EXECUTIVE SUMMARY
Wynn Resorts (WYNN) and Las Vegas Sands (LVS) have not yet made their full return to our Best Ideas List (MGM Resorts (MGM) currently sits up there), BUT we have been positively biased towards the Macau stocks for a while now and for good reason. The exit rate out of Q4 was strong and the YTD is off to a great start, aided by a very strong Chinese New Year (CNY). At this point, we’re working through some additional catalyst items, but Hedgeye CEO Keith McCullough views WYNN as one of the best China-linked names to own as he prepares for China’s GDP cycle to bottom here in Q1. We concur, if you’re going to be Long a Macau centric name, WYNN checks all the right boxes with sustainable market share gains, long term margin upside, robust EBITDA growth, capital return, and additional growth drivers in their domestic operations as well as future growth in the Middle East. Additionally, as fundamental analysts, we like the low earnings bar for WYNN and the Macau space broadly. The stocks have done well, but numbers need to move here.
As we note below, there are ample reasons to be bullish on WYNN’s stock, and Macro both domestically and abroad is some additional icing on the cake. Given where Macau is in its recovery, we’d view the China GDP cycle backdrop as more of a sentiment tailwind for the stocks as opposed to a material driver of spend per visit or visitation growth. That said, if Macau’s recovery shows incremental acceleration in the near term (beyond our bullish expectations), the improved macro setup in 2H could help support some nice upside for the Macau market.
A low expectations bar and WYNN’s prowess in the two most important casino markets in the world point to upside in the stock. Other growth vehicles need to be considered as well such as their growth project in the UAE, but there’s plenty of growth and earnings upside to pull from their same-store portfolio. WYNN is well positioned, and the market should start to give them the credit they deserve.
INVESTMENT THESIS – WELL POSITIONED IN TOP MARKETS
MACAU MARKET
- Recovery Back On Track But Skepticism Is High: Despite the hiccups in 2H (Sep and Nov), a real recovery is underway in both visitation and mass GGR, but investors have serious doubts that the recovery can continue from here. Hong Kong visitation has more than fully recovered with Guangdong getting closer to full recovery, meanwhile, non-Guangdong and hotel occupancy and overnights still have a long way to go before there’s a full recovery. Evidence is clear – when given access, high quality visitors are coming to the market and spending – mass win per visitor is trending up relative to ‘19.
- CNY A Big Test… Macau Passed The Test: After a successful Golden week in October, Christmas holiday, and western calendar new year, Macau needed to deliver in the big moment over Chinese New Year. Evidence suggests the market did get more than the expected bump in visitor counts and mass revenue growth. The signal sent by the visitation access and the recent opening of additional IVS cities (HERE) are positives for what the future visitation could look like.
- Growth From Here: Demand is absorbing that incremental capacity and soon there could be room compression on the weekends. There’s potential for the long-term catalysts to play out over the near term, but the trajectory needs to be consistent for a few months with limited hiccups – we’re optimistic Q1 can build on the momentum which was ignited during December. Access to the market is improving but still not as convenient as pre-Covid.
- Long Term Overhangs: VIP business will never get back to ’19 levels; the return of competition from other foreign markets could impede L/T growth + ROICs; Government could restrict access as GGR recovery levels off beyond the targets which triggered incremental capex spend (big negative); PRC has a recent history of slowly choking off undesirable industries… online education, video games, etc. Those negatives and overhangs are out there and now well known, but with Macau’s recovery picking up and GDP set to improve and the PRC busy with other items (economy and geopolitics), Macau could be in a unique position for at least the next year or so.
- The WYNN Difference: In ’23, MGM China totally crushed it in Macau, but WYNN China nearly matched the performance of our other favorite gaming operator. WYNN China hit its stride around the middle of last year and is only just now getting credit for it… Catalysts we have laid out for WYNN over the LTM seem to be coming to fruition – sustainable cost structure and top line market share, and EBITDA share gains. Las Vegas has been a big source of growth, but Macau has been driving the incremental here. Following a strong start to the year in Q1, WYNN took it to another level in 2H with the company’s mass share and EBITDA share inflecting higher and EBITDA share nicely higher than pre-Covid. WYNN has benefited in the early recovery, but history suggests early recovery gains can last longer than the initial year, in fact, they typically compound into year 2. Even as the competition opened its full arsenal of hotel rooms and amenities, WYNN China has been able to compete and take share. WYNN’s assets are indeed top draw – desirable properties with a fully ramped up base of staffing, room inventory, and tables. The Street continues to incorrectly imply share losses.
LAS VEGAS MARKET
- Still… The Best Hotel Market In The Country: Unlike other full-service hotels and markets dominated by hotel REIT ownership, the Strip maintains almost no exposure to permanently impaired and struggling business transient. Even its group and convention business is less exposed to traditional corporate/SMB demand but is gaining share in that arena as well. Room supply growth is low and at the same time convention capacity has really ramped up and the product is fresher than competition. With convention room nights booked picking up and the leisure calendar holding firm YoY, expect another strong year of RevPAR growth in Las Vegas. In fact, we see RevPAR growth toward ~6%... well above traditional REIT market expectations.
- Multi-Year Story: The bull case on Las Vegas was never just about ’23… The Hedgeye Convention Tracker suggests a strong 2-year outlook for this increasingly important segment with bookings tracking higher on a YoY basis. LV is gaining significant group market share and that should continue – it’s a leisure market with bigger and newer rooms and still priced at a discount to competing markets. The Strip is an event driven market & the event calendar continues to build on the prior year. ‘24 will be highlighted by the super bowl but F1 should show incremental growth this year, we think. Robust event calendar + intl. Visitation in early recovery + midweek convention business roaring back = setup for growth.
- What About Gaming?: The street and now Hedgeye continues to project flat to down casino revenues but we all might be proven wrong again… gaming remains resilient and is growing on very steep comps. High quality events coming to market have been a draw for gamblers and we expect that to continue in ‘24. The comps are just a lot tougher in ‘24 so we’re a bit more cautious on how much growth could come through. Hotel & non-gaming remain the bigger drivers to our Vegas thesis.
- The WYNN Difference: WYNN harnessed the market growth drivers of ’23 put consecutive quarters of gaming and non-gaming market share gains. WYNN’s Las Vegas operations really showed out in Q4, but there’s ample evidence of their share gains and prowess in prior quarters. With the market and its event programming skewing towards a higher end guest, we expect ’24 to bring about much of the same for WYNN. Growth might be limited but estimates are much too bearish in our view.
CONCLUSION | WYNN = A GREAT WAY TO PLAY GROWTH IN ASIA AND VEGAS
The Macau operators might never get the kind of valuation appreciation they used to get in GGR recovery periods, but for the stocks to work, especially WYNN, they won’t necessarily need it. The ongoing EBITDA recovery in Macau and significant growth we expect this year and next, as well as the stable performances in Las Vegas and Boston, should be more than enough to support a higher stock price. Macau exposure and the stops and starts of the recovery and the macro sentiment issues have been overhangs over the last two years, but there’s reason to believe those headwinds are subsiding and WYNN looks primed for that reversal of sentiment.
Market exposure and company catalyst support higher estimates and a higher stock price for WYNN.
