Brokerage JP Morgan Securities (Asia Pacific) Ltd said in a Wednesday note it was downgrading to “neutral/underweight”, from “overweight”, all Macau gaming stocks.
This was due to a “policy signal” on Tuesday from the Macau authorities, “indicating heightened scrutiny on capital management and daily operation,” linked to a proposed new regulatory regime for the industry.
The government has said Macau’s gaming law needs to be updated as a linked issue to a fresh public tender process for Macau gaming rights. The city’s existing six gaming concessions are due to expire in June 2022.
The brokerage added in the headline to its note, there was “no point fighting the policy” direction for the Macau market.
JP Morgan said the “level of actual regulation/execution” that would apply, “remains a moot point,” but the announcement would have “already planted a seed of doubt in investors’ minds”.
That was “probably enough to de-rate these names until clarity emerges on key points, an event that’s unlikely to happen this year, in our view,” wrote analysts DS Kim, Amanda Cheng, and Livy Lyu.
On Tuesday, the Macau government had revealed a general outline of proposed changes to Macau’s gaming law framework and casino regulatory system. The ideas will be subject to public consultation, starting from Wednesday (September 15) and running until October 29.
Among the proposals was that approval would be needed from the Macau government before dividends deriving from Macau operations could be distributed to operators’ shareholders.
JP Morgan said in its memo: “While it’s unclear how strictly the government would control their [operators’] capital, we believe the hefty dividends of pre-Covid days… would likely get scrutinised if not restricted, in turn making the story of ‘attractive free cash flows’ – which was the reason why we liked the sector – far less compelling, in our view.”
Lei Wai Nong, Macau’s Secretary for Economy and Finance, said during a Tuesday media briefing on the gaming law revision that the government needed “to see if they [casino operators] are financially capable to … fulfil their contractual requirements.” He noted that the government would not interfere in “normal business practices” if casino concessionaires met the requirements set in their contracts.
In a Tuesday memo, brokerage Sanford C. Bernstein Ltd suggested that the government’s goal was “not to necessarily limit shareholder distributions, but rather to make sure that proper investment is being made” in the Macau market. The institution highlighted that there was already a restriction in place in Macau, “that limits dividends [by casino concessionaires] to retained earnings.”
Also tabled by the Macau authorities on Tuesday, was that government-appointed “delegates” would oversee how gaming operators fulfil their concession duties. The consultation document mentioned specifically that the Macau government was seeking a “bigger monitoring capacity on the daily operation of the gaming companies”.
A delegate system is already used in Macau to monitor other forms of public concession.
JP Morgan said that the monitoring as proposed for the casino sector “could potentially limit opportunities from conventional grey areas – such as UnionPay [Co Ltd] cash-back transactions for premium mass, [and] deposit-taking activities for VIPs”.
Other government suggestions featured in the document put up for public consultation include: revising the number of concessions allowed in the market and the duration of any new concession term; ending the casino sub-concession system; and introducing new regulatory requirements covering casino concessionaires.
Investment bank Morgan Stanley said in a Tuesday memo that it expected the current number of six licensees in the Macau market to “remain unchanged,” with the existing “three sub-licences to become normal licences.”
“We think the licence duration could be reduced, but that would not be surprising,” wrote analysts Praveen Choudhary, Gareth Leung and Thomas Allen. In the consultation text, the government proposed revising the length of future gaming concessions, currently set at 20 years. No time period was specified in the document.
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