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Target price: $150.00
Recent price: $75.12
Timeframe: 6 months-1 year
Travel and leisure stocks have remained at very depressed levels with most down more than 50% year to date. This is understandable given the Covid-19 pandemic’s impact on travel and tourism. But with the economy opening up and a vaccine possibly arriving in coming months, I think a new theme will emerge and it’s a good time to start buying high-quality travel and leisure names. Airbnb has indicated that August/September bookings are 20% higher than a year earlier! If we get a vaccine, travel and leisure stocks will rerate significantly as investors will expect people will feel more comfortable traveling again.
I have high conviction in
which operates casinos in Macau, Las Vegas, and Massachusetts, and focuses primarily on the VIP gaming segment. Wynn is most highly levered to Macau, generating about 70% of its revenue and most of its operating income from the Chinese autonomous region.
Macau gross gaming revenue numbers have been an absolute disaster for the past six months (down 90% or more year over year). Here are the government numbers that I track.
Recent events, however, should change that. In late August, China resumed issuing tourist visas to Macau for visitors from throughout Guangdong province, which is responsible for half of all Chinese visitation to Macau. The government resumed issuing visas for visitors from the rest of China late last month. In August, China also stopped requiring a two-week quarantine for people returning from Macau.
WYNN is trading at about 5 times normalized Ebitda (earnings before interest, taxes, depreciation, and amortization), which is a historical trough. This is worse than 2008, when many casino operators were declaring bankruptcy due to the debt covenants on their real estate exposure. It’s also worse than 2015, when Macau junket operators came under fire after one was charged with money laundering. The sector typically has traded at between 15 and 20 times Ebitda.
The current situation does not warrant a lower valuation than those other dire times. The company is very well capitalized, with $4 billion in cash on its balance sheet. Capital expenditures are coming down significantly as it has completed its Encore Boston Harbor project. I’m expecting the company to generate $2 billion in Ebitda and $1 billion in free cash flow in the calendar year of 2022. I spoke to management, and the company is very bullish on a recovery.
Macau is the single biggest driver of this stock, and we think most investors have been on the sidelines before the Golden Week holiday, which this year runs from Oct. 1 through Oct. 8. This holiday marks the beginning of increased visitation after the resumption of travel visas from Mainland China to Macau. The first few days of the Golden Week holiday have shown slightly weaker data than expected. But the Chinese government only recently resumed issuing visas for Macau, and it takes a few weeks to approve them. We expect the visitation data for the end of the holiday to start picking up and for visitation to continue to strengthen thereafter.
Most investors are not positioned for a bounce. It has been a consensus move to be short or to wait to buy Macau stocks, with the “I can buy them later, not earlier,” sentiment prevailing. Within Greater China, travel trends are pretty encouraging. Hotel occupancy is 60% or more, versus what is typically 70% (with a large majority being leisure), showing strong pent-up demand for travel. Mainland China is discouraging outbound travel to other vacation areas (such as Cambodia, the Philippines, and Thailand) by enacting a mandatory two-week quarantine measure for anyone coming back into the country.
Macau travelers, on the other hand, are not required to quarantine at all. This should be good for Wynn and is underappreciated by investors. Additionally, junket operators have told us there is clear pent-up demand for gambling. Gambling is very popular in China, but unlike in the U.S., online gambling is illegal in China. That means there are limited substitutes for casino gambling in China.
Melco Resorts & Entertainment
is a comparable casino operator in Macau, and two very interesting statements from its last investor call in early August were:
- 1. “We continue to expect a faster read out and faster growth in the premium gaming segment, which benefits our portfolio of luxury integrated resorts. It is setting us up nicely for the expected recovery in the second half of the year”
- 2. “Considering that Macau is probably the safest place on earth without a single COVID case for quite a few months now. And also the lack of travel options and destinations that mainland Chinese get. We are positioned very positively.”
So why do I express this theme with WYNN and not just buy a basket of all the casino operators (e.g.,
Las Vegas Sands,
MGM Resorts International
)? Even though the basket would probably also do well, there are two primary reasons why I picked WYNN: I want the stock with the most exposure to Macau and the most exposure to the VIP gaming segment.
- 1. Macau will be the first big casino destination to come back as virus cases in China are relatively negligible. Of the multinational casino operators, Wynn has the most exposure to Macau. Las Vegas Sands is second, with about 60% of its business exposed to Macau.
- 2. Wynn has the most exposure to VIP players, who account for 50% of the company’s revenue. The other operators are more exposed to the mass market and premium mass market—players you can see on the casino floor who are gambling at much lower stakes. Why do I want more VIP exposure? Because I believe the VIP gaming segment will come back before mass market. Because of the pandemic, the tables on the casino floor that typically have six or seven players sitting side by side in close proximity will be at limited capacity. VIPs play in private rooms, typically with one player per table at much larger stakes. (Some play $1 million dollars per hand!) They also travel in private jets and have private elevators to their suites. This creates social distancing that is not available to the mass market.
- 1. Casino license renewals from the Chinese government for U.S. operators. This is not a risk until 2022 because that is when the licenses expire. A bullish note is that MGM got its license extended.
- 2. A Covid outbreak in Macau that requires a shutdown and/or a vaccine failure.
- 3. Mainland China is slow to issue visas.
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