Posted: September 12, 2009 in Uncategorized


Commented by: Felix LING (Senior Partner of Platform Asia)

12th September 2009


After reading the article “Profitability of IRs in Doubt: Citi Analyst” (by Arthur Sim, The Business Times, Singapore); the first thing came to my mind was, the projected revenue of USD1.56b each for the IRs will not be a realistic target for the first five years of the Lion City IRs operation.

Similarly for those (especially investment analysts) who believe in one of the IRs claim to roll out 1,000 gaming tables to boost casino revenue and EBITDA, it remains a long long shot. I am sure these people chose to ignore the reality check on operating costs and effective table utilization rates as well as win per table achievable.

Besides the intelligent explanation by Citi analyst with regard to the IRs profitability (in which I am inclined to agree), I would like to put forth my assessment of IRs profitability studies begin with the most significant phrase of Business Times report that I find,

“Whether Singapore Leans towards the Las Vegas model (which counts on non-gaming revenue) or the Macau model (which relies on VIP gamers), will have a significant impact on revenue generation here, and ultimately, the success of the IRs.”

What Defines IRs Success?

The success of the IR can be defined from two perspectives, namely from the investors criteria and, the Singapore government’s.

It is crystal clear to all Singaporeans that the objective of allowing casino gaming to be legalized on the island state is to serve Singapore’s new economic landscape, beefing up the country’s tourism trade and one of the most compelling persuasion to citizens of Singapore was, to create more jobs for all. Otherwise, to let go this idea of IRs it might cause Singapore to lag behind its Asian competitors in tourism and many other economic benefits to the country.

On the other hand, the Singapore government also realized that the casino landscape in the Lion City State should not be unleashed into a runaway train… as in the case of Macau. The potentially huge price to pay for acute social & family problems in Singapore is not what its government would like to ignore.

Therefore, the much lower gaming tax regime especially for the VIP gaming segment is aimed to promote a larger pie of casino revenue share for the IRs, mainly attracting visiting VIP gamers from East Asia, India and Indonesia. In such a theoretical arrangement, it is hoped that negative impact of casino gambling (caused by mass gaming spreads) to Singaporeans be kept within manageable limits.

And, it is also hoped that non-gaming elements and services be given equal attention by IR investors and hence, further complement Singapore’s service industries competitiveness and building a critical mass high-value quality services that serves the abovementioned economic goals.

If that theory of legalization of casino gambling through the IRs can be achieved, it is a great success for Singapore.

But what will be the ultimate success criteria for the IR direct investors including the syndicated banks and equity funds that provide mass scale financing to the IRs? Return-on-investment!

If readers were to notice, from this perspective of raw capital investment, very little excitement was mentioned and discussed about the IRs Non-gaming elements by investment sector. It is all about the casino revenue factor and associated issues that remain the key expectation and criteria for the success of the Singapore IRs.

But why is that so?

My points are of commercially driven,

(1)   There is the huge costs of capital been invested in IRs. It will remain as the most expensive IR-Casino development in the world for quite a while.

(2)   Because of the first reason (costs of capital) both the IR operators and associated financing parties would not wait for the next 8 – 10 years to recoup the high investment into this project, bearing in mind the inherence risk exposure in the new era of casino gaming – it is no longer the case of “If we build it, they will come (and spend even more money)…”. It is a case in point where Las Vegas Sands had stepped into this sandy ground, by over-invest/leveraged, over-built and over-confidence.

(3)   In order for the IR operators to continue to manage its financial risks including capital repayment over whatever structured plans as well as continue to leverage for reinvestment needs to stay competitive, strong net cash flow generation through good EBITDA (and EBITDA margins) remain an ultimate criteria for assessment of IR performance. And such good show of performance cannot wait! It is an opposite of another financial-risk management business called Life Insurance. While life insurance creates its embedded values and profitability over a much longer gestation period depending on investment climates and regulatory policies, the Casino-IR business just can’t wait, why?

(4)   The forth reason tells much truth of the above question, it is because while Casino is “betting” on its house advantage (theoretical win) like what the life insurance using actuarial science of product pricing & risk mitigation, casino is also quick to “destroy” its own values by changing its rules to suit the competitive environment. In particular, casino VIP gaming is one very risky play with very thin margins. (Just look at Macau’s VIP gaming landscape). There is no embedded value per se for casino operators and investors alike to wait along because players move away fast. Hence adopting the combined strategy of quick investment return, continue to leverage and re-investment (in order to retain) has been the common goal of casino-resorts industry.

