Viability Of IR "Visitor Projections" Questioned By Citi

It is always good to take the other side of the coin when everybody is in favour of a certain thing. Needless to say, there appears to be a euphoria like thingy being built up surrounding the two casinos as the date of their opening draws closer. Citigroup research has drawn attention to the viability of some of those projections, in particular to the number of visitors. My views in color.

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UNDER QUESTION

The $100 entrance fee is a sticking point as it could prevent both casinos from developing strong, recurring local mass market clients. In a report on the prospects of Las Vegas Sands (LVS), which owns Marina Bay Sands (MBS) here, Citi said that assuming Marina Bay Sands contributes 20 per cent of LVS's total Ebitdar in its first full year, every eligible Singaporean will have to go to the casino five times a year and spend more then the average visitor to Macau. Why cite Las Vegas Sands report, naturally they will project lofty figures. I doubt many research houses are looking at the 15-16 million visitors a year as their base pricing. Take it down by 20%.

We liken the current sentiment towards the integrated resort to the Macau gaming boom in 2006/07 and urge investors to not be left holding this parcel when the music stops,' added Citi analyst Anil Daswani. Mr Daswani acknowledges that his forecast of 20 per cent Ebitdar from LVS's Singapore operations is about 30 per cent below consensus. But he also added: 'If current market estimates are believed, then the Marina Bay Sands will be the most profitable casino in the world in its first full year of operations despite Singapore being a fledgling gaming market.'Singapore is an untested market as far as gaming goes. Mr Daswani, obviously is from india and not a born and bred Singaporean. If you examine gaming habits by virtue of official available data, you will get a slanted view. If you rely on data from Singapore Pools, the turf club, football betting and 4D - the official data is probably representing 10%-15% of actual betting that takes place. About the only thing that is officially correct is from the Singapore Pools (lotto like) which illegal syndicates cannot touch. Horse racing, in Singapore about S$700,000 to S$1.2m is wagered every race, officially. People in the know will not gasp when I say the real figure is at least 15x-20x that figure, you do the math. The figure is the same, maybe even higher for footballing bets. 4D is still rife in illegal quarters but may have toned down somewhat. Still the illegal pool should be at least 5x-10x the legal pool. So, with that in mind, do you wish to change your view on Singaporean gaming habits?

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 generators here, and ultimately, the success of the IRs.

Based on Citi's analysis, to achieve US$1.56 billion in revenue each, both IRs will have to attract a combined total of 31 million visitors annually. This implies that 3.2 million eligible Singaporeans (over 21 years) will have to visit either casino a total of five times. An additional 1.4 million visitors from Johor will have to visit either casino twice a year and 12.2 million tourists will have gone at least once with everybody betting and losing at least US$100.

Citi highlights that the US$100 discretionary spending is almost twice that typically spent at Genting Malaysia's casino (US$53) and higher than the average spending at LVS's Venetian Macau (US$84). 'This does not include the additional $100 entry levy that each Singaporean must pay when they enter the casino,' added Mr Daswani. Haroo, ... Its S$18 to get into the Singapore Zoo, its fucking S$29.50 to get on the bloody Singapore Flyer and that's just a 10 minute thingy. So what's S$100???

He also said that while the market is expecting Singapore IRs to achieve Net Wins Per Table in line with those achieved in Macau, 'we cannot justify these assumptions just as we cannot believe that Singapore in its first full year of operations will equate to 30-40 per cent of the market size of Macau in terms of gaming revenue or 70 per cent plus of the entire Las Vegas Strip'.

It is not just gaming that is at risk. Citi estimates that room rates at MBS will be around US$143 with occupancy at 78 per cent. However, it noted that there will be 18 per cent of new hotel room supply added to Singapore's total hotel room supply next year.

