Macau Gaming Sectorasiaresearch.daiwacm.com/eg/cgi-bin/files/Macau... · Macau government in talks...

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Macau Consumer Discretionary

What's new: We attended the press conference hosted by the Macau

Government to unveil Macau’s mid-term gaming review. The biggest

takeaway came during the off-line Q&A, when Finance Secretary Lionel

Leong and DICJ (the gaming regulator) Director Paulo Chan both called for

incremental policy tightening targeting the underbelly of the gaming sector.

Policy tightening in order. Over the past 6 months, we have seen no

material signs of policy loosening, counter to the market’s expectations.

During the mid-term review, the key risks identified appeared to be aimed

at dealing with Macau’s “suspicious transactions” and “large-amount

transactions”. The government further asserted that it is not concerned by

Macau’s current revenue base, or its rate of decline, and that the industry

will indeed need time to adjust to this new policy norm and direction. It is

noteworthy that the 2H14-1H15 round of policy tightening did not target the

casinos or their core businesses directly. That is clearly not the case now.

The significance of telephone/proxy betting. Based on our talks with the

junkets and other industry participants, this business saw 15% YoY growth

in 2015, although overall junket rolling volume still fell by 51% YoY. Prior to

the recent ban on telephone betting, we estimate this business contributed

MOP21bn in GGR in 2015, or 20%-plus of total junket gaming volume (up

from 8-10% in 2014). In our view, this tightening by the DICJ is a rational

move. That said, it is alarming that proxy betting contributes significant

gaming volume, especially among the smaller junkets (potentially as much

as 50% of gaming volumes). In our view, the ban will further hit debt-laden

junkets that are still operating and struggling. Within days of the

announcement of the ban, we heard that more small/mid-sized junkets are

planning to cut their operational presence in Macau.

What we recommend: We believe the DICJ administration and Macau

Government are on the way to introducing much-needed structural reforms

and policy revisions that will enhance the long-term viability of the industry.

However, these moves are coming at a time of declining GGR, lower

productivity of invested capital, growing indebtedness, new property

openings, and declining margins. Given the market’s seemingly high

expectations for the sector, we believe this policy direction heightens the

potential for share-price disappointment. Indeed, we remain cautious on the

Macau Gaming Sector’s fundamentals with a preference for the Cotai-

ready operators. Galaxy (27 HK, HKD24.85, Buy [1]) remains our top pick. How we differ: We believe we are the first to analyse the junket risks to

the casino operators, conduct an in-depth analysis on policy direction, and

highlight the legal obligations of the casino operators in terms of junket-

related activities.

16 May 2016

Macau Gaming Sector

Phone betting hangs up: policy past, present, future

Macau’s policy direction is leaning towards incremental tightening; stance reaffirmed during mid-term review

Phone betting up 15% YoY in 2015, accounting for >20% of junket business; ban to hit small junkets, add business risks for operators

We believe the market continues to underestimate the business and earnings risk to the operators, and the impact of further tightening

VIP GGR breakdown

Source: Compiled by Daiwa, Daiwa Note: Based on unofficial figures, luck adjusted to 2.85%

Jamie Soo(852) 2773 8529

[email protected]

Adrian Chan, CFA(852) 2848 4427

[email protected]

0

100

200

2014 2015Est. phone betting Other VIP business

Overall: -51%

Telephone betting: +>15%

(HKDb)

2

Macau Gaming Sector: 16 May 2016

Table of contents

Macau’s policy direction: the past and present ..................................................... 3

The past 6 months: a brief review ......................................................................................3

Today: what’s going on? ....................................................................................................4

A deep dive into telephone betting ......................................................................... 6

What is telephone betting? ................................................................................................6

Is it legal and how does it work? ........................................................................................6

How big is this business? ...................................................................................................7

Market-share shift illustrates segment’s significance ..........................................................7

Policy risks in China ...........................................................................................................8

Macau’s policy direction: the future ....................................................................... 9

Targeting the previously under-regulated aspects of the gaming business ........................9

Sector implications .................................................................................................14

On gross gaming revenue: further downside risk ............................................................. 14

On earnings: quality of earnings faces increasing risks .................................................... 14

On junket sector fundamentals: an incremental negative especially for operators with

high small junket exposure .............................................................................................. 15

Contagion impact on mass market ................................................................................... 16

Appendix I ................................................................................................................17

Appendix II ...............................................................................................................18

3


Macau’s policy direction: the past and present

“The Government is well aware of the systemic risks and structural issues facing

the Macau gaming industry today, and they are just beginning to tackle these issues

one-by-one in order to avoid future public outcry for accountability.”

Directly elected Macau legislator Jose Pereira Coutinho, 9 May 2016

Daiwa’s Macau Gaming policy roadmap

Date Event

The past

22-Oct-15 DICJ holds conference with key junket industry participants to refine and clarify its regulations and policies on the accounting and controls of junket operations

01-Dec-15 Appointment of Mr Paulo Martins Chan as new head of DICJ

11-Dec-15 China to launch nationwide crackdown on illegal use of UnionPay POS

13-Dec-15 Announcement of real-time monitoring system of bank cards to combat illegal cross-border financial activities and money laundering

13-Jan-16 35 non-compliant junkets denied licence renewals

The present

31-Mar-16 DICJ asserted its emphasis on resolving the Dore incident; Mr Paulo Chan indicated that the DICJ is actively engaged with lawyers representing Dore to seek a solution

14-Apr-16 Macau government in talks with junkets to raise capital requirement for new operators; one proposal under consideration is a rise in capital requirements for new junket operators to MOP10m (from MOP100k, a 100x increase)

19-Apr-16 Macau’s Secretary for Security, Wong Sio Chak, has also been appointed to the local Gaming Commission

22-Apr-16 Mr Paulo Chan deems the existing 120 inspectors at DICJ insufficient; recruits 50 new gaming inspectors

28-Apr-16 DICJ sending teams to conduct audits of junket financial records, including junket bad debts; expects information to be ready by 3Q16

07-May-16 Implementation of real-time monitoring system of bank cards using ID-scanning UnionPay POS devices

09-May-16 DICJ announced a complete ban on telephone betting

The future?

i) Increase scrutiny of "large amount transactions" and suspicious transactions", including side-betting

ii) Scrutiny of transactions related to PEPs, or "persons with political involvement"

iii) Dealing with findings resulting from audit of junket financial records (including junket bad debts) and establishment of centralised credit database

iv) Finding resolution of the Dore case, setting precedent for treatment of any similar incidents in the future

v) Revision of existing regulations and introduction of additional laws to regulate junket activities, junket-related activities, and casino compliance

Source: Daiwa

The past 6 months: a brief review

Since the announcement of Mr Pablo Martins Chan’s appointment as the new DICJ

director in October 2015, we have seen a clear change in policy direction for the

department. He has pledged to review and improve Macau’s gaming law, and has already

introduced a number of tightening measures.

