Wynn Macau faces a tougher 2013

The stagnant Cotai project is just one of the problems.

According to Nomura, it continues to like Wynn’s strong management, high-quality products and its thoughtful service strategy. But, with the rise in competition, competitors have narrowed the gap with Wynn in terms of product quality, in its view. It believes lack of capacity has deprived Wynn from benefiting from the overall market growth in 2H12.

Here’s more:

We believe that supply will remain constrained into 2013/14F and the market share trend is unlikely to improve in the short term which remains a key focus for investors. Currently trading at 13x FY13F EBITDA, Wynn’s valuation looks fair—the stock trades at the high end of the average industry valuation.

Catalysts – Cotai project could be delayed. Awaiting a construction permit, Wynn’s Cotai project has not made much progress, based on our company visit in December 2012. We believe the project may only be ready by 2017. While dividend payment could serve as a valuation support, given the capex to be spent going forward, dividend yield could be maintained at 4-5% at the current price
level but is unlikely to go up, in our view.

Valuation and risk We downgrade Wynn to Neutral and cut our SOTP-based TP to HKD23.7. We lower our valuation multiple to 13x FY13F EBITDA (on par with the industry average of 12-14x) to reflect the narrowed valuation premium between Wynn and its competitors. We also assume a delay in the completion of the Cotai project (from 2016 to 2017) and lower our valuation contribution assumption from the project.

Key risks: China’s economic condition, Cotai project timeline, intensity of competition, regulatory risks and updates on the Okada case.