Wynn Macau Limited, a subsidiary of Wynn Resorts Limited (WYNN) has finally received its long-awaited approval from the Macau Government for development at the Cotai Strip. The land concession contract entails the company to construct a resort with a five-star hotel, gaming areas, retail and other amenities under its hood, in collaboration with Palo Real Estate Company Limited on 51 acres of land in the Cotai area.
Palo will lease the Cotai Land from the Macau government for an initial term of 25 years with a right to renew the contract for additional periods. The total land premium payable for the build-up is $193.4 million, including a down payment of around $62.5 million and eight additional semi-annual payments of around $16.4 million each.
Wynn Resorts, which boasts of a strong balance sheet in the gaming industry, will start incurring considerable capital expenditure once the Cotai project starts. Management targets to open Cotai Resorts in 2015.
Wynn Macau’s contribution to the company’s earnings has increased significantly in the last two years; the resort currently generates over 71% of the total revenue. Macau is the only Chinese city where gambling is legal. Wynn Macau, owned and operated by Wynn Macau Limited, opened to the public in September 2006 at the center of casino activities on the urban Macau peninsula. In order to expand its operations in Macau, Wynn Resorts opened Encore at Wynn Macau in April 2010.
On the flip side, competitive environment at Cotai is heating up. While Wynn Resorts’ peer Las Vegas Sands Corp. (LVS) intends to come up with a portion of its Parcel 5 and 6 developments in 2012, another major competitor MGM Resorts International (MGM) is also awaiting an approval for land. MGM management indicated that MGM China is ready to start construction as soon as approvals from the Chinese government are granted with a completion timeframe of approximately 3 years. Apart from these western players, there are domestic players also who are eager to tap Cotai.
Wynn currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. We are maintaining our long-term Neutral recommendation on the stock.
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