October 2015: new junket disclosure requirements

On 22 October 2015, the DICJ hosted a conference with key junket industry participants to

clarify the regulations and policies on accounting controls for junket operations. (see

Macau gaming: DICJ increasing scrutiny on junket financial reporting, 23 October 2015).

The conference was a follow-on from the issuance of the Junket Accounting Guidelines,

which were provided by the DICJ to junket promoters in early October 2015 to further

clarify the junket accounting regulations laid out by the DICJ.

We have witnessed

progressive policy

tightening since DICJ

Director Mr. Paulo

Martins Chan stepped

into the position in

November 2015

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/MEMO_20151023_MacauGaming_DICJ.pdf#page=1

4


Junket Accounting Guidelines in detail

1. Junket operators must possess sound accounting systems and controls

2. All accounting and financial records and documents must be made available for the DICJ's inspection, upon request

3. All junket operators must submit the following documents in hard copy before 1 December 2015: - Background information on their senior accounting and finance staff, including home address, contact number, job title, employment date, education history and work experience - Physical location of accounting records

4. Beginning 1 January 2016, the junket operators are required to maintain monthly financial records, with the "Disclosure of personal data of key employees" (including directors and shareholders with more than a 5% stake in the company), subject to the DICJ's review, upon request at any time

5. Financial records must be kept for a minimum of 5 years

6. The junket operators must make transparent their bank balances upon request by the DICJ at any time

7. Gaming concessionaires and junket operators are jointly legally responsible in ensuring that all business activities carried out in casinos are compliant with the gaming regulations set out by the DICJ; junket operators must adhere to the guidelines set out by the gaming concessionaires

Source: DICJ, http://bo.io.gov.mo

January 2016: revoking 35 existing junket licences

At the beginning of 2016, Mr Chan indicated that 35 junket operators had been denied

licence renewal due to their failure to meet the deadline to submit accounts and financial

records in accordance with the Junket Accounting Guidelines issued in October 2015.

Total number of licensed junket operators in Macau

Source: DICJ, Daiwa

Today: what’s going on?

March 2016: focus on resolving Dore incident

Following the Dore incident, which took place in September 2015 and involved a sum now

believed to be upwards of MOP800m (see our 10 September 2015 Memo), DICJ Director

Paulo Martins Chan indicated that the DICJ had been actively engaged with lawyers

representing Dore to seek a solution for the investors affected. We conducted a detailed

analysis of the Dore incident and the potential for similar cases in Macau in our most

recent thematic report (see link).

Late-March 2016: Legislative Assembly unanimously approves Macau’s first-ever set of asset-freezing laws

On 21 March 2016, the Macau Legislative Assembly (AL) unanimously approved the first

reading of a bill proposing the establishment of a counter-terrorist asset-freezing regime.

Pursuant to this bill, Macau’s Chief Executive is empowered to execute United Nations

Security Council (UNSC) decisions to freeze assets. The bill states that whenever the

Chief Executive has reasonable grounds to believe that any person or entity has

committed, attempted to commit or participated in any terrorist act, he has the authority to

freeze their assets. The Chief Executive can also designate persons or entities found

committing financial terrorist acts and freeze their assets. This new regulation is expected

to take effect in 2H16 and applies to any person or entity found in Macau and all residents

of Macau, wherever they might be found.

76

160

186

153169

193219

235217

183

141

0

50

100

150

200

250

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Licensed junket operators

(#)

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http://asiaresearch.daiwacm.com/eg/cgi-bin/files/Macau_Gaming_Sector_160422.pdf#page=1

5


This step appears to directly address certain shortfalls in Macau compliance and regulatory

environment previously identified by US regulators. The 2013 Testimony of Assistant

Secretary for Terrorist Financing Daniel Glaser before the US-China Economic and

Security Review Commission on Macau and Hong Kong made similar assertions, as

highlighted below.

Excerpts from Testimony before the US-China Economic and Security Review Commission on Macau and Hong Kong

Issue

Four major deficiencies identified in Macau’s AML/CFT framework that have yet to be addressed

Macau still has not implemented a method to freeze bank accounts in anti-money-laundering and counter-terrorist-financing cases

Macau has not yet enacted a number of legal enhancements to its customer due diligence requirements

Although Macau has been asked to lower its high transaction reporting threshold for casinos to USD3,000 as recommended by Financial Action Task Force (FATF) Macau continues to allow a very high threshold of USD62,500 for reporting large transactions at casinos

Macau has yet to implement an effective, cross-border, cash declaration system

Source: US-China Economic and Security Review Commission, Daiwa

Early April 2016: discussion on raising minimum junket capital requirements; additional staff hired at DICJ

In early April, the Macau Government began talks with the junket operators to raise the

capital requirements for new operators, according to a recent Bloomberg report. One

proposal under consideration calls for a rise in the capital requirements for new junket

operators to MOP10m (from MOP100,000 currently, a 100x increase) and a requirement

that shareholders feature at least one Macau resident. The report said the proposed rule

would not affect the existing 141 licensed junkets. The junkets were also reported to be

working with the Macau Government to establish a shared blacklist of players deemed to

be at high risk of defaulting on loans.

At the mid-term review announcement on 16 May 2016, Director Chan revisited this and

indicated that there is indeed of a larger plan to increase the barrier of entry for junkets. A

number of potential measures is being discussed, including requiring i) mandatory bank

guarantee or cash deposit and ii) instituting a minimum local shareholding requirement with

certain capital contribution coming from Macau.

In the same month, DICJ Director Mr Paulo Martin Chan said that the department’s 120

inspectors were insufficient and announced plans to recruit 50 additional inspectors. This

announcement came within days of the new appointment of Mr. Won Sio Chak as Macau’s

new Secretary for Security. The commission’s responsibility includes monitoring and

creating guidelines for the gaming industry.

