Studio City International: Potential Strong Upside Ahead

Investors Should Consider Buying Shares of Studio City International Holdings Limited

Studio City International Holdings Limited (NYSE:MSC)'s recent surge shouldn't fool investors into thinking this stock isn't cheap anymore.

While these price levels are already well above the 200-day and 100-day moving averages (dark and light blue lines in the chart below), they are still trading at a significant discount to pre-pandemic levels (see 5-year stock price chart below).

One-year MSC stock price chart with 200-, 100- and 50-day moving averages (light green line):

5-year MSC stock price chart:

Furthermore, with the potential for growth stemming from an expected strong rebound in demand for casinos and resorts following the Chinese government's move away from zero tolerance towards COVID-19, I think these price levels still offer an opportunity to stock up before bullish sentiment potentially drives the share price further higher.

Therefore, investors should consider buying shares in Studio City International Holdings Limited in my view.

Investors should be aware that the asset carries significant investment risk given the possibility of it being delisted from the US stock exchange in retaliation for the current geopolitical cold war between the US and China because of Taiwan.

However, the sacrifice could be worth it compared to the potential benefits that could accrue to the stock's market value if the company picks up where it left off before the pandemic.

About Studio City International Holdings Limited in the Resorts & Casinos Industry

Studio City International Holdings Limited is headquartered in Hong Kong and operates as a resort and casino company.

Specifically, Studio City International Holdings Limited operates “Studio City phase 1” which is “a world-class gaming, retail and entertainment resort located in Cotai, Macau” according to the company in its fourth-quarter 2022 results presentation.

Macau is a special administrative region of the People's Republic of China on the south coast of China.

Next to hotel casino resorts with hundreds of mass market gaming tables, slot machines and dozens of VIP tables with rolling chips, the company declares that it operates the following facilities:

The world’s first figure-8 Ferris wheel;– A 5,000-seat live performance arena;– Approximately 1,600 luxury hotel rooms

The “8-Ferris wheel” is a giant golden color eight construction in Macau (“the world’s first of its kind”, according to this CNN's article) and is located between the two towers of the building called “Studio City”.

How Studio City International Holdings Limited Is Performing

On March 1st, 2023, Studio City International Holdings Limited published its financial results for the year ended December 31, 2022.

In 2022, the company suffered setbacks due to external factors such as a government-ordered temporary closure of Macau's casinos in July and the government's imposition of strict restrictions to curb the resurgence of COVID-19 infections in Macau and mainland China.

As a result, a decline in casino contract revenues and lower non-gambling revenues reflected a negative change for Studio City International Holdings Limited's top line as follows.

Total operating revenue for 2022 was just $11.5 million, a dramatic decrease from the previous year's $106.9 million.

The troubles of 2022 interrupted the positive trend that allowed the revenues to resume in 2021.

The chart and table below show that Studio City International Holdings Limited’s revenues showed encouraging signs of growth in 2021 before Macau's government-mandated temporary closure in July 2022 and COVID-19-related restrictions brought the company's recovery to a halt.

A similar trend emerges from the following graphics, which show that annual revenues in the calendar year 2021 recovered somewhat from the catastrophe of the pandemic year.

In addition to lower revenue, cost of sales of $73 million (down 4.2% year-over-year) and total operating expenses of $215.8 million (roughly flat year-over-year) also negatively contributed to the company's profitability.

So, Studio City International Holdings Limited ended the full year of 2022 with an operating loss of $277.2 million, worsening from $191.6 million in 2021.

The company paid $92.4 million in interest expense (up 1.5% year over year) on borrowings totaling $2.45 billion at the end of 2022.

As such, the net loss attributable to Studio City was $326.5 million in 2022, compared to $252.6 million in 2021.

Additionally, Studio City Adjusted EBITDA was a loss of $140.8 million for 2022 compared to a loss for Adjusted EBITDA of $56.5 million in 2021.

Adjusted EBITDA, like all other profitability metrics, suffered from lower revenue due to the decline in casino deals and non-gaming revenue.

However, Casino Traffic in Macau Is on The Rise

However, in 2023, Studio City International Holdings Limited's revenues are expected to resume the positive trend of 2021, and this could potentially result in a sharp rise in the share price should the company's profitability benefit from the recovery. The conditions for this seem to be in place.

According to the results of some sector reviews conducted by analysts at Jefferies Financial Group Inc. (JEF) and released last February, the business of Macau casino operators recovered very well in February 2023.

Jefferies pointed to a rising casino VIP growth rate and steady mass market rate growth since the 2023 7-day Chinese New Year holiday from Jan. 21-27.

A casino VIP is simply a wealthy person who spends huge amounts of money on gaming tables and slot machines in casinos. The mass market rate is an indicator of the volume of customers using the casino's services, as its determination is based on the amount of money wagered at the gaming tables or in a slot machine.