But its the $100 entrance fee that is a sticking point as it could prevent both casinos from developing strong and recurring local mass market customers. 'In Melbourne and Macau, a key dynamic of each market is that the local Australians and Chinese dominate their respective mass market division at the casinos. If Singapore wants more mass market type casinos to succeed, they will have to successfully attract the locals to gamble regularly,' said Mr Daswani. At MBS, Citi expects 51 per cent of total gaming revenue to come from the mass market vs 42 per cent at Venetian Macau. While Citi has focused on many downside risks, others have been more optimistic.

In a report last month, CIMB estimated that Singapore could have a casino market worth $5.1 billion. Accepting that predicting market size is 'still hazy', CIMB nevertheless used a ratio of casino revenues-to-legal gambling market in Malaysia to gauge the relative market size of the casino market versus the non-casino gambling market. Applying this ratio to Singapore, and cognisant that this could underestimate the viable casino market, CIMB found that in 2008, Singapore's tax authorities collected $1.78 billion of taxes from gaming activities. Assuming a 20 per cent tax rate, the legal gaming market in Singapore is estimated to be about $8.9 billion, it said. CIMB also pointed out that a recent study estimated that 58 per cent of the population in Singapore are gamblers and each gambled up to almost $3,300 per person. 'These data points support our estimation of a $9 billion gaming market size to tap', it concluded.

I am not dumping Citi's comments down the drain but there are a few areas of assumptions which are not all there. Many of the reports out there did pretty well in the rigorous research. Why I think both casinos will do well (and that the Sentosa one will actually do better):

a) just the two of us, no more ... no matter how you cut it, its a duopoly

b) now leverage that duopoly to eat into the massive amount of illegal gaming in Malaysia and Singapore (think of betting stations within the casinos to take bets on Singapore Pools, 4D and horse racing... races being beamed live). To eat into illegal market, it has to be more convenient, you want the same gaming dollar to travel more, you win here, you bet there, etc...

c) the Singapore government's support, they have to be a success, hence you can be assured that if there are any shortfalls in visitors or structural issues hindering profitability, there will be suggestions and ways to get around them swiftly, the two IRs viability and success reflects critically on the government's economic planning and value add industry convergence strategy

d) excellent infrastructure and connectivity, the rise and rise of low cost airlines, the new terminal for them and the connectivity with AirAsia, Firefly etc... bodes well for attracting and pushing through all visitors to at least stopover in Singapore whenever tourists pass through the Asia-Pacific region

e) The underlying difference between Macau and Singapore is a bit like Geylang and Bukit Timah, or if you prefer, like comparing Kings Cross and Darling Harbour. Despite the glitz and glamour on the outside and the facade, Macau is still a breeding ground for wild cowboys left over from triad days, there is still the underlying seediness of illegal money lending, prostitutes hanging by the doorways and and entrances, there is still the raw naked feeling that your skull could be cracked by a bad tempered loser, etc... That's why the two casinos in Singapore will be considered as "safe", where if you win big, you won't have to fear whether you can get out the casino or the island or your room unscathed. Its a bit unfair for me to trash Macau but water it down a little, you get at the truth. Safety, convenience, rule of law, upright police force ... mean the two casinos deserves a premium, and will get that premium from gamers. If you are a regular gambler (say 4 times a year to an international casino), would you bring your family with you to Macau (safety, healthy activity issues...) or would you go to Singapore?

It is fine and well to look at figure projections, room rates, occupancy rates, net revenue per punter, theme park revenue per visitor, etc... but you must first really get behind the properties and understand the nuances of the people, the place, the environment, the thinking, the mindset and psychology of the people before the estimates make good sense. The assumptions and how persuasive are the underlying assumptions will lead to how strong is the opinion of whether the views are too optimistic or pessimistic. I found nothing much of value or essence in the underlying arguments of Citi's view.


p/s photo: Gaile Lai

The 2 Major Defining Issues For Malaysia & Singapore Property

1) The stock market effect in Malaysia - If you were to look at the financial turmoil in the past, namely, the mid-late 80s, the blip in 1994, the major monster of 97, the internet bust, the SARS effect, the tsunami effect and now the credit implosion... you can chart a very useful multiplier effect from losses in the stock markets. Prior to 2000, any kind of financial bust ups will see a lot of havoc and bad debts, ask any remisier... Following moves to limit contra and contango trades, this has removed a HUGE "leveraged disaster" from the domestic economy.

