No, actually, the first one is correct: "I love it when Sao Lao wear traditional clothes". This is ok - the 'love it' refers to "the act of wearing the clothes"
But "I love them when sao Lao wear traditional clothes" might be grammatically correct but is a bit confusing because it implies that you "love the girls" when they 'wear traditional clothes' as if you don't love them when they don't wear traditional clothes.
