Macau:New UnionPay regulatory risks

Major underground money transfer channel busted

    Local media (exmoo.com) reported yesterday that China had cracked down amajor underground banking channel that was facilitating money flows viaillegal UnionPay point-of-sales (POS) machines in Macau. This particularunderground banking channel has reportedly been operating since Sep 2013,transacting as much as Rmb70bn, of which Rmb49bn was related to Macau.Given the importance of UnionPay card transactions as cash access forpremium mass players, we see risks for casino operators with high premiummass exposures. We turned our view on Macau from Overweight to Neutral on26April (Macau: Recovery priced-in) as we feel current valuation at high-endof historical range has not priced in any regulatory risks.

    Govt is silently cracking down on illegal UnionPay POS terminals

    Industry consultant "iGamingX" has learned of a case where a Chinese player'sUnionPay account was locked after obtaining cash through an illegal UnionPayPOS device. Thereafter several other customers who used the same machinealso had their bank accounts frozen upon return to China. It appears that theChinese authorities are now able to identify when these illegal UnionPay POSterminals connected to the domestic Chinese banking network are being usedoutside of mainland China.

    Negative impact on premium mass and low end VIP

    “iGamigX" also estimates that the majority of premium mass and low-end VIPplayers still use these illegal UnionPay POS terminals connected to thedomestic Chinese banking network , instead of the legal one connected to theMacau banking network, as they want to mask their large overseas cashwithdrawals as domestic transactionsNew banking decree may further deter underground banking operationsAccording to PBOC’s new banking decree, from 1July 2017, Chinese bankswill need to file domestic cash transactions above Rmb50,000(or US$10,000equivalent in foreign currencies) as large transactions to China AMLMonitoring & Analysis Center. This reporting threshold is lowered fromRmb200,000(US$29,000). This means an individual’s withdrawing /depositingof over Rmb50,000cash would be noted as an large transaction. Threshold ofdomestic individual transfer is set at Rmb500,000. Though not directly targetedat capital flight, this will pose further restriction when people transferdomestically to underground banking accounts. Report: China: A far-reachingpolicy move by the PBoC by our Economist, Li Zeng, Zhiwei Zhang.

    China’s capital controls and anti-money laundering rules are key risks

    We turned our views on Macau from Overweight to Neutral on 26April(Macau: Recovery priced-in). After the strong share price rally until April, sectorvaluation is still expensive at over 14x 2017consensus EV/EBITDA, over 1standard deviation over historical average (12.2x). We value Macau stocks onSOTP. Risks mostly relate to regulatory tightening, including China’s capitalcontrols, anti-money laundering rules, and visa policy changes.