What happened
On another brutal day for the markets, casino stock Wynn Resorts (WYNN -0.47%) was defying gravity, up an impressive 12.8% as of 1:45 p.m. ET.
The reason all comes down to China, where officials in the special administrative region of Macau said the government would begin easing COVID-19 restrictions on Chinese citizens beginning in November. Wynn gets an outsized portion of its revenue and earnings from Macau, so it's no surprise its struggling stock is rallying in response.
So what
On Monday, Macau officials said Chinese tour groups would soon be approved to visit the island beginning in November. This is a very big deal, since Chinese citizens account for an overwhelming majority of visitors to Macau. Since 2020, Chinese citizens have been restricted from traveling to Macau to varying degrees, often requiring special visas, interspersed with outright lockdowns.
Since the more contagious omicron variant broke out in the country earlier this year, China's Communist Party has engaged it a series of disruptive lockdowns across various major cities under its "zero COVID" policy. Back in July, Macau itself went into lockdown amid an outbreak on the island. Macau is a special administrative region and the only place in China where it is legal to gamble.
Long-suffering casino stock Wynn could sure use the reprieve. Although Americans may know Wynn from its iconic Wynn and Encore hotels on the Las Vegas strip, the company actually gets the majority of its profits from Macau -- at least in non-COVID times.
Back in 2019, adjusted property-level EBITDA (earnings before interest, taxes, depreciation, and amortization) for its two Macao properties, the Wynn Palace and Wynn Macau, amounted to $1.378 billion, compared with just $437 million from the Las Vegas operations and Encore Boston Harbor combined.
Given the importance of Macau to Wynn's operations, it's no wonder the stock is surging higher on the news today.
Now what
Wynn currently sports a market cap of $7.6 billion and an enterprise value of roughly $17 billion. Looking back to those 2019 figures, the stock trades at roughly a 9.4 times EV/EBITDA multiple based on "normal" 2019 EBITDA. That's much cheaper than the mid-teens EV/EBITDA multiple Wynn traded at in the years leading up to the COVID outbreak.
However, until China's restrictions are fully lifted, it's hard to say if and when this casino stock will re-rate. Wynn is still losing money on the operating income level and even more on the cash flow level, and even when restrictions lift in China, it's possible the world may go into global recession next year.
That being said, with $2 billion in cash on the balance sheet, Wynn does look like it has the liquidity to get through this period, especially if the restrictions in Macau do fully ease in November.
If the restrictions are lifted without a hitch and the world gets back to "normal," there could be material upside for Wynn. However, investors also need to be comfortable investing in China, as geopolitical concerns have also come to the fore this year and are a big factor to any business with significant operations there.