I can give you the excellent example of my 6 analysts working with me in mid 90s, their monthly salaries between RM3,000-10,000 and basically under 30 and real net worth probably zero. But each and everyone of them will have zero deposit with 2 or 3 remisiers, but personally will have a contra position of between RM100,000-300,000 in a few stocks depending on the mood of the market. This is not unique to my team of people, everybody everywhere were doing it. Naturally we always see a huge multiplier effect when the market corrects 10% over a week.

Since 2000 every major financial calamity has not seen similar catastrophic personal financial aftermaths. Now you try to buy RM50,000 worth of share with zero deposit, your remisier will ask you to fly wau. This market correction was also unique to the majority of retail stock players. Many were able to sell down most of their stocks or just stop playing stocks when the market retreated from 1,400 to 1,200... sure some will still hold a few stocks in their portfolio but many have been able to avoid the carnage. When a market falls from 1,400 to 850 its the holders of the shares that bear the brunt.

This time around retail players have been able to sidestep much of the disaster movie, its the funds that got whacked royally this time, ... local, hedge and foreign. Thus this will further help explain why most Malaysians are still relatively cash rich and under invested. Fewer job losses and fewer after effects from the stock markets = less likelihood to need to sell properties in desperation.

Hence market commentators should keep this in mind when comparing similar wealth effects prior to 2000 and after. The magnitude of the above financial effect on the broader population should not be underestimated.

2) The expatriates wave in Singapore - Singapore's population, on its own does not really grow on a net basis. However if we were to look total population from mid-2003 till mid-2008, Singapore's population grew by an incredible 17.6% to4.84m. Largely that came from a surge in expatriate staffing. That was an increase of 724,600. Official estimates had it that of the 724,600 some 546,700 were foreigners (expats) and permanent residents. If you were to assume that there were 3 per household, that would work out to an increased demand for 182,233 condo/house either for rental purposes or for purchase.

The large jump in expats and PRs were due to a sharp increase in business services segment, in particular hedge funds and more importantly private banking. The other segment of the industry which was significant was the boom related to the integrated resorts projects. When there is a major structural change in a country's infrastructure and/or the additional of a significant and viable new industry, it tends to attract a lot of investments and liquidity to partake in the euphoria. Needless to say, foreign investors piled into surrounding properties and new developments.

The wave was so strong that many developers were confident enough to lure the best architects to build the best of class condos in Singapore. The interest was so significant that pricing was at the very top end of global condo valuation standards. It even flowed into Sentosa in a big way.

To meet the increase in demand for high end housing, en-bloc sales became very popular. Developers were willing to pay a huge premium to secure good locations. They will then tear it down and build a new swanky and pricier place. En-bloc sales resulted in many Singapore owners suddenly turning into multimillionaires. That in itself, feed well into the demand for the pricier new condos as well. If your condo was worth S$1.0m in 2003, it could have been sold for S$1.8m in 2005 in an en-bloc sale. Assuming you had some mortgage left, you may still have a cash position of S$1.0m-$1.5m. That would be more than sufficient to pay down payment for the pricier new developments, maybe even flip them a few times thus tripling that capital within a short period.

The credit implosion will hit Singapore harder because of the "property and expat situation" cited above. Credit Suisse estimated that some 200,000 expats could leave Singapore in 2009, or a net drop of 160,000.

On the local front, Singaporeans themselves could see a net job loss of at least 100,000 among themselves in 2009.

p/s photos: Nia Ramadhani