What’s Priced In to Macao Casino Valuations?



Current industry valuation

As of August 25, 2017, the Macau casino industry valuation stands at 11.6x. However, the average valuation for 2017 is still lower at 11.3x. But it’s a definite improvement from the lows of 2015 when the industry valuation averaged 9.6x. The industry saw its highest valuation of 16.0x in 2007.

Valuation driver

The 12 months of consecutive growth in revenues is what’s been driving Macao casinos’ valuations in the short term. Valuations have increased from 11.5x in August 2016 (when revenues started increasing) to 12.0x in July 2017.

Revenue growth will continue to be the short-term valuation-multiple driver. That, in turn, depends on casinos being able to grow mass market revenues by attracting middle-class tourists. Policy actions by the Chinese government will also be a key driver and the major source of uncertainty.

Our analysis

In the long term, valuation multiples could be driven by Macao’s ability to achieve economic growth from sources other than gaming. That could include the growth of mass-market tourism, hotels, retail, and entertainment. That would make economic growth more sustainable and less dependent on government regulations. Many economists believe that growth potential is expected to drive future valuations.

Investors who want to avoid the risk of investing in one casino company such as Wynn Resorts (WYNN), MGM Resorts (MGM), Las Vegas Sands (LVS), or Melco Crown Entertainment (MPEL) can invest in ETFs that invest in casino stocks. These include the Market Vectors Gaming ETF (BJK) and the Consumer Discretionary Select Sector SPDR ETF (XLY).

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