EBITDA key to valuation: MS

Company EBITDA is the single most important driver for industry as well as stock outperformance, notes Morgan Stanley in a report on Thursday.

The brokerage, which released a “Primer on Macau” on Thursday, aims to identify indicators to predict industry turning points and highlight stock picking techniques.

“For gaming stocks, typically the company with the highest EBITDA quarter-on-quarter growth in a given quarter outperforms the company with the smallest EBITDA growth quarter-on-quarter,” said Morgan Stanley.

“The same applies for companies on an annual basis. This is irrespective of whether the growth comes organically or due to the opening of a mega casino. This is why gaming stocks tend to outperform ahead of the opening of multi-billion dollar projects as long as EBITDA continues to show ramp on a quarter-on-quarter basis.”

In regards to industry drivers, analysts believe gaming revenue in Macau will be driven by a combination of visitation penetration rate in China, infrastructure improvements, customer mix, and macro factors.

The macro factors that Morgan Stanley refers to include incoming or potential regulation (including China anti-corruption and capital outflow control, Macau concession renewal and smoking ban), RMB depreciation and regional competition.

“Macau is often perceived to be one key channel of capital outflow from China and is associated with money laundering. We expect regulations to get tighter in future, especially on the VIP and premium mass segments,” said the brokerage.

Other policies include the easing of the visa procedure, which could boost visitation.