Macau Gaming Sector:Key policy takeaways from a Macau legislator

What’s new:We recentlysat down with Macau LegislatorMr. José Pereira Coutinho, whoupdated us on the policy environment in Macautoday. From our discussion,allsigns seem to point to incremental policy tightening.We expect new measures to negatively impact the outlook for the sector.

    What’s the impact: Casinos to better oversee junket activities. Under gaming regulator DICJ’s direction, the Macau Government is increasingthe requirements for casino and junket operators to comply with existing gaming laws. Mr. Pereira Coutinho notedthat casinooperators have been requested to better overseejunket and junket-related activities, especially in the caseofsubstantial in-and outflows of cash. He alsobelieves the government is not inclined to tighten policies at once, but doesexpectcontinuous and increasing DICJ intervention goingforward.

    Telephone betting persists. Telephone betting continuesdespite the well-publicised early-May ban (seeour report, Phone betting hangs up: policy, past, present, future, 16 May 2016).The legislatorsaidthe government has not presentedan actionable plan to enforce compliance. Indeed, offenders have only facedmildconsequencesthus far, withno charges havingbeen laid againstany violators (casinos, junkets, and/or patrons).Arecent notice issued by the DICJ to enact theban (see p.2) only advises enforcement agents to issue verbalwarnings. Mr. Pereira Coutinhoplans to submita written interpellation to the Legislative Assembly shortly to address this policy shortcoming. While May’s GGR largely disappointed the street, we do not thinkitreflectsthe full extent of a complete ban (we estimatetelephone betsrepresented~20% of junket GGR pre-ban). We believe the full negative impact of a complete ban maybe incrementally felt in the months ahead.

    Side-betting poses contagion risk. DICJ seems intentonclampingdown on illicit side-betting (around 50% ofreported VIP gaming volumes, onour estimates), but such activities areinherently difficult to detect. To address theissue, DICJ has proposed conducting sting operations. Mr. Pereira Coutinho believes this move poses high contagion risk,as an increasingly critical look into the inner machinations of junket dealings wouldadversely impact the VIP business, which the investigation wouldnottarget. In our view, this potential spill-over posesfurther downside riskto the VIP segment and castsfurther doubtover its potential to recover.

    What we recommend:Weare Negative on the sector.WynnMacau (1128HK, HKD11.42) is ourtop Sell(5).Risk:upward swing in China’s economy.

    How we differ: We believe we are the first to conduct an in-depth analysis ofMacau’s policy direction.