Singapore Casinos: Where the chips are down (Part 1 of 4)

Is this just a short-term blip or will there be long-term issues?

The boom days of Singapore’s Integrated resort Casinos maybe coming to an end as new restrictions on junkets and competition from Asian neighbours threaten the industry’s growth.

Despite the success of the two IR’s, their revenue at $2.8 billion pales in comparison with Macau which is eight times larger at $23.4 billion. And more worryingly there are signs that not only won’t profits grow forever, they may have hit a near term peak.

“The Singapore market experienced impressive growth after the initial success of Resorts World Sentosa and Marina Bay Sands, but regulatory changes are likely to lead to a slowdown there,” notes Fitch analyst Vicky Melbourne. Singapore has become a major gaming destination in Asia, with gross annual revenue of around SGD7.7bn (USD6.3bn) in 2011. “The initial appeal of the new market is now over. Government policy and weak VIP growth will also serve to restrain revenue growth,” added Melbourne.

It may come as a surprise to some but Singapore’s Casinos are already reporting falling numbers. Marina Bay Sands reported that the local mass market was dropping off which led it to report a 6 % slip in slot revenue year on year. And it’s no better in the VIP segment, where weak demand from China saw overall profits based on a normalised win rate down 12 % year on year. It’s similar for Genting Singapore which saw profits dip 19% due to lower VIP volume.

The biggest headwind for the Casinos is proposed changes to the law which will cap commissions paid by casinos to junket operators. It is the high rolling, big spending ‘whales’ that Junket operators bring in that are crucial to continued growth, and this makes it more difficult. In addition IMAs (international market agents) won’t be allowed to extend credit to VIPs - a standard service offered in other markets. With no additional junket operators approved, “the junket model in Singapore will evolve only slowly,” notes Melbourne.

Another challenge to Singapore’s South East Asian dominance is the threat that other regional countries will move to establish casinos. No concrete announcements have yet been made regarding plans, but Japan, Taiwan, Vietnam, Cambodia are all considering allowing casinos and could have them up within a decade. Approvals are expected to be given in 1 to 2 years to Osaka and Tokyo.

Existing casino markets in South Korea, Taiwan, and Philippines are all considering allowing new casinos, and Sydney may get its first new license in 20 years. There is a lot at stake for both the IR’s and Singapore. WIth Asia’s market share of global casino revenue to rise to 44% by end-2015 after having climbed to 29% in 2010 from 14% in 2006, it’s a battle Singapore cannot afford to lose. Here's what analysts have to say on the issue:

1. Broking analyst (requested anonymity)

Singapore's VIP segment is even more cylical than others as there are no junkets to provide credit/financing to VIPs. Most VIPs derive their wealth from manufacturing and property and neither segment is doing well in Singapore or China, where the casinos derive half of their VIP volumes from. We need to see a sustained recovery in both segments in China and ASEAN before VIP volumes turn around. But deeper concerns are held for the mass market. The casinos cannot market to locals and therefore, depend on tourists for business.

Singapore is not the cheapest holiday destination with an average room rate of SGD260 (USD210). More should be done to increase the number of hotel rooms and bring down the average room rate so that more visitors can visit Singapore economically. For now, the casinos will likely experience mass market gaming revenue growth that will be anemic.

2. Wai Ho Leong, senior regional economist, Barclays

This is a short term blip, reflecting the wearing off of the initial novelty. Like the experience of other properties elsewhere, visits should moderate to a more sustainable long term trend. This has been largely anticipated and is not an ominous structural signal.

3. Grant Govertsen, principal analyst, Union Gaming Group

With the benefit of hindsight, the plateauing of gaming revenue in Singapore isn’t overly surprising. Singapore witnessed incredibly fast gaming revenue growth over the first two years of operations, which can be attributed to significant levels of pent-up demand among local and regional customers. However, given the government’s desire to minimize any potential social ills associated with gambling, restrictions on the locals’ market aren’t overly surprising.

As a result, and when combined with the fact that the locals market is well-penetrated, the mass market segment is unlikely to continue to see explosive growth. The VIP segment, on the other hand, has more recently been impaired by economic issues, and to a lesser extent by regulatory issues (e.g. restrictions on IMAs). Not everyone thinks this is the end of the growth story for Singapore’s gaming business.

4. Joe Poon, associate director of corporate ratings, Standard and Poors

Although net gaming revenue is likely to post a decline in 2012, the Singapore gaming industry still has growth potential, as there is sufficient demand in the region. Despite a slowdown in the VIP segment, visitation continues to be solid, supporting revenue rates in the mass market. After a very quick ramp up in gaming revenue in its initial years, we expect growth in the market going forward will be more correlated with GDP growth. In 2013, we expect gaming revenue growth in the 0% to 5% range in Singapore.

5. Ciarán Carruthers, president and CEO, Asia Pacific Gaming Consultancy Macau

The fall in local numbers is likely to be a short term issue as opposed to anything significant long term. Both properties ramped up very quickly and were successful opening up into a market that was already quite familiar with gaming as a form of entertainment, who enjoy it and who already had relatively easy access to casinos thru the many casino ships that called Singapore home or in the slot clubs that had been present in the city for many years previously.

The new resorts obviously offered so much more and brought in significant crowds and revenues, both from local mass players and from overseas tourists playing on their mass gaming floors. I don't believe that there has been a change in attitude towards gaming within the mass market, but perhaps the novelty of the current offering has worn a little thin. If this is the case, then you have two highly experienced, proactive and motivated executive management teams who will address this and who will know how to do it effectively.