Wynn Macau’s Convertible Bond Issuance Gets Negative Reaction, We Are Neutral

Narrow-moat Wynn Macau’s 01128 share price is down around 5% currently to HKD 7.68 in Hong Kong trading, on negative market reaction to the casino operator’s plan to issue convertible bonds. While the market may not like the possible 8.1% dilution (assuming all bonds are converted into shares), we are neutral on the move as we think the alternative would have been for Wynn Macau to raise borrowings that carry a higher debt cost. We leave our fair value estimate at HKD 8.00 and would prefer more upside to it before being buyers. We do expect Sands China and MGM China to refinance debt that is coming due, but traditional bank borrowings remain our base-case funding assumption. Overall, we continue to expect an improving visitor and gross gaming revenue outlook to remain the main driver to share price performance.

We have a neutral view on the move as we believe further debt raising was expected. Macao casinos should have further exhausted their undrawn credit facilities in the fourth quarter to sustain the ongoing cash outflows, and Wynn Macau has fully drawn its credit facilities. In terms of interest servicing, the 4.5% interest on the convertible bonds is likely to be lower than the cost of debt on bank loans, which is estimated to be closer to 6% or more.

Along with the convertible bonds’ issuance announcement, Wynn Macau also released its operating data in January and February, which is quite decent, with strong recovery in both gross gaming revenue and EBITDA from a year ago. It also mentioned its latest market share of 15%, which is the same level as of 2019, despite the cessation of junket activities.