GGRAsia – China ban on foreign casino backing is vague: analysts

China ban on foreign casino backing is vague: analysts

Aug 22, 2017 Newsdesk Latest News, Macau, Top of the deck

A reported Friday announcement from China’s State Council indicating there would be a “ban” on Chinese companies investing in what it termed “overseas” casino projects was short on specifics, making it hard to predict the effect – if any – on the sector, noted several industry analysts.

“As with similar notices and guidelines issued in the past, specificity and details are indeed limited,” stated a Monday memo from analysts Jamie Soo and Adrian Chan of brokerage Daiwa Securities Group Inc.

“That said, this newest development does follow a number of new rules and regulations recently introduced that seek to limit, control, or curb capital outflows and cross-border funding,” they added.

The amount of money flowing out of China last year topped US$816 billion, according to data compiled by Bloomberg.

In Macau, attempts to control money outflow from mainland China have included the recent introduction of facial recognition technology at some automated teller machines (ATMs) in the city that offer cash withdrawal services to holders of mainland-issued China UnionPay Co Ltd bank cards.

The South China Morning Post newspaper reported on Monday – citing a source it didn’t identify – that there had been a major uptick in Hong Kong of cash withdrawals from ATMs in likelihood as a “path of least resistance” and coinciding with the tougher controls in Macau.

Xinhua, an official Chinese news agency, reported on Friday that the State Council – the chief administrative authority of the People’s Republic of China – had formally laid down new rules on overseas investments by Chinese entities, referring to the need to curb “irrational” acquisitions.

The authorities are said to have set out three categories of investment sector in relation to Chinese firms’ pursuit of “overseas” assets: “banned”, “restricted” and “encouraged”.

Sin industries

The banned areas involved: what was termed “core” military technology; “gambling”, the “sex industry”, and “investments contrary to national security”.

Restricted areas were: property, hotels, film, entertainment, sports, “obsolete equipment,” and “investments that contravene environmental standards”.

The encouraged sectors were: investments that further the framework of China’s “Belt and Road” – a central government initiative linking the country’s development to partnerships with countries along traditional global trade routes; things that improve China’s technical standards; research and development; oil and mining exploration; agriculture; and fishing.

“The naming of ‘restricted’ industries may have an impact on the junkets’ liquidity environment, as a portion of their collateral base and liquidity channels does involve real estate, investment platforms, and entertainment-related industries,” noted Daiwa, referring to the security typically used by Chinese VIP gamblers for credit-based play in Macau and other casino markets, and to the junkets’ ways of ensuring there is enough capital available to keep the segment ticking over while they wait for players to pay back their losses.

Industry consultant Ben Lee of IGamiX Management and Consulting Ltd said in an emailed reply to GGRAsia that the State Council’s guidance raised questions regarding Chinese firms involved in overseas gaming projects.

“The guidance could have an enormous impact on all the Chinese companies currently involved in gaming projects all around the world: China State Construction Engineering Corp in the Bahamas with Baha Mar (where they have equity interests); Landing [International Development Ltd] in Jeju Island [South Korea] and London; Greenland [Group] in Jeju; and Guangzhou R&F [Properties Co Ltd] in Incheon [South Korea] with Caesars Entertainment,” stated Mr Lee.

Landing International has a listing on the Hong Kong Stock Exchange but also has real estate assets on the mainland.

“Undoubtedly, this move will be good for Macau as it will reduce potential competition in the long term,” suggested Mr Lee, referring to the possible restrictions on mainland Chinese firms regarding casino investment outside China.

Vitaly Umansky and Zhen Gong, analysts at brokerage Sanford C. Bernstein Ltd, wrote of the Chinese central government’s new guidance: “Several casino projects planned or already under development may be impacted. Those projects already under development with China investors may not be impacted by these new rules (but time will tell).”

They added: “However, potential future overseas projects that may rely on China investors, directly or via financing (for example, construction financing via Chinese construction firms) may face hurdles.”

Chinese state-owned banks funding new casino resorts in Macau have long been barred by national rules from investing in the gaming portion of such projects.

Investment funds

Daiwa said the latest announcement might also have a bearing on any mainland investment funds with exposure to casino equities.

“While the ban is likely targeted at primary market investments related to the construction and development of casino projects, it is uncertain from this announcement whether or not mainland-based funds investing in publicly-traded gaming companies do fall into its scope of restrictions/prohibitions or may at least be discouraged,” wrote Mr Soo and Mr Chan.

“It is not clear at this stage how the China government will view mainland investment in Macau in the ‘restricted’ industries,” noted Sanford Bernstein’s Mr Umansky and Mr Zhen.

Several commentators said the pronouncement also had the potential to have an impact on a new concession process in the Macau casino market following the expiry – on certain dates in either 2020 or 2022 – of the current six permits.

“If the ban were to stay in place during the concession renewals, the likelihood of additional concessions going to mainland China entities would be severely reduced,” said Sanford Bernstein.

Mr Lee said that if – for the purposes of the Macau gaming concession process – the Chinese central government does not regard Macau as an “overseas” jurisdiction, then that could open the way for mainland Chinese companies to make bids upon expiry of the existing concessions.

“It would make a bidding process a whole lot more interesting,” he stated.