According to David Katz, an analyst at Jefferies, gross gaming revenue indicates that Macau casinos are performing well, which is why operators should be generating positive EBITDA.

Gross gaming revenue (roughly meaning player bets minus player winnings) in Macau grew 82.5% year-on-year to $1.4 billion in January, beating the consensus estimate of 37% year-on-year growth.

The strong month came as the government lifted most COVID-19 border restrictions on January 8, prompting a resurgence of tourists from mainland China, Hong Kong and Taiwan.

The lifting of restrictions on the economy after the Chinese government decided to drop its zero-tolerance policy towards the COVID-19 virus should allow the Resorts & Casinos industry of Macau to recover from their worst-ever sales performance in 2022.

Interesting Business Developments

Studio City International Holdings Limited will open one of its hotel towers and an indoor water park to the public sometime in the second quarter of 2023. The indoor water park appears to be the largest of its kind in Asia.

These VIP entertainment facilities are part of a project called Studio City Phase 2, which refers to a $1.3 billion architectural complex.

Upon completion of the project, there will be one of the largest indoor and outdoor water parks in Asia and a six-hall cinema complex consisting of two regular houses and four suites for VIP clients. The project also includes a state-of-the-art MICE (Meetings, Incentives, Congresses, Exhibitions) area.

According to Lawrence Yau Lung Ho - the CEO of Melco Resorts & Entertainment Limited (MLCO), a major shareholder of Studio City International Holdings Limited, - the new five-star hotel towers of the Studio City Phase 2 complex should offer an additional 900 rooms and suites.

A second phase of the opening of the complex's sites to the public is expected to take place sometime in the third quarter of 2023.

The Financial Condition of Studio City International Holdings Limited

The net debt of casino and resort operators has skyrocketed due to increased government oversight and scrutiny of new contracts and COVID-19 restrictions impacting Macau's gambling revenues.

The situation hasn't spared Studio City International Holdings Limited's balance sheet either, but objectively speaking there is room for improvement.

As of December 31, 2022, the company had cash and bank balances totaling $509.7 million against total debt of $2.45 billion.

According to analysts at GuruFocus, the company has an Altman Z-Score of -0.4, indicating financial distress zones which implies a high probability of bankruptcy within 2 years.

As the situation in Macau continues to normalize for tourists and guests, while MSC's Studio City Phase 2 complex could attract additional demand as new entertainment options come online, there is scope for the company's financial position to improve from the current situation.

The Stock Valuation

Studio City International Holdings Limited shares are trading at $6.45 as of this writing giving it a market capitalization of $1.25 billion. The stock price fluctuated between a low of $1.52 per share and a high of $8.80 per share.

The share price appears not expensive given the growth prospects discussed in this article, while from a technical perspective, additional Studio City shares could be added to any position today by taking advantage of low levels for the share price compared to recent valuations.

The stock price is currently trading below the 50-day simple moving average line after retreating from March 1, 2023's high of $7.8.

The stock appears poised to fall further as the recent trend of the 14-day Relative Strength Index curve suggests, but it's unlikely to be trading much lower than it is today.

The stock, like any other US-listed stock, could suffer from market headwinds due to the crisis in the US regional banking system, sparked by the bankruptcies of Silicon Valley Bank and Signature Bank (SBNY).

But the factors that would support ever-higher levels for Studio City's stock price appear to possess characteristics of long-term catalysts as they relate to the ongoing recovery of Macau's casino & resort industry and the company's expansion project.

Furthermore, Studio City International Holdings Limited has a 12-month price-to-book of 1.51, which is below the industry median of 2.06 but slightly above the company's 5-year average of 1.22.

While Studio City International Holdings Limited’s Price / Book [FWD] of 2.45 is slightly below the sector median of 2.49.

A comparison based on EV/EBITDA key figures is currently not possible as the company generates negative EBITDA.

Studio City International Holdings saw its 12-month price-to-sales ratio of 96.61 rise sharply from the five-year average of 7.70 and is also impressively above the industry median of 0.88.

However, Studio City 12-month price-to-sales ratio is expected to improve as sales increase. Company revenue will benefit from the return of visitors to Studio City's Macau facilities as all previously in place restrictions to limit infection from COVID-19 have been lifted.

In terms of Studio City's price-to-sales ratio [FWD], i.e., the one that takes future sales as the denominator of the quotient, the following consideration applies:

Analysts are putting the price to sales ratio [FWD] for Studio City at 5.96x, which while still above the industry average of 0.87, represents a dramatic improvement over the 12-month price to sales ratio.

Conclusion

Tourists free from any restrictions against COVID-19 can again visit casinos and resorts in Studio City. The company's project called Studio City Phase 2 gradually expands the range of entertainment facilities. These are powerful catalysts with the potential to create relevant upward pressure on the MSC share price.

Based on these assumptions for MSC's recovery, a decision to buy the shares from current levels can be seen as reasonable.