Singapore walks a muddled path to growth
Singapore’s gaming market has delivered some serious returns since its two integrated resorts (IRs) first opened. But its future growth prospects look mixed and will depend on several factors, many of them regulatory.
The Lion City’s casino market has been one of the most interesting elements of the Asian gaming growth story in recent times and remains a key economic driver for the city state. But as its government-protected duopoly—shared between Marina Bay Sands (MBS) and Resorts World Sentosa (RWS)—settles in deeper, the sector is beginning to look safer and less exciting than it once did.
In an effort to protect its citizens from the ills of problem gambling, Singapore’s government has ensured that casino operators’ targets are placed squarely on foreign arrivals.
The Singapore government’s primary proclaimed objective in legalizing casinos was to boost the city-state’s tourism numbers. The IRs have delivered. Tourist arrivals grew13.2% year-on-year in 2011 to a record high of 13.2 million, following on from 20% growth in 2010, according to the Singapore Tourism Board (STB). The opening of the IRs is credited with reversing declining tourist arrivals, which fell 4% and 2%, respectively, in 2009 and 2008.
Tourists also brought cash, which they seem to be spending in larger amounts. Tourism receipts hit S$22.2 billion (US$17.5 billion) last year, up 17% year-on-year. But Singapore’s existing hotel infrastructure has failed to keep pace with growth. Hotel occupancy on the island nation is running at 86% during the second quarter, according to a 13th June report from CLSA, with Marina Bay Sands’s 2,561-room hotel proving to be one of the tightest squeezes at 98% occupancy.
The skyrocketing occupancy is causing upward pressure on hotel room prices which in turn deter visitors from visiting the country and its casinos. Analysts predict that tourist arrival growth will slow in 2012 on the back of global economic uncertainty, but 2013 could be even bleaker due to the lack of hotel rooms.
“The government expect growth of tourist arrivals in 2012 to moderate in light of a weaker global climate (CLSA 12%), and will benefit from the S$905 million added to the tourism development fund that was announced in the latest Singapore government budget,” says CLSA analyst Aaron Fischer in his 13th June report. “However, from 2013 onwards we forecast a declining rate of growth to 6.8% – 6.9% per annum reflecting the lack of additional hotel rooms.”
The lack of beds-for-the-night is not the only bottleneck reining in the growth trajectory of Singapore’s gaming market. There is also the issue of gaming capacity, which is restricted by the requirement that the casino areas at the IRs are limited to a maximum 5% of the properties’ total floor space. Thus, any expansion of the gaming floor space at either of the properties will first require expansion of the rest of the resort areas and will take considerable time and investment to achieve.
Global economic conditions and local regulation will be important factors to watch. A 9th February report from HSBC analyst Sean Monaghan considers four future scenarios which reflect varying degrees of growth in the Singapore market. The two more optimistic scenarios both include global stability and coordinated stimulus. The two pessimistic ones involve global instability and a China hard landing, respectively.
Under a scenario that involves protracted global instability—possibly as a result of a Greek eurozone exit or a failed U.S. economic recovery—and a lack of economic stimulus, Mr Monaghan predicts a 3% decline in the local and foreign mass gaming segments and a 5% decline in the VIP segment.
In the case of a China hard landing, Mr Monaghan has mass gaming slumping 10% and VIP gaming plummeting 20%.
“China is now facing stronger headwinds and this has implications for the East Asian region and ultimately Singapore casinos,” explains Mr Monaghan. “Visitors from China are the largest source of revenue (33%), ahead of Singapore (30%) and neighbors Indonesia, Thailand and Malaysia. They are also by far the largest contributors to VIP revenue (52%).”
Because the Singapore gaming market is so geared towards foreign arrivals, it will always be exposed to global economic crosswinds, with much of the impact lying outside the control of operators and regulators alike.
The Singapore government has already helped the two casino operators by fostering what remains a protected duopoly. But it has also hindered casino revenue by enforcing a S$100 (US$79) levy on any Singaporean citizen wishing to enter either of the two casinos and by keeping out the majority of junkets, which Macau thrives on to attract VIP players from China.
