Revenues at the city-state’s casinos have recently gone into reverse. Alexander Lobov examines the causes and prospects going forward
Lauded for the immense profits its casinos have generated in only a few short years, Singapore is now discovering what it means to grow up. Its gaming market is now mature in many ways, and seems to have succumbed to global economic headwinds.
The two Singapore casinos reported a combined third quarter reduction in gaming revenue to the tune of 22% year-on-year and an EBITDA [earnings before interest, tax, depreciation amortization] decline of 29% year on year, according to a 26th November report from HSBC.
Resorts World Sentosa was the better performer of the two. Its gaming revenue fell 17% and its EBITDA 19%, compared to the respective 27% and 36% reductions at Marina Bay Sands. After reaching a high of S$1.1 billion in gaming revenue in the first quarter of the year, the latter reported only S$772 million in Q3—a 30% decline.
The two integrated resorts opened in 2010 and seemed to grow unstoppably during their first few quarters of operations. But things changed this year, and the first half of 2012 saw weakness at both IRs. Genting Singapore’s core net profit of S$393.6 million for the half was down 27% year-on-year and revenue of S$1.5 billion was down 9%.
So what happened? Analysts put forward a number of explanations, including mass market reductions prompted by regulatory tightening and VIP declines driven by slowing economic growth internationally and in the key feeder market of mainland China, and a resultant reduction in credit extension by the casinos.
“Any slowdown in China is going to disproportionately impact the Singapore casino market,” says a Singapore-based gaming analyst. “And if you also look at the difference between Singapore and all the other casino markets, you don’t have junkets here.”
“MBS and Genting decided that the outlook is pessimistic and they shut down the granting of new credit, they won’t expand their loan books,” he continues. “Then the whole market freezes … because you don’t have junkets to fill the gap like in Macau.”
Total Singapore VIP gaming revenue— over 60% of which is comprised of mainland Chinese gamblers—declined 43% in the third quarter to S$622 million from S$1.1 billion a year ago, according to the HSBC report.
When there are fewer high rollers, the win rate is determined by a smaller number of gamblers and volatility increases. Luck did not favor the Lion City in Q3, with the decline in VIP volume accompanied by a substantial dip in the VIP win rate—with the fall in the latter potentially exacerbated by the increased volatility.
“It’s the largest market in the world in terms of whales,” says the Singapore-based analyst. “The change in volatility over 12 months at MBS has seen it go from a very high win rate to a monumentally low win rate,” he adds. “You can blame it on poor luck but I don’t see that at all.”
To make matters worse, Singapore’s regulatory environment looks set to turn sour.
Policy makers appear poised to tighten restrictions on local players. The government’s proposed amendments to the Casino Control Act—released in July—are still at the industry and public review stage. They are broad in scope, including increased fines, reviews of player draw downs of deposits, and stronger implementation of visit limits.
This is coupled with the November 2011 announcement by the Ministry of Community Development, Youth and Sports tightening regulation of casino advertising and promotion.
“Casinos are changing their marketing policies even before they’re forced to,” says the analyst. “Taking a less aggressive marketing approach to the local market will ultimately impact your growth.”
HSBC’s report points out that wider market factors are also having a negative impact.
“We believe the Singapore government has been changing labor laws over the past year, making it more difficult to import foreign labor,” says the report. “These initiatives have made it increasingly difficult for the casino resorts to get staff, given many other local restaurants, hotels and leisure businesses are competing for the same employees.”
The dearth of hotel rooms is another apparent bottleneck. “Both casino resorts, in our opinion, operate under an extreme shortage of hotel rooms,” adds the report. “This is most evident with Marina Bay Sands where it recorded hotel occupancy of 99.8% in 3Q12, while achieving one of the highest average daily room rates in the market despite being the market’s largest hotel.”
The casinos’ heavy reliance on mainland Chinese gamblers is likely to continue. Diversification will come as the rest of the region develops and the city-state is better able to attract players from other parts of Asia, such as the Association of Southeast Asian Nations and the South Asian subcontinent, but change will come slowly.
And that seems to have impacted investor sentiment. Genting Singapore has seen its share price dip from S$1.75 on 4th May to S$1.28 as of 30th November. While MBS isn’t listed separately, its US-listed parent company, Las Vegas Sands Corp, hasn’t fared much better, going from US$61 on 12th April to US$46.65 at the end of November.
HSBC isn’t bullish. It remains underweight on Genting Singapore, predicting further share price weakening to S$1.11.
But ultimately, the ball remains in the Singapore’s government’s court. The casinos are operating in a mature local market and are vulnerable to fluctuations in foreign markets. Only regulatory change can move the needle, be it in the casino industry’s favor or against it.
On the local side of things, Singapore can always reconsider the tightening measures it has put in place or focus them more on a problem gambler segment that does not appear to have materially increased since the integrated resorts opened.
But given the city-state’s desire to protect the local population, it could instead shift its attention to making the environment more attractive to foreign gamblers. It could encourage the development of more hotel rooms in the vicinity of the casinos. It could also loosen regulations on junket operators, allowing them to step in and offer credit to foreign gamblers when the casinos tighten lending.
“Ultimately, it’s a very profitable market but one has to be cognizant of the fact that the government ultimately controls the market,” says the Singapore-based analyst.
RelatedPosts
