Macau Gaming:New KYC ATMs are deployed and will hurt sentiment

Recall the announcement of new KYC ATM machines: According to Macau’sGPVG (government spokesperson’s office), on 7 May 2017, new ATM machines willbe phased in to strengthen “know your customer” (KYC) procedures. This movefollows the recommendations suggested by the Asia/Pacific Group on MoneyLaundering (APG) after the FATF audit in 2016. These new machines requiremainland Chinese cardholders of UnionPay ATM cards to show their national IDcards and incorporate facial recognition technology to verify the identities of thecardholders before cash will be dispensed. This measure follows the lowering of theATM per transaction withdrawal limit in 2016 in an effort to enhance anti-moneylaundering and antiterrorism measures, as well as to curb capital flight from China.

    While surprised by the speed of the rollout, we continue to think sentimentrather than fundamentals will be hurt: We originally took the view that theimplementation would be challenging as it would mean granting access to China’snational biometric database to Macau’s banks and the technology would require timeand money to develop. Even though the rollout speed was faster than expected, itdoes not change the fact that the new measures will mainly impact players who useother cardholders’ ATM cards to withdraw money in Macau. However, we think thiskind of player is not a significant contributor to Macau’s gaming revenue. This isbecause when the ATM per transaction limit was lowered in December 2016, gamingrevenue growth continued to accelerate, which suggests that ATMs are not a keychannel in providing gaming liquidity. Also, we do not think the new measures targetthe gaming industry specifically. The government is only acting in response to theFATF audit recommendations to prepare for the annual FATF meeting in July 2017.

    Share prices may take a breather in the near term: Macau names have rallied28% YTD since May gaming revenue growth surprised on the upside, outperformingthe Hang Seng Index by 10%. Trading at c16x FY17e EV/EBITDA, the negativesentiment could weight on the sector, even though fundamentals remain intact. Wecontinue to recommend names with solid operating performance and undemandingvaluations