Buy for a margin expansion story Over the past month, Wynn Macau's share price had pulled back over 10% (vs. MSCI HK +1%) as investors worried about World Cup and latest UnionPay restrictions. Our channel checks suggest the latest UnionPay restrictions had no impact on Macau's GGR. This echoes our on-the-ground checks where 7 of the 10 pawnshops we visited over the weekend were still able to act as funding sources to premium mass. As such, we see the recent pullback as a good Buying opportunity for Wynn Macau where margin expansion should help grow EBITDA by 40% in 2018, and where low leverage allows for the conversion of strong FCF into higher dividends. We think Wynn Macan can lift dividends to HK$1.5/shr in 2018, implying 5% dividend yield at current share price. Reiterate Buy.
Wynn Palace's mass potential still under-appreciated Wynn Palace has ﬁnally ramped up its mass table yield to US$16.4k/table/day by 1Q18, highest in town and 17% above Wynn Peninsula's. But we feel Wynn Palace still has more potentials as its mass table drop was still 7% lower than Wynn Peninsula's. Since Wynn Palace has 70% more hotel rooms, we think Wynn Palace's mass table drop should surpass that of Wynn Peninsula's by 2019. Encouragingly, premium mass hosts told us that the new series of exclusive events, e.g. Canto pop concerts, wine & whisky dinners, are increasing the frequency of visits by premium mass players.
Strong free cash ﬂow supports dividend growth Until Phase 2 goes ahead, the company has very limited capex needs, likely only US$100m to reinvigorate the West Casino at Wynn Peninsula to update VIP rooms and to remodel the Encore hotel. On the back of our 40% EBITDA growth forecast for 2018, we think free cashﬂows can grow to US$1.2bn in 2018, implying a FCF yield of 6.7%. With end-2018 leverage likely below 2.5x, we think the company will hike 2018 dividends to HK$1.5/shr, implying over 5% dividend yield at current share price.
Risks priced in:reiterate Buy Wynn Macau is trading at 13.5x DB 2018F EBITDA, below its historical avg of 14.4x. We lift 2018/2019 EBITDA by 1%/5% and net proﬁt by 0%/7%. Our target EV/EBITDA multiple is 17x, second highest in the sector, just below Sands China. We believe this is justiﬁed as Wynn Macau's dividend yield will likely catch up to a similar level as that of Sands China's. Downside risks include i) tighter capital controls from China impacting GGR momentum, ii) competition leading to margin erosion, iii) less-than-expected market share gains; and iv) regulatory risks concerning the expiry of its gaming concession.