The proposed expansion plans for Singapore’s two casino resorts – and the continuation of the existing duopoly through 2030 – are a positive for the city-state’s casino operators, say investment analysts covering the casino sector.
The hefty investment pledged by each of the operators and the announced regulatory changes to the existing framework however are a concern, with the expected returns from the casino resort expansions not looking very compelling, said several brokerages in notes released on Wednesday.
The Singaporean government said on Wednesday it had agreed to the expansion of the city’s two integrated casino resorts in return for an aggregate investment of SGD9 billion (US$6.65 billion).
Singapore is home to two casino resorts: Marina Bay Sands, run by a subsidiary of U.S.-based gaming operator Las Vegas Sands Corp; and Resorts World Sentosa (pictured), owned and operated by Genting Singapore Ltd.
“We believe that the announcement on IR [integrated resort] expansion had a mix of both positives and negatives,” said Japanese brokerage Nomura. Aside from the extension of the casino duopoly until 2030, “the increase in gaming tax, while overall reducing EBITDA [earnings before interest, taxation, depreciation and amortisation] margins, is still very measured … and keeps Singapore casinos competitive from a regional perspective,” said the Nomura team.
Another positive, said Nomura, is the increase in gaming capacity for each of the operators, with Marina Bay Sands and Resorts World Sentosa given an option to increase their gaming machine inventory by 1,000 and 800 units respectively.
But the brokerage added: “We believe the capex figure of SGD4.5 billion [per property] is higher than our and street expectations of SGD1.5 billion to SGD2 billion, and is likely to mean minimal free cash flow for the next four to five years.”
As part of the agreement with the Singaporean government, casino resort Marina Bay Sands will build a fourth tower adjacent to its existing complex. Plans also include a 15,000-seat arena and a new a luxury all-suite hotel with approximately 1,000 rooms, topped with a sky roof.
Casino resort Resorts World Sentosa will have two additional hotels, adding up to 1,100 rooms to the property; its Universal Studios Singapore theme park will also be expanded with two new areas – Minion Park and Super Nintendo World. Resorts World Sentosa will revamp its S.E.A. Aquarium, taking over the adjacent Maritime Experiential Museum to create a new Singapore Oceanarium.
Singapore government, the winner
As part of the deal, the Singaporean authorities also announced an increase to casino entry levies for locals, starting today (Thursday).
JP Morgan Securities (Asia Pacific) Ltd said in a memo that the “great long-term news” was outweighed by “nearer-term negatives”, including a “hefty price tag, i.e., what we view as ‘unnecessarily’ large-scale investments… and ‘unwanted’ regulatory changes”.
“Even assuming (very) long-term growth unlocking from this expansion, we view the net impact to current fair value as negative,” said JP Morgan, referring to Genting Singapore.
It added: “Since most of the key expansions will come in after 2024, we see meaningful EBITDA uplift only by 2025, at the earliest, which is probably too far off even for long-term investors.”
Brokerage Morgan Stanley Asia Ltd said Singapore’s government is “the winner” in the agreement with the city-state’s casino operators, inking a deal to receive a further SGD9-billion of investment, with a significant increase in non-gaming attractions, including meetings, incentives, conferences and exhibitions (MICE) facilities, and hotels rooms.
Several brokerages saw the agreement with the Singaporean government as having a near-term negative impact, especially for locally-listed Genting Singapore, with several analysts cutting their EBITDA estimates for the company.
Genting Singapore’s shares were falling on Thursday, and Las Vegas Sands shares – listed in the United States – ended lower on Wednesday.
Marina Bay Sands is operated by Las Vegas Sands’ subsidiary Marina Bay Sands Pte Ltd. The Singaporean unit is not listed independently in any stock exchange.
“We fear that Genting Singapore earnings will structurally contract again come March 2022 [when the new tax structure announced by the Singaporean government kicks in] before growing as the new Resorts World Sentosa 2.0 development and enhancements come on-stream by 2024-2025,” said a report from Maybank IB Research.
In a Wednesday note, brokerage Deutsche Bank Securities Inc said it viewed the agreement with the Singaporean government as a “relatively positive development” for Las Vegas Sands, “given what we believe to be some mass stagnation, caused by capacity constraints, with the net result being equity value creation (after the increased taxes)”.
Executives from Las Vegas Sands had for years called on the local government to allow the firm to make additional investments in Singapore, claiming that Marina Bay Sands remained capacity-constrained.
Sanford C. Bernstein Ltd stated in a Wednesday memo that the long-term positives of the Marina Bay Sands capacity expansion for Las Vegas Sands “outweigh the tax increases and further limits on locals”.
It added: “We expect Las Vegas Sands to be able to debt finance the construction, with no impact on its dividend and we would expect the expansion to be completed [around] 2024. This development would not deter Las Vegas Sands from continuing to pursue a Japan integrated resort opportunity.”
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"This timeline set by [Japan's] national government now works as a strong drive for regional cities to keep up their own selection processes [of IR operators]"
Director of the Japan IR Association