Late April 2016: teams deployed to conduct audits of junket financial records

In late April, DICJ Director Mr Paulo Martins Chan said in an interview that the department

already sent teams early in the year to conduct audits of junket financial records. Mr Chan

further asserted that the department “never had this kind of information” prior to the

increased financial disclosure requirements introduced in November 2015, and that the

results of this audit (including bad debts) are expected to be ready by the end of this year.

Mr Chan indicated that Macau’s policy direction is very clearly towards increasing

regulations and requirements, especially those pertaining to junkets’ financial

requirements.

May 2016: telephone betting banned

With effect from 9 March 2016, the Macau Government imposed a complete ban on

telephone-betting activities. As we analyse in the following discussion, this activity is

arguably the segment that presents some of the highest risk within the junket business

model as: 1) the actual player does not have to be physically on the casino premises, 2) it

adds an additional layer of obscurity around the source and ownership of the money, and

the identities of the players, and thus, 3) it potentially makes it more difficult for junkets

and/or casino operators to conduct the necessary regulatory and compliance procedures.

Steps are being taken to

establish higher barriers

of entry for the junket

operators and to

increase the manpower

charged with

supervisory

responsibilities

6


A deep dive into telephone betting

What is telephone betting?

Phone betting (also known as tele-betting or proxy betting) takes place in VIP rooms and

involves bets being placed by a gaming patron over the phone through a trusted proxy

(usually a junket agent) who is physically on the casino premises and at the gaming table.

The practice was initially developed during the SARS epidemic in 2003 to allow Mainland

Chinese VIPs to gamble in Macau without being exposed to the health risks associated

with travelling at that time.

For this service, the player was required to commit a minimum of HKD1-3m in gaming

capital. The gaming table also had to be reserved exclusively for only the designated

telephone-betting patron; multiple players (live or proxy) were not permitted to play at the

table.

Is it legal and how does it work?

Based on our on-the-ground research, telephone betting does not technically violate

Macau’s gaming laws. We understand that the casino operators have to notify and receive

authorisation from Macau’s Gaming Inspection and Coordination Bureau (DICJ) prior to

allowing gaming patrons to use electronic devices at the gaming table which is typically

used for telephone betting. We have attached a sample of the form used by casino

operators to notify the DICJ in Appendix I of this report.

As such, the casino operators technically need to be aware of all telephone-betting

activities taking place on their premises. Given the information on use of electronic devices

at gaming tables gathered by the DICJ, the DICJ should also have a good understanding

of the scale of this business before the ban (ie, the frequency of play and the size and

scale of telephone betting by operator and by property).

Telephone-betting: how it works in junket rooms

Source: Daiwa

Junket agentnotifies junket operator of the need to use

electronic devices on gaming table

Private VIP tableJunket agent gambles on behalf of client

DICJ

Macau's Gaming Inspection, and Coordination Bureau

DICJ approves use of electronic devices at specific VIP gaming table

Junket operator reserves exclusive gaming room for and extends credit to junket agent; the minimum initial gaming capital requirement for telephone betting ranges between HKD1-3m

7

1

Junket agent

Places gaming bets through a trusted intermediary who is

usually the junket agent

Gaming patron

Casino operator applies to DICJ on the use of electronic devices at specific gaming table

Casino operator

Junket operator notifies casino operator

Casino operator gives junket operator green light to start gaming session

25

3

4

Junket operator

6

The casino operators

were required to submit

a form to the DICJ

authorising the use of

electronic devices

before starting

telephone-betting

activities at gaming

tables

7


How big is this business?

Estimated MOP21bn business in 2015. Based on our conversations with junkets and

other industry participants, phone betting grew significantly in 2015 and now accounts for

around 20% of junket gaming volume in Macau (from 8-10% in 2014). More alarming is

that among some junkets, telephone betting has purportedly grown to account for as much

as half of their revenue bases. This implies that telephone betting grew by over 15% YoY in

2015 against the backdrop of a 51% YoY decline in overall junket rolling volume. Based on

current run rates, this implies that the business accounts for approximately MOP21bn of

GGR pa.

Market-share shift illustrates segment’s significance

It is no coincidence that market-share movements are closely tied to the selective bans on

telephone betting imposed by casino operators in the past. Prior to October 2014, all 6

operators allowed telephone betting. By the end of October 2014, however, talk in the

market suggested that Sands and Wynn had both suspended this service (November 4,

2014: Casinos starting to ban phone betting). However, it appears that Wynn restarted

telephone betting in February 2015, while Sands’ ban remains in place today (Some

casinos operators resume telephone betting, 26 February 2016). Over this period, we have

seen very notable market-share swings among the operators, as shown in the charts

below.

Market-share shift adds weight to our estimate on phone betting It is particularly noteworthy that the market-share swings during the 3 months from

November 2014 and January 2015 was equivalent to ~ 15% of Sands and Wynn’s

cumulative rolling volume (in-line with our expected volume for phone betting at the

beginning of 2015).

Impact of phone betting on Wynn Macau’s junket market share Impact of phone betting on SCL’s junket market share

Source: Compiled by Daiwa, Daiwa Note: based on unofficial figures

Source: Compiled by Daiwa, Daiwa Note: based on unofficial figures

Impact of telephone betting on market share

Visible market-share

improvement among

peers without explicit

ban on telephone

betting; followed by

decline in the month

Wynn is thought to have

resumed telephone

betting

Source: Compiled by Daiwa, Daiwa

Note: Includes SJM, MGM, Melco Crown, Galaxy; based on unofficial figures

11.9%

9.9%

12.6%

8%

9%

10%

11%

12%

13%

14%

1Q14

2Q14

3Q14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb

-15

Mar

-15

2Q15

3Q15

4Q15

No ban on telephone betting Ban instituted Ban lifted

Wynn: visible decline in market share during months where telephone betting was banned, followed by improvement immediately after ban was lifted

12.0%

13.7%

10%

11%

12%

13%

14%

15%

16%

1Q14 2Q14 3Q14 Oct-14 Nov-14 Dec-14 1Q15 2Q15 3Q15 4Q15

Before ban After ban

Sands: visible decline in market share following the ban on telephone betting

74.3%

78.4%

75.1%

70%

72%

74%

76%

78%

80%

1Q14 2Q14 3Q14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 2Q15 3Q15 4Q15

No ban on telephone betting Ban on telephone betting by Sands & Wynn Wynn lifts ban

Rest of operators: visible rise in market share during months where telephone betting was banned by Sands and Wynn, followed by decline immediately after ban was lifted by Wynn

We estimate that phone

betting accounts for 20%

of the junket gaming

volume — but the figure

could be as high as 50%

of the volume among the

smaller junkets

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/20141104mo_Macau_Gaming_Sector.pdf#page=1

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/MEMO_20150226_MacauGaming_Some.pdf#page=1

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8


Policy risks in China

In our view, the rapid growth of telephone betting added to the policy risk in China.

