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Macao Casino Industry Valuation: What’s Priced In?

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Current industry valuation

As of December 10, 2015, the Macao casino industry’s valuation stands at 12.9x. This is close to the industry average valuation of 12.5x from April 2008.

For 2015, the average valuation was at 12x. Casinos included in this valuation were Las Vegas Sands (LVS), Wynn Resorts (WYNN), Melco Crown Entertainment (MPEL), and MGM Resorts (MGM).

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Why the EV-to-EBITDA multiple?

Capital-intensive companies such as casinos are better valued using EV-to-EBITDA multiples. These companies have high levels of depreciation and amortization and varying degrees of leverage. The EV-to-EBITDA calculation is capital structure neutral, thus making these companies comparable.

Valuation drivers

A turnaround in revenue and earnings will be the most significant valuation driver for Macao casinos. This will depend on casinos’ abilities to attract mass market, middle-class tourists. Another driver will be government support.

Our analysis

Macao casinos’ revenues have fallen for the 21st consecutive month. Though the pace of the fall has slowed, the industry still has a long way to go. In the short term, China’s crackdown on corruption is expected to keep VIPs away from casinos, while the weak economy will keep the mass market away.

In the long term, all hopes are pinned on Macao’s ability to shift from VIP gaming to mass market gaming. A diversified revenue stream is expected to make Macao’s economy more sustainable. This growth potential is expected to drive future valuations.

Investors who want to avoid the risk of investing in single casino companies may be interested 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 current trends.

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