likely to stay the distance. It remains to be seen whether this strategy can help justify its valuation premium.

Most Hong Kong retail investors sell their shares on the first day of trading for a quick profit. By putting 90 percent of the shares in the hands of institutional buyers, Wynn is aiming to avoid the hit when its shares start trading on Friday.

That’s probably why the stock has not fallen in grey market trading, even though it was priced at HK$10.08, at the top end of the HK$8.52-$10.08 range.

Wynn has specifically obtained a waiver from the Hong Kong stock market to prevent retail investors from holding more than 30 percent of the total shares offered. But this effort turned out to be unnecessary, as private investors are simply not interested.

Retail demand for Wynn Macau is so weak that small investors are only taking 10 percent of the offering. It appears that Asian high rollers are more interested in gambling in Macau’s casinos than investing in their stocks. Many have been burned in the past by the stocks’ high volatility.

Investors are also deterred by the rich valuation. Wynn Macau has valued itself at around 16 times forecast 2010 cashflow, much higher than the 7.5 times enjoyed by Macau gambling tycoon Stanley Ho’s SJM Holdings.

That is not to say Wynn does not deserve some premium. First, it has always been an investor favourite in the U.S., with a stable institutional investor base. Money managers hold as much as 60 percent of Nasdaq-listed Wynn Resorts. SJM, in comparison, has 1.4 percent institutional ownership.

Second, Wynn’s casino and hotel in Macau looks more modern than SJM Holding’s dimly-lit and smoke-filled Grand Lisboa complex. The luxurious look helps it attract a younger client base and broadens its appeal to non-gamblers as a conference venue.

Third, the majority of Wynn Macau’s revenues is earned from VIP clients who typically place large wagers. This focus has given its casinos better returns per table and a better return on equity than industry peers. But high-end gaming can also be more volatile.

Some of the new investors in Wynn Macau are already shareholders of Wynn Resorts, though the proportion is unclear. Wynn’s Macau casino already generates 50 percent more cashflow than the Las Vegas casino, and the offering gives investors — who have limited opportunities to invest in the gaming industry at home — a new outlet.

They are also attracted by the world’s largest gaming market: Macau’s total revenue is more than double the amount generated by the Las Vegas Strip in 2008. But local investors know very well that Macau’s dependence on Chinese high-rollers can also be its Achilles heel. Changes in Chinese visa policies can lead to big swings in visitor numbers. Macau is also suffering from overcapacity in China, where there are about 30 casinos of varying sizes.

While it looks like Wynn’s existing investor base has helped it to draw strong demand for the Macau spinoff, it may be a one-off. The future looks a lot less certain for highly-leveraged Macau Sands, a unit of Les Vegas Sands, which is hoping to go public in Hong Kong later this year. Without help from the VIPs, the Sands might have a harder time getting such a good valuation.

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