According to our on-the-ground checks, the rapid growth of telephone betting appears to

have a direct correlation with the intensification of China’s anti-corruption campaign since

2014. Therefore, it seems reasonable to assume that telephone betting would be of

particular interest to Mainland Chinese gaming patrons who wish to stay away from Macau

and are looking for anonymity.

Gambling remains illegal in China, and patrons placing bets over the phone when

physically in China are likely to be violating Mainland laws. While it is difficult for us to

ascertain the physical location of Macau’s telephone-betting patrons, it is not inconceivable

that at least some of them are Chinese nationals who are physically located in China. Our

on-the-ground checks suggest this is indeed the case.

Patrons participating in

gaming activities such

as telephone betting

when physically in China

are likely to be violating

laws in Mainland China

9


Macau’s policy direction: the future

Targeting the previously under-regulated aspects of the gaming business

In the past 6 months, we have seen: 1) increasing oversight of a junket’s capital base and

capital structure, 2) the introduction of asset-freezing laws, 3) an increase in human

resources at DICJ tasked with supervisory roles, 4) the deployment of teams to conduct

junket audits, and 5) the most recent ban on telephone betting. It is clear that the DICJ is

taking steps to understand and strengthen the regulations governing the previously

(arguably) under-regulated areas of the gaming businesses.

Mid-term review reaffirms policy direction

During the offline Q&A session at the mid-term review hosted by the Macau Government

recently which we attended, both Finance Secretary Mr Lionel Leong and DICJ Director Mr

Paulo Martins Chan shared this view. A considerable amount of time was spent discussing

the increase in casino-related crimes, the occurrence of suspicious transactions, the

casinos’ compliance with internal control, and their reporting deficiencies.

The mid-term review also highlighted 5 key areas facing the junket segment today, namely:

i) low costs associated with entering and exiting the junket business which are leading to

increases in the risk of abscondment, 2) the high bargaining power of the junkets vs. the

casino operators, resulting in the instability of the Macau gaming industry, 3) credit risks

arising from a lack of central debtor databases and the junkets’ tendency to lend merely on

trust, 4) illegal activities being carried out through gaming, such as side-betting and phone

betting, which are difficult to regulate, and 5) junkets holding and accepting cash deposits

from patrons and investors.

Daiwa’s view on what MSAR gaming policy roadmap will look like

1) Increase scrutiny of "large amount transactions" and suspicious transactions", including side-betting, telephone betting

2) Scrutiny of transactions relating to PEPs, or "persons with political involvement"

3) Dealing with findings resulting from the audits of junket financial records (including junket bad debts) and the establishment of centralised credit database

4) Resolving the Dore incident, setting precedents for other Dore-like incidents

5) Revision of existing regulations and the introduction of laws to regulate junket activities, junket-related activities, and casino compliance

Source: Daiwa

In our view, the talks focused on addressing “large-amount transactions” and

“suspicious transactions. Both of these items we discuss in the following sections.

Indeed, we are in a round of sector-specific policy tightening in Macau that will take at least

the next 12-24 months to rationalise. We believe the incremental policy tightening

measures expected to be progressively released will continue to dampen Macau’s

potential for growth.

Implicit focus on addressing FATF/APG recommendations

This policy direction appears to address the junket issues long-identified for their inherent

structural and systemic risks. As explained in a 2009 US Financial Action Task Force

(FATF) report, “junkets are identified as a vulnerability as they involve the cross-border

movement of people and funds and often target high net-worth/VIP clients. Transparency

of the movement of funds is an issue with junkets, due to gaps in controls, and weak

implementation and supervision”.

This round of tightening comes ahead of the tentative 4Q16 onsite visit by Asia/Pacific

Group on Money Laundering (APG). The visit aims to evaluate and assess the degree to

which Macau’s is complying to the relevant AML/CTF rules, with a focus on the regulations

and recommendations that were highlighted in the 2007 Mutual Evaluation report. It is

interesting to note that the government’s recent steps appear to address the: 1) key

recommendations proposed by APG on the gaming sector in Macau’s Mutual Evaluation

Macau’s policy direction

likely to focus on

strengthening

regulations governing

under-regulated areas of

gaming

10


report in 2007, and 2) comments made during the 2013 Testimony of Assistant Secretary

for Terrorist Financing Daniel Glaser before the US-China Economic and Security Review

Commission on Macau and Hong Kong (excerpts in the following tables).

APG recommendations on gaming sector in Macau’s 2007 Mutual Evaluation Report

RECOMMENDATIONS AND COMMENTS

Gaming Sector

While the legal obligations for customer due diligence (CDD) requirements are stipulated, the recent introduction of these provisions means that there was insufficient time to assess the implementation of the provisions.

Key CDD and record-keeping obligations are not included in law or regulation.

The established threshold for obtaining casino customer data remains too high.

Obligations to obtain customer information only appear to be mandated for the purposes of identifying large currency transaction reports and STRs (Suspicious Transactions Report).

No provisions exist for ongoing verification of customer information.

No provisions exist for ongoing monitoring of customer activity.

There are no provisions for high-risk customers beyond PEPs (persons with political involvement).

The guidance should give clearer instructions as to the application of CDD provisions on junket operators/game promoters.