(5)   Now that even Marina Bay Sands had openly admitted that casino revenue will be about 75 – 80% of the total IR revenue. This is a realistic and frank answer. Therefore, would the IR operators under pressure to push for casino revenue first? They jolly well or face with the nasty outcome.

Based on the above reasoning, it appears to be quite a different picture about how to define the success of Singapore IR, especially over its first 5 – 8 years in operation.

Where the True Margins Come From?

I would not try to write yet another lecture notes on this subject as readers could read up more in details in this Professional Ground blog. Plenty of such great articles can found here.

It is still useful for those who want a snap-shot of the answer (including our dear investment analysts). Here I would lay them out in simple but easy to understand manner, in relation to the IRs casino revenue projection.

(a)   First thing first. Regardless of how one would like to argue about casino gaming margins in different context and regions, it is still the Mass casino gaming that is the “holy” cash cow for the casino operator. Let me show you a much simplified picture of profitability:

VIP direct Junket gamers contribution to casino:

–         Junket commission: ave. 60% of win

–         Gaming tax: 12% (w GST)

–         Casino gross takes: ave. 28%

VIP Room operator system:  (if allowed)

–         Room operator takes: up to 70 – 75% of win (including perf. Bonuses & promoter commission)

–         Gaming Tax: 12%

–         Casino gross takes: ave. 13 – 15%

Mass casino floor contribution:

–         Casino floor expected gross takes: ave. 60 – 70% of Hold%

–         Manning & marketing costs: ave. 30 – 40% (depending on cost structure

l     Notes: The above are just simplified guides. Other factors will influent win% and costs. It is unlikely that the junkets will accept a lower commission rates for Singapore IR casinos as compared to Macau. Because in Macau the gaming tax is already 40%.

(b)   One might say that what about the directly sourced VIP gamers by casinos themselves? Is it not that this category of margins can be higher than the junket players? I would leave this $1m question to the IR casino operators… they should know how this game is played on this turf.

(c) This is an educated guess (but most analysts would like to know): Based on averaged gaming budgets per capita of Las Vegas and Macau (including visitors), as well as composition of table/slot mix & ratios and potential restrictions imposed by IR regulator, it is more realistic to envisaged that Singapore IRs total casino revenue will likely be at 20 – 25% (most optismistic scenario) of Macau’s total casino revenue, if IR casinos are able to set the pre-condition right and achieved that score with the help of high proportion local gamers contribution. 

Will They Come? (The Mainland Chinese VIP Gamers)

Similarly I would leave it to the readers to be familiarized with some of the very good articles about this well-discussed topic on this Professional Ground blog instead of trying to copy them here.

However, this very important question leads to anther interesting question about How Strict the casino regulations should be? For the Singapore IRs, in order to fulfill the macro economic goals for the City State and at the same time, maintain a high standard of anti-money laundering control. So, how strict is Strict?

Personally, I think that this is one area that is difficult to strike a good balance for the start. Only through actual experiences, time-tested and circumstances that will help shape the condition in which IR casino operators, regulator and gamers are happy to accept as “adequate rule of the game”. You can’t just adopt an example of one of the gaming jurisdictions and implement for convenience. Those who think it is all about the same, just check out the outcome of one of the most ‘comprehensive & strict’ gaming jurisdiction – New Jersey.

For the IR casinos to achieve the projected USD1.56b casino revenue each, if without the pre-condition of strong and sustainable liquidity and risk appetites for high volume credit exposure on VIP gaming ground; I would say that it is not quite a viable target but more importantly, can the IR casinos achieve and sustain viable EBITDA margins of 30 – 35%?! Gross revenue is not everything and it can be devastating for casinos with high leverage (and the IRs are); this is well demonstrated by the high churning of gross revenue by Macau’s VIP gaming landscape.

IR casinos need both strong revenue & EBITDA margins

IR casinos need both strong revenue & EBITDA margins


By Editor: Mr. Felix Ling is an Asian expert in gaming-IR with extensive senior management experience in Macau. The Professional Ground conducted an exclusive interview with Mr. Ling in August and is posted on this blog. To know more about Platform Asia, please go to www.bulletinpasia.wordpress.com  


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