(Bloomberg) -- Macau casino shares are poised for a 50 percent rebound if history repeats itself, according to Morgan Stanley.
Based on the last cycle that ended in July 2012, shares are set to recover on the back of improving earnings, followed by a sharp correction, analysts Praveen K Choudhary and Jeremy An wrote in a note Thursday. A Bloomberg Intelligence index for Macau casinos has tumbled more than 30 percent since this year's peak in May as gaming revenue growth slowed and analysts turned cautious on the sector.
That echoes the previous cycle, when VIP revenue growth started to decelerate and dragged down shares by 30 percent, the note said. Stocks then bottomed and began a steep rebound. The Macau gaming measure jumped 3.7 percent as of 10:41 a.m. in Hong Kong on Friday, headed for a two-day rally of 8.3 percent. MGM China Holdings Ltd. climbed 4.4 percent, while Sands China Ltd. and Wynn Macau Ltd. rose more than 3.4 percent.
Earnings before interest, tax, depreciation and amortization for Macau casino companies may grow 19 percent on year this quarter, according to the note.
If the current cycle were to follow the pattern seven years ago, though -- shares may correct 30 percent following the rebound. When stocks surged from January to April 2012 amid solid mass market revenue growth, a 30 percent correction followed as earnings estimate revisions remained negative and EBITDA growth began to decelerate.
Earlier this week, Deutsche Bank AG cut its ratings on casino operators, noting the current downcycle is similar to the late-2011 to mid-2012 slowdown when gaming revenue growth sharply decelerated.
To contact the reporter on this story: Daniela Wei in Hong Kong at jwei74@bloomberg.net
To contact the editors responsible for this story: K. Oanh Ha at oha3@bloomberg.net, ;Will Davies at wdavies13@bloomberg.net, Kana Nishizawa, Ron Harui
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