What’s Priced In to Macao’s Casinos’ Valuations?
Current industry valuation
On March 28, 2017, the Macao casino industry’s valuation stood at 11.5x, lower than its average of 12.4x in November 2005. In 2016, the industry’s average valuation was 12.1x.
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A turnaround in revenue and earnings is expected to be the most significant valuation driver for Macao’s casinos. This turnaround will depend on casinos’ abilities to attract middle-class tourists in support of its mass-market segment. Another driver will be government support. However, these drivers are also key risks.
Macao’s casino revenues rebounded for the seventh consecutive month in February 2017. For now, both the VIP and mass-market segments are showing strong growth. There are other positives visible, too. For example, there’s been growth in visitors’ average daily spending, which looked like a distant dream a few months ago. This growth has also led to the rerating of casino stocks, as we can see in the chart above.
Long-term recovery will have to be led by the high margin, high visibility mass market. However, visitor volumes will need to rise dramatically for any recovery to be meaningful for Macao. Oversupply is also still a problem. Analysts are, however, positive about Macao’s growth in 2017.
Investors who want to avoid the risk of investing in a single casino company such as Sands China (LVS), Melco Crown (MPEL), Wynn Macao (WYNN), or MGM China (MGM) may want to invest in ETFs that invest in casino stocks. These include the VanEck Vectors Gaming ETF (BJK) and the Consumer Discretionary Select Sector SPDR ETF (XLY).
Visit Market Realist’s Casinos and Gaming page to learn more about the industry, its indicators, and its current trends.