Singapore IR – Who Gets First Bite, Wins

Posted: December 14, 2009 in Uncategorized

The 60-60 Rule for Singapore IR

Comment by:  Expert IR

14th Dec 2009             

What will be the optimal business model for the Lion City’s Integrated Resorts (IR), to be opened in early 2010? At the recent Gaming Executives Summit Asia, 2009 forum held in Singapore, most of the speakers tend to stick to the notion of “Singapore IRs will not fail” syndrome. It was quite a surprise that just how many of them still think that If You Build It They Will Come scenario, like in the 90s and early 2000 era in Las Vegas. It must be noted that saturation of same product mix without innovation and creativity will only drive the pricing (and profit) further south.

Many investment analysts and the gaming community have made their invaluable comments over the last three years, about how great the Singapore IR will become another Las Vegas of the East.

Reasons were cited as the IRs offer luxury retails, fine dining, theatre shows, aquarium, convention space, great hotel rooms, theme park and the obvious, casinos. Is it true that the markets remain in such a “passive” mode that it would be so willingly to adsorb all these goodies without a choice? Nonetheless some investment bankers and fund managers have started to hail the “Money off the table” advice.

As the panel of Professional Ground has earlier commented that by offering the same products in more quantity, the Sands China’s business driver of plot 5&6 in Cotai Strip (Macau) might not be the best idea after all.

Back to Singapore IR that in essence it is a “tight” market to begin with. i.e. there are constraints of high end affordability in mass volume consumption, traditionally heavy reliance on the five (5) tourism sources (China, Indonesia, Malaysia, Australia and India), lack of effective junket channels for consistent high turnover, as well as tight regulatory control. It is therefore NOT viable for the Lion City IR to follow what Macau has been doing in terms of heavily emphasizes on VIP casino gaming revenue as a business model, regardless of the Lion City’s low gaming tax as incentive.

At Professional Ground, we reckon that the optimal Risk-reward model for Singapore IR’s sustainability would be as follows:

Rule #1 – There isn’t a large enough market size for casino revenue to be equally shared by two IR operators based on our projection of top-line of USD2.5 – 3b in total to be sustainable. Especially in the situation that IRs need to maintain a 75% of total gross revenue from casino takes in the first few years of operations.

Rule #2 – If Rule #1 a reality, it is ONLY viable for an IR operator to win over at least 60% market share of the USD2.5b total casino revenue in order to be in the comfort zone and to yield good EBITDA and margins.

Rule #3 – Not only an IR operator needs to secure for the first few years of its operations with at least 60% of the total casino revenue pie in this tight market, the spread for VIP gaming vs Mass gaming should be in the range of 40% VIP gaming coupled with a larger 60% portion of Mass gaming revenue split. This equation would help to sustain healthy good margins that can be expected by investors and operators alike.

For those who are still wondering about why is that so. Readers may want to recall our suggestion in previous articles, that the Lion City IRs require EBITDA margin that is 30% or more to be sustainable in its early years of existence; bearing in mind that realistic projection of IR’s total casino revenue would only be at best, 25% of current total casino revenue of Macau.

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