Source: APG, Daiwa Note: APG is the regional associate member of the Financial Action Task Force (FAFT), the intergovernmental body established as a policy-making

body to “set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system”. Members include the US, Hong Kong, France, Singapore, etc

Excerpts from the Assistant Secretary for Terrorist Financing’s testimony before the US-China Economic and Security Review Commission on Macau and Hong Kong

Issue

1 Most key aspects of CDD obligations were not adequately incorporated into law and regulation…While a number of legal enhancements to Macau’s CDD requirements have been drafted, they have not yet been passed or enacted

2 The gaming sector, while incorporated in the jurisdiction’s legal anti-money laundering (AML)/Combating the Financing of Terrorism (CFT) framework, presented a substantial money-laundering risk and featured a number of gaps, including:

Lack of a risk-based assessment of gaming customers and operators

Inadequate inspection and oversight of casinos and junket operators and promoters

3 In Macau there is an even larger risk of money laundering within the VIP gaming-room operations, which are physically conducted within the casinos but remain outside of the casino’s official over sight. The risk is further enhanced because so much of the money that is wagered in Macau goes through the loosely regulated CIP rooms

4 An indicator of the money-laundering problem in Macau is evident in the rising number of suspicious transaction reports filed with Macau’s financial intelligence unit.

5 Four major deficiencies identified in Macau’s AML/CFT framework that have yet to be addressed:

Macau still has not implemented a method to freeze bank accounts in anti-money-laundering and counter-terrorist-financing cases

Macau has not yet enacted a number of legal enhancements to its customer due diligence requirements

Although Macau has been asked to lower its high transaction reporting threshold for casinos to USD3,000 as recommended by Financial Action Task Force (FATF) Macau continues to allow a very high threshold of USD62,500 for reporting large transactions at casinos

Macau has yet to implement an effective, cross-border, cash declaration system

Source: News flow (ie, WSJ, The Guardian, Bloomberg, SCMP, CNBC), Daiwa

Large-amount transactions

According to Macau’s Financial Intelligence Office (GIF) website, instruction No. 2/2006

“Preventive Measures against Crimes of Money Laundering and Terrorist Financing”

indicates that the gaming concessions and sub-concessions are responsible for identifying

and reporting all “large-amount transactions” that exceed MOP500,000 to the DICJ within 2

days of the transaction date. A sample of the form is attached in Appendix 1

Transactions requiring casino operators to file a “large-amount transaction report”

1 Gambling or wagering in amount equal to or exceeding MOP500,000 or equivalent

2 Gaming credit or the repayment of a loan equal to or exceeding MOP500,000 or equivalent

3 Gambling, wagering, gaming credit or repayment of a loan, although individually less than the above reporting amount, but if the aggregate total is equal to or exceeds MOP500,000 or equivalent, then within 24 hours

4 Any games promotion business transaction equal to or exceeding MOP500,000 or equivalent, including the payment to a player or expenditure incurred by a bettor

Source: GIF, Daiwa Note: taken from instruction No. 2/2006 “Preventive Measures against Crimes of Money Laundering and Terrorist Financing”

Concessions and sub-

concessions are

responsible for reporting

all transactions that

exceed MOP500,000 to

the DICJ

11


The information required includes the name, address, identification document, date of

transaction, and amount/source of funds. The casino operators are required to provide the

necessary training to employees concerned about the rules and procedures on preventing

financial crimes.

It is worth highlighting that the APG indicated in 2007 that the existing MOP500,000

threshold is “is too high and needs to be lowered in accordance with FATF standards. The

threshold remains overly high given the scope and volume of gaming business in Macao,

China casinos.” The specified threshold for casinos in FATF is USD3,000.

Suspicious transactions

Also, according to the GIF website, instruction No. 2/2006, “suspicious transactions” are

described as “the operation relating to the practice of gaming or wagering which, by its

nature, non-habitual manner or complexity, indicates any activity of money laundering or

terrorist financing”. It would not be a far-fetched scenario that at least certain instances of

telephone betting and other junket activities may be considered “suspicious” in nature, and

the casino operator has a duty to record these transactions and to identify the participants

involved, especially a PEP, or “person with political involvement”. A sample of the

Suspicious Transaction Report, or “STR”, is attached in Appendix 1.

Registration requirements of “suspicious transactions”

1 Gambling or wagering, based on its nature, complexity, the amount involved or in a non-habitual manner indicates any activities of money laundering or terrorist financing

2 Gaming credit, based on its nature, complexity, the amount involved or in a non-habitual manner indicates any activities of money laundering or terrorist financing

3 Games promotion business, based on its complexity, the amount involved or in a non-habitual manner indicates any activities of money laundering or terrorist financing.

Source: GIF, Daiwa; Note: taken from instruction No. 2/2006 “Preventive Measures against Crimes of Money Laundering and Terrorist Financing”

It is also law that all persons involved in a large-amount transaction and/or suspicious

transaction must be clearly identified – this includes the person gambling, the

representative and agent, and (especially in the case of proxy betting) the person whom

the person gambling is acting on behalf of.

Identification requirements of people involved in suspicious transactions and large-amount transactions

1 Person gambling or wagering, or beneficiary of gaming credit, who participates in suspicious transactions or large-amount transactions

2 Representative or agent of the participant involved in transactions stated in the previous paragraph

3 If the person gambling or wagering or the beneficiary of gaming credit is acting on behalf of others, then the person on whose behalf the gambling, wagering, or gaming credit transaction is conducting should be identified

Source: GIF, Daiwa Note: taken from instruction No. 2/2006 “Preventive Measures against Crimes of Money Laundering and Terrorist Financing”

We find it interesting that in the aforementioned Macau’s Mutual Evaluation report issued

by APG, improving the STR was highlighted as one of 9 special recommendations. APG

commented that “reporting requirements are embodied in law and regulation, however,

there are concerns with effectiveness of implementation…”.

APG indicated in 2007

that the existing

MOP500,000 threshold is

too high and should be

lowered in accordance

with FATF standards

12


Policy tightening addresses areas most at risk of large amount transactions and suspicious transactions

Tightening up of telephone betting: As we have discussed, phone betting is perhaps the

segment that presents some of the highest compliance risk. Theoretically, the casino

operator should have a clear understanding of the actual identities of all the players on the

telephone. However, the high risk in this business stems from the fact that identification is

unlikely to be an easy undertaking as the player is not physically there (or maybe even in

Macau for that matter). Furthermore, the actual source of funding is unlikely to be easily

determined (some of the documents require a statement and sign-off if the transaction is

deemed to be a “large amount” or “suspicious” in nature).

Based on our understanding, if the minimum capital requirement for telephone betting

stood at HKD1-3m, this would theoretically also mean that nearly all (if not all) of such

activity would have exceeded the MOP500,000 threshold set by the GIF as a “large-

amount transaction”. As such, it is noteworthy that a lot of the telephone-betting activities

that have taken place in the past would have had to have been implicitly acknowledged by

the casino operator as large-amount transaction reports relating to them would have been

filed.

