Inside Asian Gaming

INSIDE ASIAN GAMING | May 2010 Many Happy Returns Are Las Vegas Sands Corp (LVS) and Genting and its consortium partners going to lose money on their respective Singapore casino resorts? It’s unlikely. The issue then is how much they will make and how quickly. LVS has, typically, set its stall out early and very clearly. It plans to achieve a 20% return on investment (ROI) annually on total capital invested at Marina Bay Sands. That means it would achieve project payback in five years (subject to any future decision to reschedule debt that it might attempt should business conditions change). Broadly speaking, annual ROI rates for new casino projects in Asia have been falling—in part as a function of rising supply, but also as a function of ever-larger amounts being spent on building them. Marina Bay Sands cost US$5.7 billion. LVS’s first-ever foreign casino, Sands Macao, cost 21 times less at US$265 million. Sands Macao took less than one year to achieve payback. MBS—in order to achieve its ROI target and assuming it is basing its ROI calculations on net earnings rather than on EBITDA—will have to generate at least US$95 million net per month. That’s the equivalent of US$3.12 million net per day. Sands Macao only needed to earn US$726,000 net per day to reach payback—even in such a short time. Of course, MBS and Sands Macao are different types of product in different markets, launched at different times. Sands Macao’s stratospheric performance is never likely to be repeated in Asia, or anywhere else for that matter. It was an overnight hit because it was Macau’s first truly mass market, Las Vegas style plain vanilla casino, and in stark contrast to SJM’s VIP-focused operation. The Sands opening also crucially coincided with mainland China’s easing of travel restrictions on its citizens wishing to visit Macau, supplying a flood of new demand. Anyone wanting a Singapore casino licence was always going to have to spend big on non-gaming facilities. The boosting of Singapore’s tourism infrastructure was the key requirement of the government in granting concessions. The good news is that Singapore’s lower gaming tax take (15% of the gross on the mass market and 5% on VIP play, plus Goods and Services Tax at 7% on both segments) and the greater per capita GDP of Singapore and Malaysia compared to the per capita GDP in Macau’s hinterland, mainland China, should contribute to a better yield per customer and better margins than can be achieved in Macau. That’s even taking into account Singapore’s higher wage rates and the absence of high volume junket play. Too Much Too Young? A lot can happen in five years, inside and outside Singapore. So for LVS to start talking about expanding into Japan when the performance of its Singapore IR hasn’t yet been calibrated may seem even to those investors without elephantine memories at best ambitious and at worst chutzpah—as if the warning issued by the company’s auditors back in November 2008 regarding LVS’s existence as a going concern had never happened. The history of capitalism—especially the North American, heavily leveraged kind—is that you need to keep moving and growing. That does, however, create inherent structural challenges and risks including the possibility of over extension and liquidity problems—as was dramatically illustrated in LVS’s case following the global financial crisis of 2008. Given the still delicate state of global capital markets, theremight be some who think it would be best for LVS to make its current assets sweat a bit more before thinking about acquiring new ones. Members of the Macau government probably fall into that group. The underperforming Macau conference market and the metaphorical tumbleweed often blowing through Venetian Macao’s Cotai Expo facility is a case in point. Another is LVS’s failure so far to deliver on its often-repeated promise to ‘monetise’ its retail real estate on Cotai. Were LVS to step up its efforts to make its existing Macau assets work harder, it could actually be an important hedge against the proven volatility of the Macau gaming market—a volatility everyone conveniently tends to ignore or downplay during a bull market. That apparently inherent volatility relates to several factors. One is the underlying character of Chinese-style capitalism as practised initially in Hong Kong and now exported to mainland China. For decades, Hong Kong’s economy has been a boom-bust roller coaster unrestrained by the kind of welfare state safety net policies practised in much of the West. Macau’s gaming market has traditionally tracked the highs and lows of the Hong Kong economy, which for years supplied most of the players. Now that mainland China is the biggest supplier of customers to Macau, new political considerations have come into play. These include the central government’s need to control credit issuance and to maintain social harmony by protecting its own citizens from what it recognises is their near pathological obsession with gambling. Talk is of course cheap regarding LVS’s expansion into Japan. Despite media speculation, that country seems no nearer to legalising casino gaming now than it has been at any time in the preceding decade. Political and administrative inertia—the two diseases that have caused the Japanese economy nearly to flatline for the best part of two decades after spectacular post-war growth—show no signs of relinquishing their grip. The conservatism and caution often exercised by Japanese companies may account for why they have a reputation for doing deals at or near the top of the market in the merger and acquisition sector. That’s probably why in 1995, a certain Japanese company called SOFTBANK Corporation paid Interface Group-Nevada Inc, run by Sheldon G. Adelson Esq., an impressive US$800 million for the latter’s Comdex trade show and portfolio of 16 smaller exhibitions—at the very moment that revenue from Comdex shows peaked. It was that deal that set Mr Adelson on the path to becoming a global developer and operator of casino resorts. This time, it may be the Japanese who see him coming. 4 Editorial Inside Asian Gaming is published by Must Read Publications Ltd 8J Ed. 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