More Bad News For Wynn Resorts (NASDAQ:WYNN)

Thesis

In my past Wynn Resorts (NASDAQ:WYNN) articles, I have always pointed out the uncertainties that surround the company. One of these was the recovery of Macau, a crucial city in Wynn Resort’s operations. In the past few weeks, the situation for Macau and Wynn Resorts became worse. This was due to tight Covid regulation by the Chinese Communist Party (the “CCP”), and because it is likely for the CCP to continue its tight Covid regulation for the foreseeable future.

Macau’s recovery is not expected in 2022. Therefore, as a result of the lagging Macau business, Wynn Resort’s full recovery will most likely not occur this year. For this reason, I believe Wynn Resorts stock is a sell.

Covid-19 and China

For much of 2020 and 2021, the impact of the pandemic has brought health crises and strict global regulations to curb the spread of the virus. However, starting in recent months, the public view of the virus and the regulations have been putting more emphasis on full re-opening. Despite this societal trend, numerous experts, including Dr. Antony Fauci, cautiously predict that Covid-91 will likely never become extinct.

What this means is that Covid-19 will continue to circulate around the world without posing a significant risk to the majority of the population. Fatality rates and infection rates will significantly slow while in circulation.

Much of the Western world, including the United States and EU, has accepted the likelihood of unending circulation of Covid-19 and has started to curb the majority if not all the regulations. However, China continues to push its zero-Covid policy, which is an extremely stringent policy to control the infection rate of the virus.

Today, China has shut down multiple cities, including one of the biggest cities, Shanghai. With a population of over 28 million, Shanghai is one of the main economic hubs in China. However, due to the rise in Covid cases in the region, the CCP has decided to completely shut down the city for days to test the entire population. These unimaginable moves come on the back of China’s zero-Covid policy, one of the main agendas of President Xi Jinping. These lockdowns and tight Covid regulations pose a significant threat to Macau and Wynn Resorts.

Wynn Resort’s Macau Operation

Wynn Resorts has a heavy presence in Macau due to Macau’s reliance on tourists from mainland China. About 91% of Macau’s tourists come from China, Hongkong, and Taiwan. Although Taiwan is an independent region, Macau’s reliance on tourists from Hongkong and mainland China is significant. Thus, China’s zero-Covid policy will impact most of Macau’s tourism.

Further, this creates immense hurdles for Wynn Resorts. In 2019, Macau represented about 70% of Wynn Resorts’ revenue. It is extremely unlikely for Wynn Resorts stock to recover back to pre-pandemic times while the majority of the Macau operations are shut down with no definite timeframe for recovery. Therefore, full recovery of Wynn Resort’s operation is unlikely to occur in the foreseeable future.

The Possibility of An Unending Zero-Covid Policy

Some investors may argue that the Shanghai lockdown will be ending in the coming days, thereby ending the risks of the zero-Covid policy to Macau and Wynn Resorts. However, I believe otherwise. Through these strict actions, I believe China will likely maintain a zero-Covid policy until the end of 2022.

Since the start of the pandemic, President Xi Jinping and his ruling party have pushed strict Covid control measures, citing the party’s success in comparison to western countries. Thus, it will be hard for the ruling party to suddenly change course. President Xi has invested too much political capital into this agenda. Further, President Xi is planning to run for a third term, expected to start in the second half of 2022. As such, he will likely prefer as much political and social control and stability as possible, reducing the chance of confusion and unrest that might arise by suddenly removing the strict Covid policies.

China’s exit strategy from this strict policy may come after President Xi’s third term starts. The currently ruling party has proudly advertised to its people that they have rejected the Western countries’ vaccines and are working to create a vaccine made in China. This vaccine is expected to be released toward the end of 2022. Therefore, I think it is likely for the CCP to claim the disease is endemic and applaud the Chinese domestic vaccine, which is actually created by the leadership of CCP to assert more control and confidence over its people.

Therefore, until at least the end of 2022, I believe Macau and Wynn Resort’s operation in Macau will be indefinitely postponed, thereby delaying Wynn Resort’s recovery.

Risks

The CCP easing Covid restrictions in China poses risks to my bearish thesis. Government actions and policy are unpredictable. The actions of the CCP can be speculated upon, but they may change course in the coming months, creating steps or possibility of Macau’s recovery. For example, like the United States, if the Covid cases see sudden declines in China in the coming few, the CCP may, for any reason at all, ease restrictions and begin a revival of Macau.

Further, even without the recovery of Macau operations, Wynn Resorts’ stock price may recover from the current lows as the year-over-year comparison is made with an easier 2021 comparison. This may result in a slight bounce back since all the factors that have been contributing to low stock price are likely priced in already. However, even with these upside risks to the bearish thesis, I believe the risks are far greater than the upside for investors to consider investing in Wynn Resorts.

Summary

The CCP’s actions make an investment in Wynn Resort dangerous. China continues to crack down on Covid cases all across the country. The CCP is even willing to shut down the entire city of Shanghai. This strict attitude may create an indefinite pause in Macau and delay Wynn Resorts’ recovery. Therefore, I believe Wynn Resorts is a sell today.