Investors bet on Wynn Macau IPO as a winner

Wynn Macau, the Macau division of the casino business owned by Las Vegas gaming magnate Stephen Wynn, has set the ball spinning for an initial public offering that aims to raise between HK$10.65 billion and HK$12.6 billion ($1.34 billion to $1.63 billion).

Perhaps sensing that this may be an opportunity where the house doesn't have the upper hand, investors flocked to the deal as soon as the books opened yesterday morning and sources say the deal was covered in half an hour. Lucky then perhaps that the offering was launched at a slightly larger size than the $1 billion talked about in recent weeks. Part of the reason for the increase is a pickup in the share price for some of its peers as well as its US-listed parent company Wynn Resorts, but the company will now also be selling 25% of its share capital as opposed to an initial plan to par with only 20%.

The IPO comes on the heels of record monthly gaming revenues in Macau in August, suggesting a market recovery is under way. Supporting this notion is the fact that China has started to relax its earlier travel restrictions and investors have bid up other Macau gaming stocks over the past couple of months in anticipation that the economic recovery will spark a pickup in both travelling and spending at the tables.

Wynn Macau is also getting closer to completing the construction of its second gaming property -- the Encore -- in the former Portuguese colony, which will include 37 VIP tables and add 400 luxury hotel suites and a new sky casino. The Encore, which which will cost about $650 million and is scheduled to open in the first half of 2010, will be fully integrated with the company's existing resort, the Wynn Macau, which was opened in September 2006 and has 205,000 square feet of gaming space, 369 tables of which 149 cater to VIPs, 1,220 slot machines, five restaurants and 600 luxury hotel rooms.

One syndicate analyst report notes that the availability and quality of hotel rooms is one of the determining factors when VIP players choose where to gamble and argues that Wynn's current business has been constrained by having only 600 hotel rooms. "The additional suites at the Encore, which are likely to be 60% bigger in size and more luxurious than the existing rooms, should help increase and retain VIP traffic," the analysts behind the report say.

Wynn stands out among the six casino operators in Macau because of its focus on the VIP market -- a segment which analysts argue have been hurt relatively less by both the economic downturn and the travel restrictions in China. In 2008 it derived 73% of its gaming revenue from VIP customers, 20% from its mass market gaming tables and 7% from slots. According to analysts it also has better returns per table and slot machine and higher return on equity.

Wynn Macau is selling 1.25 billion shares at a price between HK$8.52 and HK$10.08 per share. All the shares are new, but unusually the listed company won't get to keep any of the proceeds as they will be transferred to parent company Wynn Resorts as part payment for the Macau business it is "taking over". Wynn Macau will also issue new shares corresponding to 75% of its issued share capital to US-listed Wynn Resorts. However, the listing candidate will get to keep whatever money is raised from the 15% overallotment option, if it is exercised.

This won't really matter, however, as both Encore and the company's daily operations are fully-funded by debt and the cash flow it generates from the gaming business.

As usual, 10% of the offering will be set aside for Hong Kong retail investors initially, but this can increase if the retail demand is strong enough to hit certain clawback triggers. However, the company has obtained a waiver that will limit the size of the retail tranche to 30% of the total deal size, versus the usual 50%. If the retail tranche is more than 10 times subscribed, the retail portion will increase to 12.5%, if it is more than 30 times subscribed, the retail tranche will increase to 15%, and above 60 times, retail investors will get 30%. The 3.5-day Hong Kong public offering will open on Thursday.

Before the launch of the institutional offering yesterday, six corporate investors had already agreed to buy $250 million worth of shares at the IPO price in exchange for supporting the deal as cornerstone investors. This includes holding on to the shares for at least six months after listing. According to a preliminary prospectus, the investors are:  CMY Capital Markets, a Malaysia-based global investor with interests including hotels & resorts and other properties, which will buy $70 million worth of shares; Dornbirn, a company wholly-owned by the family trust of Sun Hung Kai Property's Walter Kwok, which is taking $20 million; two investment units under Malaysia's Hong Leong group, which will invest a combined $80 million; a company owned by Hong Kong retail tycoon Thomas Lau, which is taking $50 million worth of shares; and Keywise, an investment company focusing on public equity investments in Greater China, which will buy $30 million worth of stock.

The price range values Wynn Macau at a 2010 enterprise value-to-Ebitda multiple of 12.5 to 14.5 times. Analysts argue that that EV/Ebitda is a better valuation tool than simply price-to-earnings because the casino sector is still in build-out mode. Enterprise value is made up of market capitalisation and net debt.

Among the Macau casino operators, SJM Holdings, which listed in Hong Kong just over a year ago and is controlled by Macau's own gaming tycoon Stanley Ho, trades at a 2010 EV/Ebitda multiple of 8.5, US-listed Melco Crown, a joint venture between the Ho family's Melco International Development and James Packer's Australian casino business Crown Limited, is quoted at 13.4 and Hong Kong-listed Galaxy Entertainment trades at a multiple of 16.2, according to Bloomberg.

Meanwhile, Wynn Resorts trades at a 2010 EV/Ebitda multiple of about 15. One source notes that it would be reasonable to expect that the Macau business will grow faster than the parent after being spun off, given that gaming revenues in Macau are growing faster than those on the Las Vegas Strip and Macau is also highly leveraged to Chinese consumption. It also deserves a premium to the local players because of its strong brand and focus on the VIP market, analysts say.

While earnings at Wynn Resorts have fallen for the past two years as the global economic slowdown hurt travel and spending at its Las Vegas casinos and hotels, which includes The Mirage, Treasure Island, Bellagio and Wynn Las Vegas, Wynn Macau reported a 48% gain in net income last year to HK$2.04 billion ($263 million).

Across all casino operators, Macau generated gross gaming revenues of $13.6 billion in 2008 - more than double the $6 billion generated by the Las Vegas Strip in the same period.

According to its preliminary prospectus, Wynn Macau is has applied to the Macau government for the right to lease a 52-acre site on the Cotai strip to be used for future expansion and is currently awaiting final approval.

J.P. Morgan, Morgan Stanley and UBS are joint global coordinators and sponsors of the listing, as well as joint bookrunners together with Deutsche Bank and Bank of America Merrill Lynch.