After the closing bell Wednesday, bellwether casino operator Wynn Resorts (NASDAQ:WYNN) posted weaker-than-expected earnings of $1.05 per share, far below the $1.18 the Street was hoping to see. Shares plunged in after-hours trade on the news, but the real news wasn’t the company’s bottom line.
The real news in Wynn’s report was the growing dominance of Macau as the world’s preeminent gaming hub.
Revenue from Wynn’s Macau operations provided the lion’s share of the company’s revenue, while its Las Vegas revenue was stagnant. Wynn Macau saw a 41.7% year-over-year increase in revenue to $951.3 million. That accounted for nearly three quarters of the company’s total revenue. By comparison, Wynn Las Vegas revenue came in at a relatively paltry 3.7% to $346.9 million.
The details of Wynn’s Q3 reveal how important the former Portuguese enclave has become to the gaming industry. It also shows the power of Chinese consumers, the chief patrons of Macau casinos.
In September, Macau’s gambling revenue rose 39% to 21.2 billion patacas ($2.6 billion). That number was outstanding, but despite the rising revenue, many stocks such as Wynn, Las Vegas Sands (NYSE:LVS), MGM Resorts (NYSE:MGM) and Hong Kong-based Melco Crown Entertainment (NASDAQ:MPEL) sold off hard during the past month.
Part of the reason for the selloff in the sector was fears about a heightened credit squeeze in China on small- to medium-sized companies. Owners and executives of these companies, as well as wealthy Chinese citizens, are the prime Macau customer, so there was a concern that discretionary spending in Macau would suffer. Those fears, however have proved to be unfounded.
Instead, rich mainland Chinese continue to patronize Macau resorts through so-called junket operators. These junkets shuttle Chinese players by ferry from Hong Kong to Macau, which is about an hour-long boat ride. The junket industry accounts for an estimated 75% of Macau’s total gaming revenue, which is forecast to be nearly $34 billion in 2011. That’s more than five times the $6 billion revenue forecast for Las Vegas gaming revenue.
Given the dominance of Macau in the gaming sector, investors might want to look at the best Macau gaming pure play in the sector. Here, the hands-down winner is Melco Crown.
The company not only owns the ultra-hip City of Dreams Macau casino, which is designed to attract younger Chinese high rollers to its posh gaming resort — it also owns and operates the classic Altira Macau resort, known for its luxury and contemporary look and feel. The company also owns Mocha Clubs, where single-player machines are linked to various games consisting of progressive jackpots and multiplayer games, and Casino Taipa Square, which attracts a wide variety of gambling devotees from throughout Asia and the rest of the world.
Melco shares have been hit hard of late, and the shares declined sharply along with the Wynn earnings miss. However, at current levels, I suspect we could be staring at a very attractive buying opportunity in the stock. If Macau’s October gaming results live up to or exceed expectations, shares of this pure play in the Macau casino space are likely to hit the jackpot.
As of this writing, Jim Woods did not own a position in any of the aforementioned stocks.