Since Feb. 20, shares of Wynn Resorts Limited (NASDAQ:WYNN) have fallen more than 25% while the S&P 500 has only lost a little more than 1%.
Macau, the once-savior of the casino industry, is now its downfall. And that, plus a few other issues, are giving investors of WYNN stock a losing hand.
The issues with Macau are hurting not only Wynn Resorts, but all the casino operators with properties on the island, including Las Vegas Sands Corp. (NYSE:LVS), MGM Resorts International (NYSE:MGM) and Melco Crown Entertainment Ltd (NASDAQ:MPEL). Macau’s fourth-quarter GDP dropped 17.2% year-over-year from 2013, and the third-quarter GDP fell 2.3% from 2013. That sort of data puts Macau in a recession.
While China as a whole is still experiencing growth — 7% GDP — why is Macau suffering through a 20% decline in economic activity?
The main reason is because last year the Chinese government decided it would crack down on corruption within the gaming industry, specifically the junkets in Macau. The junkets loan money to wealthy Chinese citizens when they are in Macau and are paid back when the gamblers return home to the mainland.
China has very strict rules when it comes to taking currency out of the mainland — which does not include Macau. Therefore, for high rollers going to Macau commonly turn to the junkets, who loan them money to gamble on the island.
Now that China is cracking down on that corruption, Macau is feeling the economic pinch.
Another issue on the horizon for Macau is a possible smoking ban in its casinos. If customers are forced to stop gambling and walk outside every time they want to smoke, they’ll have less time at the gaming tables — again cutting into revenue.
And finally, casino operators are being hurt by construction delays on the Hong Kong-Zhuhai-Macau Bridge, which would connect Hong Kong and Macau to mainland China. Once expected to open next year, the latest estimates now put the bridge being completed in 2020.
Other Issues for WYNN Stock
The problems for Wynn Resorts don’t stop in Macau. Steve Wynn, the founder and CEO, is in the middle of a bitter battle with his ex-wife, Elaine Wynn, over her seat on the Wynn board of directors. The WYNN board has formally asked shareholders to vote Elaine Wynn off the board.
Elaine Wynn, who owns 9.5% of WYNN stock, is fighting the move. Dissention on a board is never a good thing and it seems there is quite a bit on WYNN’s board.
In addition, several analysts lowered their ratings on WYNN stock over the last few weeks. With the combination of negative press and increasing uncertainty in Macau, it shouldn’t surprise anyone that WYNN stock is down 20% in just a few weeks.
Now, should new investors buy WYNN stock on the dip? Probably not.
The events in Macau could just be scratching the surface for the Macau gaming industry. The next shoe to drop could be the entire Chinese economy, just not Macau. Even with a slowing economy the GDP in China is 7% — but what if that number falls to 4%, 3%, or even 2%? How does that affect gambling activity in Macau? It wouldn’t be good.
The dispute with Steve Wynn and Elaine Wynn also could bring more pain to the company if this battle continues to rage. Increased legal costs, bad press and possibly even more could all come from this fight. It is very difficult to see a happy ending with for all parties involved, including shareholders.
Investors are better off keeping WYNN stock on hold until we know more about Macau, the Chinese economy and the board of directors’ issue.
At the time of this writing, Matt Thalman owned shares of MGM and LVS. Follow him on Twitter @mthalman5513.
