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Why the Macao Casino Industry’s Valuation May Remain Low

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Current industry valuation

As of December 10, 2015, the Macao casino industry’s valuation stands at 11.10x. However, the average valuation for 2015 is much lower at 9.6x. In fact, this is one of the lowest valuations the industry has seen since 2008. The industry saw its highest valuation of 16x in 2007. Stocks included are Wynn Resorts (WYNN), Melco Crown Entertainment (MPEL), Las Vegas Sands (LVS), and MGM Resorts (MGM).

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EV/EBITDA multiple

Capital-intensive companies like casinos are best valued using the EV/EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple. These companies have high levels of depreciation and amortization and varying degrees of leverage. The EV/EBITDA is capital structure neutral, thus making these companies comparable.

Valuation driver

For the foreseeable future, Macao casinos’ valuation is expected to be driven by the bounce back in revenue and earnings, which in turn will be driven by the casinos’ ability to attract more middle class tourists and the government’s policy actions.

Our analysis

Macao’s shift from VIP gaming to the mass gaming market and non-gaming revenue (like hotels, retail, and entertainment) is expected to benefit Macao in the long run. A diversified revenue stream is expected to make Macao’s economy more sustainable. This growth potential is expected to drive future valuations.

In the near term, however, the end to this pain is nowhere in sight. The Chinese government’s severe crackdown on corruption will keep wealthy individuals away from the gaming market for quite some time, which in turn will continue to pressure the industry’s valuation in the short term.

Investors who want to avoid the risk of investing in a single casino company may invest in ETFs that invest in casino stocks. These include the Markets Vector Gaming (BJK) and the Consumer Discretionary Select Sector SPDR Fund (XLY).

Visit Market Realist’s Casinos and Gaming page to learn more about the industry, its indicators, and current trends.

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