In our view, the previous prevalence of telephone betting could mean regulatory overhangs

for the sector in the future, as well as potential legal and financial ramifications for the

operators, even if telephone betting has already been banned. While apparently not

technically illegally in Macau, we do highlight that this practice appears to be in the grey

area of the law.

On the additional junket disclosure requirements and the Dore incident: The

regulator’s focus on dealing with “large-amount transactions” and “suspicious transactions”

is well illustrated by the increased scrutiny on the financial conditions, sources of funding,

and operations of Macau’s junket businesses.

If we use the Dore incident as an example, that incident faced risks in terms of both large-

amount transactions and suspicious transactions. The total balance in question was

reported to be as high as MOP800m, which is much higher than the MOP500,000

threshold. Among the individual depositors who filed a complaint with the office of Macau

legislator Mr. Pereira Coutinho, all of the amounts in question were still well over

MOP500,000 (and at least 40% of the deposits were over MOP10m), which is also far

higher than the prescribed amount defined as being a “large-amount transaction”.

Moreover, when the Dore incident occurred, there were more than 50 individuals lining up

at Wynn’s casino premise seeking to redeem their cash deposits from Dore. This could

arguably have been considered “suspicious” in nature, which would have been grounds for

a report to the DICJ.

In our view, increased scrutiny of these “large-amount” transactions across the industry

could have a material impact on the operational aspects of the junkets, including their

ability to raise (and/or retain) their underlying junket capital. Furthermore, this may also

have a negative impact on the casino operators, not only on revenue but also on their legal

obligation to identify and report said transactions to the DICJ.

The obligation to refuse service. According to the GIF, the casino operators are obliged

to refuse transactions requested by players and patrons in the event that the requirements

relating to identifying, or obtaining details on, a transaction cannot be met. SCL is one such

operator that terminated telephone betting in October 2014. At the time, local news media

quoted the following response by a representative of the casino operator, “it’s a

continuation of Las Vegas Sands and Sands China expanding their leadership role on

compliance-related matters in general”. Similarly, Singapore has expressed “zero

tolerance” for proxy betting.

Previous prevalence of

telephone betting could

mean regulatory

overhangs for the sector

in the future

13


Government is not overly concerned with the prevailing GGR decline

As things stands today, the recent ban on telephone betting will already have had an

incremental (and sequential) negative impact on the industry’s GGR. Further policy

tightening (ie, a crackdown on side-betting, increased scrutiny of “large-amount

transaction” and “suspicious transactions”) could also have a negative impact on other

aspects of Macau’s gaming businesses.

It is particularly noteworthy that Mr. Leong highlighted that the government is not

concerned by Macau’s current revenue base or the rate of decline of this base. He also

indicated that the administration is focusing on achieving “quality” of play rather than on the

GGR growth/amount. He further asserted that Macau can no longer rely on a small head

count to drive the lion’s share of business, and that the spate of policies being introduced

are not aimed at depressing gaming revenue in Macau. Mr. Leong also said that the

industry will indeed take time to adjust to this new policy norm and direction.

In our view, the current DICJ administration is indeed on the path to introducing much

needed structural reforms and policy revisions that will benefit the longer-term viability of

the industry. However, this is coming at a time of an already-declining GGR, lower

productivity of invested capital, growing indebtedness and declining margins. With the

street so focused on short-term indicators (ie, weekly/monthly GGR, quarterly EBITDA), we

believe that this policy direction induces an increasing potential for near-term

disappointment for the sector.

A clear shift from 2H14-1H15 policy cycle: from collateral damage to direct tightening

Another point to consider is that during the 2H14-15 policy tightening, the spate of

tightening measures introduced by the government didn’t target the casino sector

specifically (ie, UnionPay, transit visas, anti-corruption campaign). At the time, the widely

held view was that while the policies introduced had a negative impact on the sector, the

implication for the casinos was more one of “collateral damage”, rather than targeting it

directly.

However, the same cannot be said for the policy environment today. The tightening moves,

while healthy for the sector in the long run, have been carefully orchestrated and are aimed

directly at the underbelly of the gaming business. Thus, there is no tangible reason to

believe that the tightening phase is nearly over.

The government is

focusing on achieving

“quality” of play rather

than GGR growth

14


Sector implications

The street continues to hold the view that junket business risks are well-established and

represent an ever-diminishing relevance in the discussion about the prospects for Macau’s

gaming industry. We find this perspective worrying. In our view, a closer examination of

Macau’s junket business is increasingly relevant and material today (the recent ban on

telephone betting, along with the recent spate of tightening measures introduced by DICJ,

supports our view).

In our opinion, the Macau Government’s policy direction is clearly towards increasing its

oversight beginning with the riskiest aspects of the gaming business. We may see further

tightening over the next 12-18 months.

On gross gaming revenue: further downside risk

As we see it, the street continues to underestimate the junkets’ importance to the casino

operators. In our view, further policy tightening (including the recent ban on telephone

betting) will have a direct and negative impact on overall VIP gaming volume going

forward. The revenue contribution of phone betting to the segment is significant, at 20% of

Macau’s junket business currently, rising from around 8-10% for 2014 (on our estimates),

buoying the overall junket rolling volume (which still nevertheless fell by more than ~50%

YoY for 2015).

VIP GGR breakdown

Phone betting revenue

grew by >15% YoY for

2015 and accounted for

~20% of VIP revenue

Source: Compiled by Daiwa, Daiwa

Note: Based on unofficial figures, luck adjusted to 2.85%

With VIP revenue still contributing ~50% of total GGR, a complete ban on telephone

betting would still have a very material 10% impact on top-line GGR, on our estimates. We

believe the scenario of a VIP GGR decline spurred by the shrinkage of telephone betting

(as well as policy risk associated with this business) has not yet been reflected in the

consensus GGR/earnings forecasts, nor factored into sector share prices. This new

development thus casts further doubt over the street’s forecasts, which call for a

stabilization or growth of the top-line this year (whereas we forecast GGR to decline by

-5% YoY for 2016, still among one of the lowest forecasts on the street today; the official

GGR YTD is tracking at -12% YoY).

