Downturn raises odds at Singapore casinos
By Muhammad Cohen
SINGAPORE - When the Sands Macao opened in 2004, Asia's first Las Vegas-style
casino prompted an extraordinary boom for Macau and casino owner Las Vegas
Sands (LVS). Thereafter, Singapore's Prime Minister Lee Hsien Loong reversed
decades of ruling party opposition to approve two casino resorts, hoping to
emulate Macau's and LVS's success.
Macau and LVS are now both reeling as the world's economies take a turn for the
worse, and some analysts forecast Singapore's integrated resorts (IRs), the
first due to open at the end of this year, may be following in those footsteps.
Conceived in prosperity to win a competitive bidding process that attracted the
world's top
gaming operators and contracted during a regional construction wave,
Singapore's IRs will be the world's most expensive casino resorts constructed,
costing up to US$6 billion. The global economic downturn, and falling revenue
at Macau's casinos, now cast dark shadows over those heady plans.
A
further shadow was cast by Taiwan's parliament
this week when it voted to legalize gambling on
offshore islands, paving the way for an
alternative destination for gamblers in the
region. AMZ Holdings, a United Kingdom-listed
property development company, is poised to build
the island's first casino, and hopes to agree with
an international gaming group a joint venture to
develop on a site it owns, the Financial Times
reported.
Taiwan officials have indicated
that two or three gaming licenses will be issued once subsidiary legislation is
passed, and two state-owned sites have been set aside for potential
development, the report said. The first casino is expected to open its doors
for business in 2013.
The Singapore resorts will need to produce annual earnings before interest,
taxes, depreciation and amortization (EBITDA) of $1 billion, according to a
source with knowledge of the industry and specifics of the two projects, who
asked not to be named. That's nearly double the EBITDA at the world's most
successful casino, the source contends.
Prosperous 8
"The number [of visitors needed] for keeping the integrated resorts afloat is 8
million," Gillian Koh, senior research fellow at Singapore's public-private
Institute for Policy Studies (IPS) think-tank, says. Last year's total of 10.1
million tourism-related arrivals means each visitor would need to visit one IR
and more than half would need to visit both.
Singapore expects the IRs will boost visitor numbers, but that's not
guaranteed. Last year, despite the successful debut of the Singapore Grand
Prix, arrivals fell 2% from 2007, according to the Singapore Tourism Board
(STB). The STB has forecast 2009 as a "challenging" year. The greatest
challenge, of course, is the global economy, which began cutting into
Singapore's business and leisure arrivals during the second half of last year.
Singapore conceived casino legalization as part of a plan to boost visitor
arrivals to 17 million, double the island state's 2004 level. The premise
behind the IRs was simple: licensing a 15,000 square meter (161,000 square
foot) casino at each IR would ensure enormous profits to subsidize world class,
non-gaming attractions drawing more visitors.
"Singapore wanted two tourist facilities from the IRs: a MICE [meetings,
incentives, conventions, exhibitions] oriented hotel on the bay and a theme
park," Singapore International Chamber of Commerce executive director Phil
Overmyer says. STB offered bidders two IR sites, in Marina Bay near downtown
and on Sentosa, an island off Singapore's south shore, and Singapore got what
it wanted in spades.
LVS won the Marina Bay bid by promising Asia's largest convention center at
120,000 million square meters to leverage its MICE expertise. Under chairman
Sheldon Adelson, LVS transformed Las Vegas into a convention destination, and
Singapore hopes for similar magic in Marina Bay. Beyond the convention and
gaming floors, Marina Bay Sands features include a museum, shopping mall, two
Broadway style theaters, and 2,600 hotel rooms. LVS promised in its bid to open
the entire complex by the end of 2009.
Even though the three hotel towers are currently barely a third of their
planned 53 stories, LVS still says it will open Marina Bay Sands this year, and
STB still lists the IR's debut as a highlight for 2009. As predicted on this
site, (see Singapore,
Sands stand by their bets, November 13, 2008), in November, Singapore
authorities have granted permission for a phased opening, with the first phase
likely to include little more than the gaming floor and some token amenities.
The government also approved raising the casino's table count from 600 to
1,000.
Million bucks an hour
Singapore took those steps in response to LVS's brush with insolvency late last
year, marking the end of an incredible chapter of wealth creation dating to the
Sands Macao opening. LVS chairman Adelson earned $1 million an hour for two
years, as tallied by The New York Times, after taking LVS public in late
2004.
LVS committed $10 billion to expansion on Macau's Cotai landfill linking its
outer islands with the $2.3 billion Venetian Macao, an update of its Las Vegas
flagship resort, as the centerpiece. Fueled by China loosening travel
restrictions and the opening of the Venetian, Macau overtook Las Vegas at the
top of the global gaming revenue charts in 2007. When LVS sold its Grand Canal
Shoppes mall in Las Vegas for $766 million, chief operating officer William
Weidner said the company's motivation was "to take all that money and dump it
over in Cotai".
