It’s been a rough year for Wynn Resorts (NASDAQ:WYNN). After several years of slumping revenues in the Macau market, Wynn stock looked poised to finally make new all-time highs in 2018.
But then the trade war with China hit.
Fortunately, Wynn’s China situation isn’t as bad as the market seems to think, In fact, an end to the trade war could be an extremely bullish near-term catalyst for WYNN.
Wynn Stock and China
Wynn may not seem like an obvious victim of the trade war, but Wynn needs a healthy Chinese economy. In the fourth quarter, Wynn generated $1.29 billion in revenue from its two casinos in Macau, China. That same quarter, Wynn’s U.S. operations in Las Vegas generated just $393.6 million in revenue.
In other words, 76 percent of Wynn’s total operating revenue last quarter came from Macau. Wynn may be an American company, but three fourths of its business comes from China.
Trade war aside, Macau has been a roller coaster ride for casino investors in the past decade. A period of booming growth in Macau from 2007 to 2014 sent Wynn stock up 170 percent. However the government decided to crack down on corruption in Macau and, after peaking in February 2014, gross gaming revenue growth took a nosedive.
As a result, Macau and Wynn investors endured a streak of 26 consecutive months of GGR declines in Macau. By the time the losing streak ended in September 2016, Wynn stock was down more than 60 percent from its 2014 highs.
Entering 2019, Macau has once again been on a winning streak, registering 14 percent GGR growth in 2018 and riding a new streak of 29 consecutive months of growth.
That streak ended in January, when Macau reported a 5 percent GGR decline.
How Bad Is Wynn’s China Situation?
While investors wait for the February GGR numbers to see if January was an outlier or a new trend in Macau, they can take comfort in the fourth-quarter numbers. Wynn’s Las Vegas revenue was up 3.1 percent from a year ago, while its Macau revenue was up 4.3 percent.
Wynn also issued a 50 percent dividend hike, its first dividend increase since it slashed its dividend by 80 percent back in late 2014.
There’s no question the slowdown in Macau has been largely influenced by the slowdown in the overall Chinese economy. Chinese consumers are rightfully concerned about the impact of the trade war. When consumers are concerned, discretionary spending on activities like gambling is often the first to be cut.
However, even a slowing Chinese economy logged 6.4 percent GDP growth in the fourth quarter, well above the “booming” U.S. GDP growth of 3.5 percent last quarter.
Positive Catalysts and Wynn Stock
President Donald Trump has made it clear that he will hold China’s feet to the fire when it comes to negotiating a better trade deal. However, the trade war is negatively impacting both Chinese and American companies.
U.S. earnings were down overall in the fourth quarter, and a trade deal is in the best interest of both nations. Trump has set an early March deadline to reach some sort of deal or he has said he would ramp up U.S. tariffs on China.
Higher tariffs would certainly provoke some sort of retaliation from China, and there would be a real risk to the U.S. economy.
The U.S. and China may not reach a concrete deal by the March 1 deadline, but it wouldn’t be surprising to see Trump agree to an extension of the deadline given good faith negotiations by China.
Even in a worst-case scenario in which the U.S. and China ramp up the trade war next month, it would create a situation where both governments would be under a new level of intense scrutiny as the fallout from the trade war pressures both nations’ economies.
Whether it happens this month, this year or next year, it seems unlikely that Trump will carry on this trade war through the 2020 U.S. elections.
Assuming the trade war comes to an end at some point, stocks with exposure to China, such as Wynn, should get a huge boost in sentiment. An end to the trade war takes the worst-case scenario off the table.
As of this writing, Wayne Duggan held no positions in the aforementioned securities.