On earnings: quality of earnings faces increasing risks

Furthermore, the street has argued that the junket segment (as well as phone betting)

represents an ever-diminishing contribution to profitability (total VIP as low as 10% of

EBITDA among some operators, and 2-3% of total from telephone betting). As a result, this

ban poses little risk to the casino operators’ earnings. We disagree with the assertion on 2

key points:

0

50

100

150

200

2014 2015Est. phone betting Other VIP business

Overall: -51%

Telephone betting: +>15%

(HKDb)

15


1. Significant operating risks to junkets add further risk to the casino operators

The junkets segment, as a whole, is facing significant operating pressures which give

rise to increasing and unaddressed risks that may well be under-estimated by the

street. The risks faced by the junket segment include aging receivables, increasing

bad debts, and a significant decline in available cash. Furthermore, our checks

indicate that telephone betting can represent as high as 50% of total VIP gaming

volume among some of the smaller junkets. The ban will thus place these businesses

under further significant operating pressure. Indeed, the cost of potential liabilities

borne by casino operators for both existing and emerging issues facing the segment

today could be very high (ie, junket failings, absconding of capital).

2. This risk extends beyond EBITDA

In our view, these costs and liabilities may not be reflected in the operators’ adjusted-

EBITDA and property EBITDA (the yardstick used most frequently by the street to

evaluate performance), but they will certainly affect the operators’ underlying

profitability in terms of operating profit and net profit.

As we have discussed in prior reports, the casinos’ balance sheets deteriorated in

2015, with receivables bad debts increasing by almost 30% YoY. The casino operators

also collectively wrote off close to 30% of their receivables in 2015, while receivables

continued to age. During the 1Q earnings call, casino bad debt was among the focal

points of discussion. This supports our view; and the recent sector developments

(including the ban) only add further to this short-term pressure.

On junket sector fundamentals: an incremental negative especially for operators with high small junket exposure

As we have highlighted, phone betting accounted for >20% of total junket gaming volume

before the ban last week (from 8-10% in 2014). However, this business is asymmetrically

distributed and much higher among the smaller junkets. Based on our conversations with

junkets and other industry participants, phone betting is purported to account for as much

as half of some of the smaller junket operators’ gaming volume today. In our view, casinos

with the highest exposure to smaller junkets face the most risk (as they have a much

higher implied contribution from telephone betting as well as being poorly capitalised).

We draw upon our risk analysis previously conducted in (see link), which points to Wynn

and MPEL possessing the riskiest slice of the industry’s VIP business today. We fine-tuned

this analysis for the purpose of this discussion on phone betting by focusing strictly on the

casino’s junket business (SCL was not included in this analysis since the operator already

banned phone betting on premise since 4Q14).

It is noteworthy that our original risk analysis only includes SJM’s junket business at Grand

Lisboa. Our underlying assumption is that the satellite casino operators will ultimately bear

the risks and responsibility associated with the junket businesses residing within the

respective satellite casino premises (as we have seen with the incidence involving L’Arc in

early-2016). It should be noted that SJM’s total top-line exposure to phone betting (beyond

strictly at Grand Lisboa) will still be higher than what our prior risk analysis would have

suggested given the high number of smaller junkets residing within SJM’s 14 satellite

casinos. Satellite casinos represented 47% of SJM’s total VIP revenue in 2H15, or 23% of

its total GGR.

Phone betting may

contribute as much as

half of the VIP gaming

volumes among some of

the small junkets


16


Junket rolling distribution by junket sizes

Source: Daiwa estimates

Note: *Based on SJM”s official 2H15 rolling breakdown; junket rolling for remaining operators based on unofficial 4Q15 figures (1) High risk: revenue generated by small junkets defined as junkets that operate fewer than 20 tables over 1-2 properties (2) Mid risk: revenue generated by mid-sized junkets defined as junkets that operate 20-50 tables with exposure in more than 2 properties (3) Low risk: revenue generated by large junkets that operate more than 50 tables (Suncity, Guangdong, Tak Chun, Macau Golden)

More junket announcing closures since announcement of ban

In our view, this ban will further cripple the debt-laden junkets that are still operating and

clearly struggling. Within days of this announcement, we have already heard that more

small/mid-sized junkets are going to cut more of their VIP rooms.

Contagion impact on mass market

As we have previously highlighted (see When Chips are Down), the ancillary services of

junket operators have historically supported mass segment growth. We continue to believe

that the VIP segment’s structural weakness will have a tangible impact on business for the

mass segment. Our prior in-depth look at both segments shows that a number of ancillary

non-gaming services sponsored by junket operators (shown in the subsequent chart) have

helped to support the sustained growth of the mass segment over the years. We have

found anecdotal evidence that a number of these junket-sponsored ancillary services are

not profitable for the junket operators, but have been established to help support their core

VIP gaming businesses. This includes: i) cash and currency exchange, ii) travel agencies,

iii) entertainment, and iv) event sponsorships. With the junkets continuing to face

increasing sector pressures, we believe it is increasingly likely that ancillary non-gaming

services will be scaled back or terminated. We have already seen the well-publicized

closures of Macau’s jewellery and pawn shops as a very good example of this. Such a

move would be negative for the mass segment, in our view.

Macau Gaming Sector: junket operators’ ancillary non-gaming services

Source: Daiwa

58% 60%42% 44%

27%

0%

20%

40%

60%

80%

100%

SJM* Wynn MPEL Galaxy MGM

Low risk junket Mid risk junket High risk junket SJM: Self-promoted SJM: Satellite casinos

A number of small and

mid-sized junkets have

plans for further junket

room closures after ban

on telephone betting


17


Appendix I

Sample authorization form for use of electronic devices submitted to DICJ by casino operators

Source: Compiled by Daiwa

XXXXXXX

DATE:

TIME:

PIT:

TABLE NUMBER:

CAPITAL:

BROKER NAME:

BROKER ID:

CLIENT NAME:

PM# AND NAME:

TABLE LIMIT: (MIN)

(MAX)

18


Appendix II

Large Amount Transaction Report

Source: GIF, Daiwa

19


Suspicious Transaction Report (page 1)

Source: GIF, Daiwa

20



Source: GIF, Daiwa

21



Source: GIF, Daiwa

22


Suspicious transaction report (page 4)

Source: GIF, Daiwa

23



Source: GIF, Daiwa

24


Daiwa’s Asia Pacific Research Directory

HONG KONG

Takashi FUJIKURA (852) 2848 4051 [email protected]

