CIMB Bank Bhd was quick to exploit Wynn Macau Ltd’s IPO on the Hong Stock Exchange (HKSE) by listing two structured call warrants — Wynn C1 and Wynn C2 — on the same day as Wynn Macau’s listing on Oct 9.

Since then, both Wynn C1 and Wynn C2 have gained five sen each, or 33.3% from their respective issue price of 15 sen, closing at 20 sen last Wednesday. During this period, Wynn Macau’s share price has gained 9.92% or HK$1 to HK$11.08, from its offer price of HK$10.08 per share.

Both Wynn C1 and Wynn C2 are European-style warrants, meaning they can be exercised only upon the expiry dates. However, both have a different exercise price and tenure.

Wynn C1 is exercisable at HK$10.08, at a ratio of eight warrants to one Wynn Macau share. It expires on July 7, 2010.
For Wynn C2, its exercise price is higher at HK$12.88, with an exercise ratio of eight to one. Although its exercise price is higher, the warrant has a longer tenure — to Jan 7, 2011 — an additional six months compared to Wynn C1.

Based on last Wednesday’s closing prices, Wynn C1 has a 24.2% premium to Wynn Macau’s share price compared to Wynn C2’s 49.4% premium.

Judging from the volume traded, Wynn C1 — given its cheaper premium — has been more popular among warrant investors compared to Wynn C2. In other words, Wynn C2’s high premium of 49.4% is seen as a deterrent although its expiry is six months longer than Wynn C1.

To reiterate, Wynn Macau owns and operates the luxury integrated resort and casino in the Macau Peninsular called Wynn Macau. Catering to high-end clientele, it is among the biggest gaming operators in the former Portuguese colony, and perhaps the most profitable with a net profit margin in the range of 13% to 15%.

The company’s IPO was a huge success, priced at the top range of the proposed offer price at HK$10.08 per share. The IPO valued the company at a total of HK$52.29 billion, which is more than twice the market value of Macau’s market leader SJM Holdings Ltd, controlled by casino kingpin Stanley Ho.

The reason Wynn Macau is worth more than SJM is because of its lean operational structure and strong focus on the lucrative VIP market, which brings in higher absolute profits than SJM. This also explains why Wynn Macau is being valued at a PER of around the mid-20s.

At its current price of HK$11.08, Wynn Macau is trading at 22.7 times projected earnings for FY2009 ended Dec 31 of HK$1.97 billion, and 24.8 times FY2010 projected earnings of HK$2.28 billion.

While its current valuations appear rich, the company’s share price continues to inch up since the IPO, driven by improving market sentiment, as well as news that the Macau government is looking at a new rule to limit the number of tables in Macau to cool over-expansion in the industry.

Casino players in Macau view the rule positively, as it would curb the excessive me too expansion mode, which led to more tables being added to the market at a faster rate than revenue growth. Though this may improve the industry’s profitability as a whole, it remains difficult to quantify the benefits to the players, including Wynn Macau.

For warrant investors though, both Wynn C1 and Wynn C2 are presently not cheap, given their premium of about 24% and 49% respectively to the mother share. Thus, apart from curbing overcapacity, it is crucial that the government of China and Macau announce more measures, such as easing the current visa restriction on mainland residents, to boost Macau’s gaming industry. This would be a strong catalyst to re-rate Wynn Macau stocks and hence the prices of the warrants.



This article appeared in Capital page of The Edge Malaysia, Issue 777, Oct 19-25, 2009.