Wynn IPO shows retail investors growing sceptical of new listings

Wynn Macau, the Macau arm of the casino business owned by Las Vegas gaming magnate Stephen Wynn, has priced its initial public offering at the top of the indicated range after strong demand from global institutional investors. This pushed the total deal size to HK$12.6 billion ($1.63 billion), making it the second largest IPO in Hong Kong this year after the $2.35 billion H-share portion of Metallurgical Corporation of China's dual offering in Shanghai and Hong Kong.

Retail investors were less willing to take a gamble on the casino operator, however, with sources confirming that the demand wasn't strong enough to trigger a clawback. The exact level of demand wasn't disclosed, but with the retail tranche accounting for 10% of the deal and the first clawback trigger set to kick in at a subscription ratio of 10 times, this means retail investors subscribed for less than $1.63 billion worth of shares. While this is clearly a lot of money in its own right, the level of interest is dwarfed by the $64 billion worth of retail orders submitted for Sinopharm's $1.13 billion IPO and the $24.1 billion of orders tabled for MCC's offering just a couple of weeks ago.

While Wynn isn't unique in the same way as Sinopharm, which is the largest distributor of pharmaceutical products in China and the only company of its kind (of significant size) to be listed outside of China, the more modest retail interest is also a clear sign that investors are getting increasingly sceptical about the benefit of participating it IPOs. Many Hong Kong retail investors buy IPOs for the short-term; selling the shares after just a few days for a quick profit. Many are also forced to sell a portion of their holdings straight away to pay back the margin loans they obtained to pay for the investment in the first place.

And with the last few IPOs having all traded down in the secondary market, investors are sitting on quite substantial paper losses -- unless they have already sold and made them a reality. In any case, there is a lot of disappointment around at the moment and the fact that retail investors held back on Wynn, which is considered one of the top casino players in Macau, at a time when analysts are expecting a continued pickup in gaming revenues in this market, shows that they are becoming more selective about what to invest in.

From the point of view of institutional investors this is not a bad outcome, however, as it means there will be more shares available for them, making it easier to get a meaningful stake. And from the company's point of view it means a greater portion of the shares will be placed with investors who intend to hold them for longer. According to bankers, there was a lot of interest among high-quality investors of that kind. Again, no subscription numbers were disclosed, but one source said there were more than 450 names in the order book. About half of those ended up getting nothing, as the five bookrunners chose to favour top-quality investors. The Wynn management is said to have been highly involved with the allocation.

Some of the buyers are already shareholders of US-listed Wynn Resorts, which will own 75% of Wynn Macau after the IPO. However, the company did focus on attracting Asia-based funds to the deal, by for instance spending four days of the roadshow in Asia versus one day in London and two days in the US.

Six corporate investors, including Malaysia's Hong Leong group, CMY Capital Markets -- a Malaysia-based global investor with interests in hotels and resorts and other properties -- and a couple of Hong Kong tycoons, agreed to come in as cornerstone investors and buy $250 million worth of shares at the IPO price. Their holdings will be subject to a six-month lock-up. (See earlier story on Wynn for further details).

Wynn Macau sold 1.25 billion shares at a price of HK$10.08 per share, after offering them in a range between HK$8.52 and HK$10.08. All the shares were new, but the listed company won't get to keep any of the proceeds as they will be transferred to Wynn Resorts as part payment for the Macau business it is "taking over". However, the company will get to keep whatever money is raises from the 15% overallotment option, if it is exercised.

The final price values Wynn Macau at a 2010 enterprise-value-to-Ebitda multiple of 14.5 times. Analysts argue that EV/Ebitda is a better valuation tool than price-to-earnings because the casino sector is still in build-out mode. Enterprise value is made up of market capitalisation and net debt.

Among the Macau casino operators, SJM Holdings, which listed in Hong Kong just over a year ago and is controlled by Macau's own gaming tycoon Stanley Ho, trades at a 2010 EV/Ebitda multiple of 8.5, US-listed Melco Crown, a joint venture between the Ho family's Melco International Development and James Packer's Australian casino business Crown Limited, is quoted at 13.4 and Hong Kong-listed Galaxy Entertainment trades at a multiple of 16.2, according to Bloomberg

Meanwhile, Wynn Resorts trades at a 2010 EV/Ebitda multiple of about 15. One source says it would be reasonable to expect that the Macau business will grow faster than the parent after being spun off, given that gaming revenues in Macau are growing faster than those on the Las Vegas Strip

Analysts argue that the high-end valuation is justified because of Wynn's strong brand name and its focus on the VIP market. In 2008 the company derived 73% of its gaming revenue from VIP customers, 20% from its mass market gaming tables and 7% from slots. According to analysts, Wynn also has better returns per table and slot machine, and a higher return on equity than its Macau peers.

J.P. Morgan, Morgan Stanley and UBS are joint global coordinators and sponsors of the listing, as well as joint bookrunners together with Deutsche Bank and Bank of America Merrill Lynch.

Wynn Macau will debut in Hong Kong on October 9.