Regional Research Head

Kosuke MIZUNO (852) 2848 4949 / (852) 2773 8273

[email protected]

Regional Research Co-head

John HETHERINGTON (852) 2773 8787 [email protected]

Regional Deputy Head of Asia Pacific Research

Rohan DALZIELL (852) 2848 4938 [email protected]

Regional Head of Product Management

Kevin LAI (852) 2848 4926 [email protected]

Chief Economist for Asia ex-Japan; Macro Economics (Regional)

Junjie TANG (852) 2773 8736 [email protected]

Macro Economics (China)

Jonas KAN (852) 2848 4439 [email protected]

Head of Hong Kong and China Property

Cynthia CHAN (852) 2773 8243 [email protected]

Property (China)

Leon QI (852) 2532 4381 [email protected]

Banking (Hong Kong/China); Broker (China); Insurance (China)

Anson CHAN (852) 2532 4350 [email protected]

Consumer (Hong Kong/China)

Jamie SOO (852) 2773 8529 [email protected]

Gaming and Leisure (Hong Kong/China)

Dennis IP (852) 2848 4068 [email protected]

Power; Utilities; Renewables and Environment (Hong Kong/China)

John CHOI (852) 2773 8730 [email protected]

Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap

Kelvin LAU (852) 2848 4467 [email protected]

Head of Automobiles; Transportation and Industrial (Hong Kong/China)

Brian LAM (852) 2532 4341 [email protected]

Transportation – Railway; Construction and Engineering (China)

Thomas HO (852) 2773 8716 [email protected]

Custom Products Group

PHILIPPINES

Bianca SOLEMA (63) 2 737 3023 [email protected]

Utilities and Energy

SOUTH KOREA

Sung Yop CHUNG (82) 2 787 9157 [email protected]

Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel

Mike OH (82) 2 787 9179 [email protected]

Banking; Capital Goods (Construction and Machinery)

Iris PARK (82) 2 787 9165 [email protected]

Consumer/Retail

SK KIM (82) 2 787 9173 [email protected]

IT/Electronics – Semiconductor/Display and Tech Hardware

Thomas Y KWON (82) 2 787 9181 [email protected]

Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Game

Kevin JIN (82) 2 787 9168 [email protected]

Small/Mid Cap

TAIWAN

Rick HSU (886) 2 8758 6261 [email protected]

Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design (Regional)

Christie CHIEN (886) 2 8758 6257 [email protected]

Banking; Insurance (Taiwan); Macro Economics (Regional)

Steven TSENG (886) 2 8758 6252 [email protected]

IT/Technology Hardware (PC Hardware)

Christine WANG (886) 2 8758 6249 [email protected]

IT/Technology Hardware (Automation); Pharmaceuticals and Healthcare; Consumer

Kylie HUANG (886) 2 8758 6248 [email protected]

IT/Technology Hardware (Handsets and Components)

Helen CHIEN (886) 2 8758 6254 [email protected]

Small/Mid Cap

INDIA

Punit SRIVASTAVA (91) 22 6622 1013 [email protected]

Head of India Research; Strategy; Banking/Finance

Saurabh MEHTA (91) 22 6622 1009 [email protected]

Capital Goods; Utilities

SINGAPORE

Ramakrishna MARUVADA (65) 6499 6543 [email protected]

Head of Singapore Research; Telecommunications (China/ASEAN/India)

Royston TAN (65) 6321 3086 [email protected]

Oil and Gas; Capital Goods

David LUM (65) 6329 2102 [email protected]

Banking; Property and REITs

Shane GOH (65) 64996546 [email protected]

Small/Mid Cap (Singapore)

Jame OSMAN (65) 6321 3092 [email protected]

Telecommunications (ASEAN/India); Pharmaceuticals and Healthcare; Consumer (Singapore)

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This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research.

Australia This research is distributed in Australia by Daiwa Capital Markets Australia Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research.

India

This research is distributed in India to Institutional Clients only by Daiwa Capital Markets India Private Limited (Daiwa India) which is an intermediary registered with Securities & Exchange Board of India as a Stock Broker, Merchant Bank and Research Analyst. Daiwa India, its Research Analyst and their family members and its associates do not have any financial interest save as disclosed or other undisclosed material conflict of interest in the securities or derivatives of any companies under coverage. Daiwa India and its associates may have received compensation for any products other than Investment Banking (as disclosed) or brokerage services from the subject company in this report during the past 12 months. Unless otherwise stated in BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action, Daiwa India and its associates do not hold more than 1% of any companies covered in this research report. There is no material disciplinary action against Daiwa India by any regulatory authority impacting equity research analysis activities as of the date of this report.

Taiwan

This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research.

Philippines

This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities. For relevant securities and trading rules please visit SEC and PSE links at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively.

Thailand

This research is distributed to only institutional investors in Thailand primarily by Thanachart Securities Public Company Limited (“TNS”).

This report is prepared by analysts who are employed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates. This report is provided to you for informational purposes only and it is not, and is not to be construed as, an offer or an invitation to make an offer to sell or buy any securities. Neither Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees accept any liability whatsoever for any direct or consequential loss arising from any use of this research or its contents.

The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable. However, Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees make no representation or warranty, express or implied, as to their accuracy or completeness. Expressions of opinion herein are subject to change without notice. The use of any information, forecasts and opinions contained in this report shall be at the sole discretion and risk of the user.

Daiwa Securities Group Inc. and/or its non-U.S. affiliates perform and seek to perform business with companies covered in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates, their respective directors, officers, servants and employees may have positions and financial interest in securities mentioned in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this research. Therefore, investors should be aware of conflict of interest that may affect the objectivity of this research.

United Kingdom

This research report is produced by Daiwa Securities Co. Ltd. and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange and Eurex. This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available. Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory.

Germany This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for

https://daiwa3.bluematrix.com/sellside/Disclosures.action


http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf%20and%20http:/www.pse.com.ph/

http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory

27


the conduct of business in Germany.

Bahrain

This research material is distributed in Bahrain by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113

United States

This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (Tel no. 212-612-7000).

Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.

Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months. Disclosure of investment ratings

Rating Percentage of total

Buy* 66.9%

Hold** 19.7%

Sell*** 13.5%

Source: Daiwa

Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 31 March 2016. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings. Additional information may be available upon request.

Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law

(This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)

If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items.

In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.

In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.

For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.

There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.

There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.

Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us.

Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association






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