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Takeaway: Remain negative on Macau - reaction to end of specific anti-corruption drive overdone and smoking ban guidelines look restrictive

DICJ held a meeting with the concessionaires yesterday to clarify expectations for the smoking ban

CALL TO ACTION

The implementation of the October 6, 2014 Macau smoking ban became less hazy and very clear – with no room for operator interpretation of where punters can smoke on the gaming floor.  The DICJ and Department of Health called an emergency meeting of the six Macau gaming concessionaires to discuss and clarify the smoking ban rules.  We reiterate our negative outlook for the Macau gaming operators and believe the clarification will put added pressure on the concessionaires

DETAILS

At the same time some analysts are recommending investors attempt to catch the falling Macau knife, our outlook remains decidedly negative.  Yesterday’s announcement by the Chinese government of the end of a specific anti-corruption program was interpreted as the pivot for a turn in the VIP business.  However, we believe the broader anti-corruption effort continues and see no basing of Macau’s VIP business yet.  Moreover, yesterday’s surprise convening of the concessionaires by the DICJ yielded much more specific guidelines for October 6th implementation of the smoking ban.

We understand the DICJ along with representatives from the Department of Health called a meeting with the six gaming concessionaires to discuss and clarify the smoking ban Tuesday afternoon.  Apparently, the DICJ reiterated the only area where smoking will be permitted on mass gaming floor is within the dedicated smoking rooms. Aside from the dedicated smoking rooms with special ventilation systems, all mass gaming areas will be non-smoking areas, including premium mass areas.

The DICJ further noted the clear, legal definition and difference between a mass vs. VIP table -- the definition of a mass table as opposed to a VIP table is via the classification from the DICJ whereby the annual operating premium payable to the Macau government associated with a “mass" table is HKD $150K with a “VIP” table attracting an annual premium of HKD $300K.

The DICJ then pronounced -- tables currently designated as “mass” tables cannot be amended to be included as VIP/Premium/High Limit and shall maintain the mass designation and remain as non-smoking once the regulations are in force beginning October 6, 2014.  Tables designated as VIP or junket sponsored tables within designated VIP areas or dedicated junket rooms remain unaffected and smoking will be allowed.

CONCLUSION

In our opinion, the clarification by the DICJ makes the smoking ban very black and white per the legal definition of what constitutes a mass vs VIP table.  As a result, the gaming concessionaires cannot interpret where smoking is allowed or not allowed.  We believe today’s ruling/clarification serves to further “dislocate” player time at the tables (some premium mass included), a vital component to driving play, and potentially cause further disruption as enclosed smoking areas specifically constructed for premium mass smoking may have to be dismantled.

We reiterate our negative view of the Macau gaming operators and would take advantage of yesterday’s pop to reduce positions.  For longer-term investors desiring long exposure to Macau, we favor Galaxy Entertainment Group due to its early 2015 Phase 2 opening and unique Chinese VIP strategy which is taking market share from competitors. We will be in Macau on October 8th and 9th and will update our observations real time.