Macau:Junket SMS highlights regulatory risks

Stock multiples may be hit but fundamentals should remain strong.

    On Friday, a large Macau junket operator sent an SMS to its VIP customers,saying China is stepping up investigations into underground banking. Nearterm, we think Macau stock multiples will get hit as this news remind investorsof regulatory risks. Some investors also worry these govt actions will impactjunket liquidity. After speaking to the junket, we conclude junket liquidity willlikely remain strong despite these govt actions, as this is not the first time govtlaunched these investigations. That said, sentiments towards VIP-focus stocks,e.g.Wynn (Buy), Galaxy (Hold), and SJM (Hold), may turn sour.

    What prompted the junket operator to send that SMS.

    We believe what prompted the junket operator to send that message to its VIPcustomers was that a few underground banking networks, which were used tohelp VIPs transfer money to junket agents, had a dozen of their accountsrecently frozen and/or being investigated by Chinese authorities. As such, thejunket operator wanted to remind VIPs not to keep money in these accountsfor too long, in case these accounts would be frozen by the authorities. Someinvestors misunderstand this message as the junket operator asking VIPs towithdraw money from the junket accounts, which may then impact junketliquidity. In fact, this is not the case. Junket liquidity has remained abundant.

    Why more underground banking accounts recently got investigated.

    As we wrote in our report “New regulatory risks (17 May 2017)”, PBOC issue anew decree stating that, effective 1 July 2017, Chinese banks will need to startreporting domestic transactions by any individuals over Rmb500,000 as largetransactions to China’s AML Monitoring & Analysis Center. (See table on rightfor details.) In the past, govt monitoring was mostly on “cross-bordertransfers”. But since underground banking works mostly by matchingRmb/US$ needs by utilizing the un-repatriated export receipts accumulatedoffshore, most of the underground banking transactions actually involve twoparallel “domestic transfers” happening on both sides of the borders. As such,this new decree is now able to detect more underground banking accounts.

    See bottom chart for an illustration on an underground banking transfer.

    Downside risks surrounds the uncertainty of regulations and their impacts.

    We value Macau stocks on SOTP. Downside risks are regulatory risks. Upsiderisks are strong junket liquidity keeping GGR/day high in 2H17.