Analysts expect regulations to evolve both for the better and worse from the casinos’ point of view. The government’s harm-minimization policies could become more stringent as it ponders problem gambling further in 2012. In 2010,
Singaporean residents were second only to Australians in total gambling losses per resident adult, according to H2 Gambling Capital. The country’s government may not continue to tolerate this run of bad luck among its populace.
But policy makers are also taking some steps welcomed by casino operators, albeit slowly. On 22nd March, the Casino Regulatory Authority (CRA) announced that it would allow a first batch of junket promoter licenses to two Malaysian groups. In doing so, the CRA rejected 12 other applications.
Analysts view this is as baby steps that could lead to bigger strides in future.
“The junkets approved are much smaller than the ones operating out of Macau, so the incremental revenue from them might not be that significant,” says CLSA analyst Richard Huang. “But going forward, with the approval of more junkets, the incremental gaming revenue could be more material.”
“The first two junkets to be licensed are relatively small by industry standards and it will take some time for the market to show growth from this policy initiative,” agrees HSBC’s Sean Monaghan in a 26th March research note.
Thomas Arasi, former CEO of Marina Bay Sands and now president and CEO of Harbinger Advisers suggests the Singapore government is only likely to issue further licenses to junkets that resemble “travel agents on steroids,” rather than Macau-style junkets who extend credit to players from mainland China and collect debts through grey channels.
Mr Monaghan is optimistic about further approvals, though. His growth projections for the market include assumptions of medium and large junkets—targeted at different parts of Asia—being licensed and entering the market.
“We estimate that by the end of 2015, there will be 44 junkets licensed and operating in Singapore (16 small, 16 medium and 12 large), producing a combined monthly roll of S$4.5 billion,” he writes.
MBS has so far not endorsed any junket applications, with the current batch all coming from RWS. Genting Singapore will undoubtedly be hoping that its two approvals will give it some serious return on investment. It reported a 31% dip in net profit during the first quarter of 2012—as compared to a 51% higher net profit at MBS during the same period—which Genting put down to lower gaming revenue and depreciation after the opening of new hotels and attractions.
Revenue at RWS is likely to also get a boost when the west zone of the complex is completed—likely to occur before the end of this year. The west zone will include the Equarius Water Park and the Marine Life Park attractions.
MBS too will likely benefit from the opening of the nearby Gardens by the Bay development, the first stage of which was officially open to the public on 29th June. And while Genting has blazed the trail for junket applications, Sands could also dip its toe into a strategy it already utilizes effectively in Macau.
Further attraction—the first phase of Gardens by the Bay, to the left of Marina Bay Sands, opened 29th June
But impact from non-gaming attractions and junket approvals remain relative uncertainties, especially when compared to the persistent uncertainty in the Eurozone and the slowing Chinese economy. And the high occupancy levels at hotels Singapore-wide make it painfully clear that the city state needs to rapidly develop its basic tourist infrastructure.
Vacant land around Marina Bay could be developed into additional hotel rooms and a third casino license could be awarded after the exclusivity of the current two licenses expires in 2016, but these developments are still distant and very uncertain.
Until the headwinds of insufficient hotel rooms and global economic uncertainty are resolved, growth in Singapore casinos is likely to remain far more muted than it has been over the past two years. Long-term gaming demand in Asia looks healthy, however, as does Changi’s position as an international aviation hub and Singapore’s attractiveness as a tourist destination.
Although the Singapore gaming market is healthy enough to continue generating substantial profits—MBS remains the most profitable casino resort on earth and RWS ranks high on the list—it lacks impetus to keep growing at a rapid clip. The potential for more stellar growth remains, though the question of whether it will be tapped appears to be in the hands of regulators and policy makers both inside and outside the city-state.
Aviation hub—Singapore’s Changi Airport is consistently voted one of the top airports in the world