Weak Yuan Manageable for Wynn
A devalued Chinese currency should only be a short-term problem for the Macau operators.
The devaluation of the yuan against the U.S. dollar last week pressured the shares of Wynn Resorts (WYNN), Las Vegas Sands (LVS), and MGM Resorts (MGM). These companies are exposed to the Chinese consumer as two thirds of total visits to Macau come from mainland China, and Wynn, Las Vegas Sands, and MGM are forecast to receive 62%, 55%, and 27% of 2015 EBITDA from Macau, respectively. Currency may present a near-term sentiment overhang on the shares, but barring an economic collapse, we see the yuan devaluation as manageable for the Macau operators.
The Macau operators do not have translational risk from yuan depreciation. Sales and expenses derived in Macau are denominated in the pataca, the region's legal currency. The pataca is pegged to the Hong Kong dollar, which is in turn pegged to the U.S. dollar. If the yuan continues depreciating, it will face decreased purchasing power relative to the Hong Kong dollar; this could have a negative transactional impact on those operating in Macau. But further yuan depreciation could result in Hong Kong devaluing its dollar to stay competitive with other countries. This would neutralize the purchasing power headwind and create a manageable translation headwind. For instance, a 1% change in the U.S. dollar/pataca exchange rate equals a gain or loss of $13.7 million for Las Vegas Sands, which is manageable based on our 2016 net income estimate of $2.3 billion for the firm.
Dan Wasiolek does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.