Las Vegas Sands: Evaluating The Latest Policy Impact

| About: Las Vegas (LVS)

Summary

China introduces new capital outflow restrictions on insurance companies.

The latest move is in response to huge capital outflows out of China but will have ramifications in Macau.

Latest move likely to see revenue downgrade by analysts in the first quarter of 2016.

I am currently short Wynn Resorts and will be looking to add shorts on Las Vegas Sands on the latest announcement.

Introduction:

In a bid to further stem heavy capital outflows out of the country, China has further tightened the noose around capital out of the country. According to China UnionPay, the dominant credit-card issuer in China, they will be enforcing an $5,000 per transaction cap on the amount customers can spend with their credit card on overseas insurance products that are similar to savings products. This in my view is simply an extension of the nation wide clamp down on China UnionPay in Macau. I think the latest move will further restrict capital inflows into Macau and accordingly am underweight the sector.

China tightens noose on capital outflow

China's aggressive devaluation of the RMB last month saw the capital markets go into a tailspin from the Chinese Central Bank's move. The move by the Central Bank sparked fears that they will continue their aggressive devaluation of the RMB. You can see it for yourself below.

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Source: Bloomberg

From the chart above, you can see that the latest move by the Chinese Central Bank last month follows a similar move to that seen in August last year. The move will have serious ramifications on the investing appetite of the Chinese. The stock market collapse in the summer of last year coupled with decreasing returns from bank deposits due to the Central Bank's expansionary monetary policy have seen Chinese investors flock to other assets in search of higher yields. Chinese investors now prefer to hold the US dollar instead of the RMB in anticipation of further devaluation measures from their Central Bank.

The move to the dollar is a major concern to the Chinese government. According to the Wall Street Journal, capital outflows are now eroding China's war chest of dollars and other currencies, with its foreign exchange reserves down $109.7 billion alone in December last year. The latest move by the Chinese government is part of their strategy to further stem the outflow of RMB.

But what does this have to do with the gaming sector? Regular followers of LVS will recall that I had published a piece on the nationwide clamp down by the Chinese government on the widespread abuse of China UnionPay in Macau (you can see it in the link above). Whilst I concluded that the impact from that move is likely to be less severe considering how it has been in the works since 2014, the latest move is different in that this came as a surprise to the markets.

For years, Chinese looking to get their money out of China will get around it by buying insurance policies in Hong Kong such as savings plans as this assures them of capital protection. This allows them to not only shift capital abroad but also to have their money placed in the more stable Hong Kong dollar or USD. The Chinese have also used this method to get money out of China quickly by buying a savings policy and then surrendering the policy early to get their money back. In so doing, they can choose the way in which they receive the money and as you might have guessed by now, they choose to have their money received outside of the Chinese borders.

For years, this has been one of the choice methods by the high rollers in getting capital out of the country to gamble in Macau. The latest move by the Chinese government looks targeted at this particular situation in my view. The latest restrictions placed on the RMB leaving China will further tighten the tap on capital flowing into Macau.

Whilst it is still possible to get around this latest move by having the customer swipe their card a few more times to get around the $5,000 maximum cap, I think there is no telling whether the Chinese government will impose additional measures to restrict the outflow of capital from the country. I turn slight negative on Las Vegas Sands (NYSE:LVS) and the gaming counters on the latest news.

Key Operating Metrics: Valuations

LVS is currently trading mostly in-line with their peers based on an EV/EBITDA (trailing) basis. For the first quarter of 2016, the current consensus revenue estimate for LVS is for them to do $2.886 billion, which is a 4.8% decrease from a year ago. I think this estimate seems a little too optimistic at this point and they might see analyst's downgrades prior to results announcement.

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Source: Bloomberg

Conclusion

Whilst the latest move does not have a direct impact on the gaming sector in Macau, I see an indirect impact on the sector. While it is still early days to speculate whether the Chinese government will further tighten capital out of the country, it is not a total stretch of the imagination if they do. I am short WYNN and will be looking to add shorts on LVS.

Disclosure: I am/we are short WYNN.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.