Analyzing Macao Casinos’ Valuation
Current industry valuation
As of June 23, 2017, the Macao casino industry’s valuation stands at 12.1x. However, the average valuation for 2017 is much lower, at 11.3x. However, this valuation is a definite improvement from the lows seen in 2015, when the industry valuation averaged at 9.6x. The industry saw its highest valuation of 16x in 2007.
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Macao casinos’ revenue has been growing since August 2016. Its valuation has followed suit, rising from 11.5x in August 2016 to 12.1x in June 2017. Going forward, we believe that Macao casinos’ valuation will be driven by their ability to sustain revenue growth. This sustainability depends on casinos being able to grow mass-market revenue by attracting middle-class tourists. Policy actions by the Chinese government, also key drivers, are a major source of uncertainty.
The Chinese government has directed Macao to shift its economy from being purely gaming industry dependent to depending on more industries such as mass-market tourism, hotels, retail, and entertainment. If achieved, the diversified revenue stream could bode well for Macao, as it will make its economic growth more sustainable and less dependent on government regulations. This growth potential is expected to drive its future valuation. However, the industry is bound to struggle until Macao achieves sustainable growth.
Investors can gain exposure to casino stock by investing in the iShares US Consumer Services ETF (IYC), which invests 0.52% of its portfolio in MGM Resorts (MGM) and 0.35% in Wynn Resorts (WYNN). It has no holdings in Las Vegas Sands (LVS) or Melco Resorts & Entertainment (MLCO).