Alina555
Introduction
In my previous Wynn Resorts (NASDAQ:WYNN) article published on April 1st, I was bearish on Wynn Resorts giving the company a sell rating. My reasoning for this opinion was China’s stringent zero-Covid policy. At the time, China seemed to have no plans of easing any restrictions involving Covid-19 continuing to delay the reopening and recovery of the Macau region. I believed too many political interests had been invested for the ruling party to admit any faults and shift the direction of the policy. However, today, after about three months, the dynamics surrounding China’s zero-Covid policy are starting to change. I believe the country is finally starting to prepare for a post-Covid world, which will likely unleash a massive pent-up travel demand benefiting Wynn Resort’s operation in Macau, and bringing the company’s entire operation back to normality. Therefore, I believe Wynn Resorts is a speculative buy today.
Turning Point in Zero-Covid Policy
The zero-Covid policy has been implemented by China almost since the initial outbreak of Covid-19 in Wuhan. The zero-Covid policy is China’s nationwide effort to achieve zero Covid infections by implementing strict quarantine and testing requirements among cities or neighborhoods even if there is only one reported infection. Some regions or cities have also enacted mandatory Covid tests and/or quarantines for their residents even if there were a single individual who came in close contact with a person who tested positive for Covid-19. These stringent measures have curbed travel demands since 2020.
However, after over two years, I believe China is at a turning point in its action against the virus potentially preparing for a post-Covid world.
First, China announced that they will cut quarantine time in half for international travelers entering China. This change in the legislation is China’s first easing of restrictions related to Covid-19. Thus, in my opinion, the symbolic move may be signaling China’s intention to gradually drop its restrictions like the rest of the world.
Second, Xi Jinping predicted a final victory with a zero-Covid approach. In a speech he gave in Wuhan in June, President Xi touted the success of the zero-Covid policy saying that it is the best and the only route for China. However, in the end, he mentioned: “reaching the final victory” through the zero-Covid policy. I think it is highly likely for President Xi to claim this victory against Covid toward the end of 2022 or the start of 2023.
I have mentioned in my previous article that China and President Xi will probably not back away from the zero-Covid policy because of the immense political capital that the state and President Xi have invested. The reason behind this was that President Xi was attempting to stay in power for another term at the National People’s Congress taking place toward the end of 2022. Thus, backtracking any policy that the state has heavily invested in before President Xi claims another term would have been unlikely at the time. However, after President Xi claims another term in the National People’s Congress, I think China and President Xi may finally claim victory against Covid to get their economy growing again. This, in my opinion, is logical as the zero-Covid policy’s job was to maintain social stability for President Xi while sacrificing China’s economic growth. By waiting until President Xi cements his third term and claiming victory against Covid, China, to its citizens, can advertise its victory, social stability, and future economic gains. Therefore, I believe President Xi’s claim of “reaching the final victory” against Covid will happen in the coming months.
Finally, worsening economic situations are pressuring China’s zero-Covid policy. China’s GDP growth in Q2 of 2022 came out at just 0.4% year-over-year compared to a consensus of 1%. It is true that the global economy is slowing as a result of the Russian invasion of Ukraine, inflation, supply chain problems, and the U.S. Federal Reserve’s aggressive tightening, but for China, lockdowns and restrictions played a major role. Shanghai, a city that went through a stringent lockdown, experienced a 14% decrease in the city’s GDP. Thus, continuing stringent Covid restrictions are starting to massively impact China’s economic health incentivizing lawmakers to ease restrictions as soon as President Xi claims his third term.
China, Macau, and Wynn Resorts
For Wynn Resort to fully recover from the depth of the pandemic, Macau needs to recover to pre-pandemic levels, and for Macau to recover, China needs to ease its Covid restrictions.
In 2018, about 88.1% of tourists coming into Macau came from mainland China and Hong Kong showing that recovery in the Macau region will only start if the Chinese governments ease restrictions and allow travel. Further, Wynn Resorts needs Macau to recover to pre-pandemic levels because about 70% of Wynn Resort’s revenues came from Macau operations in 2019. Therefore, if China starts to ease restrictions and allow travel to resume, I think it can be reasonably argued that the pent-up travel demand seen throughout the world will unfold in China creating an influx of demand for tourists wishing to visit Macau ultimately reviving Wynn Resorts.
Pent-Up Demand
Once China starts easing its restrictions, the pace of recovery and the strong pent-up demand will likely allow Wynn Resorts to recover rapidly. Looking at Wynn Resort’s U.S. operations for context, in Q2 of 2022, Wynn Resort’s U.S. operation revenue increased by $323.2 million or 105% year-over-year showing a fast and strong recovery. Similarly, as China opens up and tourists flood Macau, I believe the pace of recovery will be brief due to the pent-up travel demand. Further, pent-up travel demand in China is extremely strong as a result of prolonged restrictions. In April, daily domestic flights in China stood at around 2,000 to 3,000 before jumping to around 7,000 in June of 2022, which is about a 70% recovery from 2019. Thus, as the government eases travel restrictions to and from Macau to the level near 2019 in the coming months, I believe the massive travel demand will swiftly allow Wynn Resorts to recover and thrive.
Valuation
Wynn Resorts’ current relatively low market capitalization will likely assist a sharp comeback in the company’s stock price upon operations returning to normality. Historically, from 2012 to 2019, Wynn Resorts had a rather volatile price-to-earnings ratio ranging from 15 to 45. Further, in the past 4 years of normal operations from 2016 to 2019, the company reported an average net income of $421 million. Therefore, considering the past average price-to-earnings ratio of about 30 and an average net income of about $421 million during normal operations, I believe it can be reasonably assumed that Wynn Resort’s market capitalization can potentially double to about $12.6 billion upon normalization.
Summary
Wynn Resorts is still a speculative buy. There is no concrete evidence of China’s shift away from the zero-Covid policy. There are only speculations at this time. However, great risks come with great potential rewards. If China does move toward easing Covid-related restrictions in the coming months in line with my predictions, the 2023 summer travel season will be extremely profitable for Wynn Resorts shareholders. Therefore, I believe Wynn Resorts is a speculative buy today.
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