VIP table games have been a major growth driver for the Macau casino industry. In 2011, VIP baccarat generated gross revenue of $24.5 billion, accounting for 73% of the casino sector's overall revenue.

Wynn Resorts (WYNN), which derives approximately 60% of its revenues from the Macau region, depends on VIP tables games for much of its future growth.

According to our valuation, VIP table games contribute approximately 48% to Wynn's current valuation. In this analysis, we discuss the key factors that support our estimates on Wynn's Macau VIP table games segment. Our $136 price estimate for Wynn Resorts implies a 30% premium to the market price.

Factors that support our estimates:

Increasing population of Chinese high net worth individuals (HNIs)

This is a key driver behind Macau's robust growth. According to a Cap Gemini-Merrill Lynch Private Wealth report, China recently surpassed the U.K. to become the fourth largest population for HNIs.

Expected completion of Cotai project by 2015/2016

Wynn recently got the approval to proceed with its proposed Cotai project, which is expected to be completed in four years and would significantly increase Wynn's VIP table games turnover. CEO Steve Wynn has also asserted that the company will focus on the high-end gaming market, going forward.

Positive outlook on VIP Baccarat and Macau casino industry

VIP Baccarat is gaining popularity in Asia particularly China. In 2011, VIP baccarat revenue increased 44.6% year-on-year, according to official data from the Gaming Inspection and Coordination Bureau.

Similarly, the outlook on Macau gaming industry is positive. According to a study by PwC, the Macau gaming industry is expected to more than double during the next five years to $62.2 billion, representing 34% of the total global casino revenues in 2015.

Government focusing on infrastructure initiatives

The Macau government is taking several initiatives to boost tourism in the region. It is building Guangzhou-Zhuhai high-speed railway which is expected to reduce travel time from Guangzhou to Macau to 40 minutes, down from 2+ hours by bus. It also plans to build Macau Light Rapid Transit that will fully integrate different regions within Macau and is expected to complete by 2015.

Other long-term plans include Hong Kong-Zhuhai-Macau bridge that will connect Hong Kong to Macau and will reduce car travel time from 4 hours to 40 minutes.

Mitigating factors to our estimates:

Increasing competition

In recent years, competition has intensified significantly in Macau. All casino operators are vying for a presence in the region due to the impressive outlook on the Macau gaming industry. However, increased competition would lead to greater than expected operating expenses and promotional allowances, thereby, resulting in lower margins for gaming companies.

Government policies

Government policies like visa restrictions affected Wynn Macau in 2008. Similarly, other government policies impacting tourist flow and industry margins could have an adverse effect on Wynn Macau's VIP Table Games Turnover.

Decelerating economic growth in China

The majority of the tourists visiting Macau come from China. An economic slowdown in the Chinese economy could negatively impact Macau's gaming revenues.

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