Soft gaming revenues push casino operators to place their bets on Japan

Visitors spent $1.5b on gambling and entertainment in Singapore, but this proves to be small compared to casino companies' potential income from Japan.

Total spending on gambling, sightseeing, and entertainment climbed 6% YoY to $1.498b, Singapore Tourism Board data revealed. Coupled with increased visitor arrivals in the country, this should be good news for the city's casinos, but softer gambling figures has had them look to other sources of profit like Japan.

When Japan's bicameral legislature passed the Integrated Resorts Implementation Bill in July, which permits casinos to operate in three large-scale gaming venues, Singapore's two casino operators quickly expressed interest in securing a license in what is shaping up to be one of the largest casino markets in the world. Analysts reckoned there is a likely chance that either Genting Singapore, which owns Resorts World Sentosa, or Las Vegas Sands, which owns Marina Bay Sands, will win a license and usher a strong new growth driver in the medium-term horizon as both operators face respective headwinds in the Singapore market.

Japanese Prime Minister Shinzo Abe has supported the idea of legalising casinos despite domestic opposition due to the strong tourism draw of integrated resorts, which are comprised of casinos as well as hotels and other entertainment and business facilities. Foreign casino operators reportedly estimated the Japanese casino market could be worth about $15.8b annually when resorts are opened in three cities, which would surpass Nevada's $11.1b.

UOB Kay Hian analyst Vincent Khoo noted that the two Singapore casino operators are "strong candidates in the integrated resort bidding, given their experience in operating in a highly-regulated casino environment and track record in contributing to the country's tourism."

Genting Singapore has started to hire a Japanese team to prepare for the bid, according to OCBC Investment Research, while Las Vegas Sands is reportedly putting effort into engaging with local officials, businesses and community groups in Osaka, widely expected to be chosen as the first major city to host a casino in Japan. Top executives from Las Vegas Sands and Marina Bay Sands have also said that they are eyeing as much as $10b in investment in Japan, and that investment in an Osaka integrated resort could even exceed that of Marina Bay Sands.

Wei Kiat Ng, an analyst at S&P Global Ratings said the liberalisation of the Japanese casino industry is one of the most exciting recent developments for both Singapore operators. “However, we expect the bidding of licenses will only commence at earliest in 2019, with license awards only in 2020.”

Softer rolling volume
The strong interest in obtaining a Japanese license and cornering a large new market comes as Singapore operators grapple with challenges in the city-state’s mature gaming sector with about $4.6b of gross gaming revenue in 2017, according to Bloomberg data.

Las Vegas Sands, for example, posted disappointing results in the second quarter of 2018. Whilst revenue climbed 6.2% to $3.3b, its operating income on a GAAP basis, declined 2.4% to $797m, compared to $817m in the year-ago period. The company attributed the drop to softer rolling volume and win percentage in Singapore, and a $92m write-off of costs related to the tower adjacent to the Four Seasons Macau. Singapore, which accounts for about one-fourth of the operator’s business, recorded $368m of adjusted property EBITDA during the period.

Marina Bay Sands' rolling chip volume decreased by 35% year over year to an eight-year low in the second quarter of 2018, according to a UOB Kay Hian report, which when coupled with a lower win rate, dragged down VIP gaming revenue by as much as 58% year over year. The casino’s core EBITDA tumbled 25.2% to US$368m with a margin of 52.2%, dropping from 59% in 2017.

Prior to the release of Las Vegas Sands’ second-half 2018 results, Fitch Ratings noted in April that Marina Bay Sands’ VIP volume was up 10% while mass market volume was slightly down, reflecting the recovery in global VIP volume mostly from China and the highly penetrated mass market segment, respectively. The rating agency said it expects low-to-mid single digit growth in gaming revenues in 2018, assuming low single-digit growth in mass revenue on the back of rising foreign visitation and a continued mid-to-high single-digit growth in VIP.

Despite the recent quarterly decline, Ng noted that Marina Bay Sands has gained market share over Genting Singapore over the past few years given its more convenient location and status as a Singapore landmark. He said Resorts World Sentosa current market share has fallen to 35% to 40% of total wins, down from 50% in 2014.

Non-gaming focus
Ng was quick to point out though that amidst the market share decline, Genting Singapore has been focusing more on restaurant events, and other attractions “to try to increase premium mass visitation, which will help to sustain its market position.”

Genting Singapore registered a 20% jump in profits to $217.19m in the first quarter of 2018, buoyed by bustling VIP rolling volume in the Lunar New Year and high non-gaming revenue. The company said visitations across its attractions exceeded 18,000, with the Universal Studios Singapore and S.E.A. Aquarium particularly drawing in higher visitorship and increased average spend compared to the prior-year period.

Ng reckoned that with its large exposure to the VIP market, Genting Singapore is vulnerable to a decline in VIP rolling volumes and win rates. “Hence, we note that Genting Singapore is slowly shifting its focus to lure more mass-market players, which will help to partially offset the volatility of earnings,” he said.

Genting Singapore will likely see modest growth in gaming revenue of about 3% to 40% over the next two years, according to Ng, with the forecast assuming a steady increase in VIP rolling volumes and a stable flow of visitors. Ng expects the operator’s EBITDA margin to remain healthy in the 38% to 40% range over the next two years, underpinned by a tighter credit policy and other cost-efficiency measures.

Looking forward to 2019, Ng held a stable outlook for the Singapore gaming sector, citing a steady flow of visitations of both tourists and meetings, incentives, conferences, and exhibitions -- commonly known as MICE -- events in Singapore.

Previously in July, visitor arrivals in Singapore rose to 1.73 million in July, from 1.54 million in June, and the highest monthly reading so far in 2018. Of these, about 360,000 were from Mainland China, a key market for VIP high rollers, about 50% higher than the 242,000 visitors seen in the previous month. In the seven months to July, visitor arrivals in Singapore increased to 10.93 million, up 7.39% from the prior-year period. Meanwhile, industry observers pointed to a robust line-up of MICE events, including the Industrial Transformation Asia-Pacific, later in 2018, that should help sustain the influx of business visitors.

Fitch Ratings has also acknowledged a low risk that the Singapore government will award additional gaming licenses after the 10-year exclusivity provision ended in early 2017, which could put further pressure on both operators. Ng reckoned the incumbents have little worry about, since a third challenger faces considerable entry barriers. “Despite the recovery in the gaming market, in our view, returns on investment for a new casino in Singapore would not likely be compelling given land availability and competition,” he said. “In the unlikely case of a grant of a third license, we estimate it would take at least three-to-four years before a new casino could be fully completed and opened.