That's turned out to be a regrettable turn of phrase. Troubles for LVS began in
Las Vegas in the middle of last year, with high gas prices and the
deteriorating US economy cutting revenue at its Venetian and Palazzo resorts.
Then China tightened travel restrictions and Macau's gaming revenue growth
slowed. In September, revenues began falling year-on-year for the first time
since 2004.
Heavily leveraged to support its edifice complex, lower income brought LVS to
the brink of violating its loan covenants, threatening to throw the company
into technical default. Its share price fell from a high of above $160 to below
$5. Since September, Adelson has put $1 billion of his own money back into LVS.
Overall, the company has raised more than $2.5 billion in new capital and
suspended new developments in Macau, opting to complete Marina Bay Sands
instead.
"Adelson would be better off to take Marina Bay than what he has in Las Vegas,"
Devin Kimble, managing director of Singapore restaurant and catering group
Menu, said. LVS has talked with Kimble about putting a microbrewery in Marina
Bay. "I've certainly rethought it" after seeing what's happened at Venetian
Macao, Kimble said.
Some analysts believe LVS and Macau fell prey to particular circumstances that
won't impact Singapore's casinos. "China did not restrict money and travel out
of China," IPS researcher Koh notes. That's true, but Koh and her colleagues
are also investigating whether that analysis misses the point. When China
limited visits to Macau, the Chinese leadership sent a message that it was
unhappy with the exodus of money from the mainland to Macau's casino tables.
Slowing growth at home won't make China more receptive to money heading even
further overseas to Singapore.
Fish story
Genting International won the Sentosa site, promising not one but two theme
parks. Its 49-hectare Resorts World at Sentosa includes the only Universal
Studios theme park in Southeast Asia and the world's largest oceanarium.
Genting's Highlands resort near Kuala Lumpur is Malaysia's only legal casino
and popular with tourists from Singapore, so the company may have gone
overboard to protect its home turf. According to one insider, when Genting
learned that its main rival was proposing a 175,000 fish oceanarium, it upped
the ante to 400,000 fish.
The Resorts World complex also includes a maritime museum, a resident
performance spectacle, outdoor sound and light shows by the creator of the
Fremont Street Experience in Las Vegas, six hotels with 1,800 rooms ranging
from hardcore luxury to Hard Rock, and meeting space for up to 35,000. Building
world-class destinations carries world-class price tags.
Marina Bay Sands was initially budgeted at $3.85 billion, already making it the
world's more expensive casino resort, and Resorts World was budgeted at just
over $3 billion. Both IRs broke ground during a building boom, locally and
across much of Asia. Higher material prices, driven by rising global commodity
prices, produced cost overruns. LVS currently estimates Marina Bay Sands'
completion cost at $4.5 billion, and Genting says Resorts World will cost $4
billion, including $53 million to widen a bridge to improve access to the
island. Some analysts contend those budgets reflect phased openings and that
the final bill for each completed resort could top $6 billion, a challenge to
profitably in any economy.
"Marina Bay Sands will be a magnet for tourists and business people to come to
the region," University of Nevada-Las Vegas Singapore campus dean Andy
Nazarechuk says. "Resorts World is going to be more impacted by the global
financial situation. Families are trying to watch their budgets, and a big
vacation is something you forego in tough times."
But Singapore Management University president Howard Hunter sees it
differently. "The Genting project is so different, it has a good chance of
success in the near term," Hunter says. "Over 15-20 years, Marina Bay Sands
will be all right, too, but the economic climate will not be good for the next
two to three years."
"Bad economic times are always good for gambling," contends Aaron Brown, author
of The Poker Face of Wall Street. "But depression gamblers want
inexpensive, no-frills action close to home. They don't travel far for fancy
casinos. With business conventions and extravagant splurges dead, and capital
costs sky-high, it's going to be tough for Singapore and Macau casinos."
Taking a global view, Brown says, "Relative to other casinos, Singapore has
advantages and disadvantages. Asia has been less affected by the bad times than
other parts of the world, and the casinos are still under construction. If
financing problems can be overcome, the recession might push costs down and
allow the projects to be ready just when things swing up again.
"In the worst case, the projects will collapse, or will bleed money for years,
then seem rundown and out-of-date when things recover, the Atlantic City
story," Brown concludes. "In the best case, the projects will get completed
under budget and kick off the recovery, at least an Asian recovery, in high
style."
When LVS opened its Sands Macao casino in 2004, it set a record by recouping
its cost in less than a year. Building Sands Macao, then the world's largest
casino, cost $265 million. Each Singapore IR will cost at least 15 times as
much, and be far more to operate than Sands Macao, which had no facilities
beyond the gaming floor and a handful of restaurants. In any economic climate,
Singapore's IRs will be hard-pressed to generate 15 times more profit.
Special correspondent for Macau Business magazine, Muhammad Cohen told
America's story to the world as a US diplomat and is author of Hong
Kong On Air (www.hongkongonair.com),
a novel set during the 1997 handover about television news, love, betrayal,
high finance and cheap lingerie.
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