Dicing with a downturn

Source : Business Times - 18 Oct 2008

With so much riding on Singapore’s IRs, can they beat a global slowdown?

REACHING deep into the earth and also soaring above it, Singapore’s two integrated resorts (IRs) approach their moment of truth. Just over a year back, when the skies above them were clear, they were set ambitious targets.

Each was primed to bring in $2.7 billion - 0.8 per cent in all - as value-add contribution to Singapore’s gross domestic product. Between them, they were expected to add 50,000 jobs to the economy by 2015.

What could go wrong? This was 13 months ago and Macau had just made headlines for achieving US$10 billion in gaming revenue, propelling it ahead of glitzy Las Vegas.

Then came the surge in construction costs that raised the amount being pumped into the Marina Bay and Sentosa IRs to US$10.5 billion - a 20 per cent hike above initial plans. For the IRs to reach their financial targets, they would have to recoup these extra billions through higher revenues. But 15 months before casino doors are thrown open, it looks as if even meeting revenue targets would be an achievement.

Already, Singapore’s in a technical recession and it is likely to stay with us for several quarters. The US and Europe are staring at their bleakest outlook in decades. Even China, previously thought to be immune to the meltdown, has seen its tycoons get trimmed. The average billionaire on Hurun’s 2008 China Rich List now has US$2.4 billion of personal wealth, down from US$3.6 billion the year before.

Macau, meanwhile, is bleeding. So what does the future hold for Singapore’s IRs?

Macau’s loss, ironically, could be Singapore’s gain. For the first time in three years, Macau’s casino revenue fell last month from the 52.5 per cent average growth achieved in the first eight months of 2008.

This has everything to do with the curbs imposed on mainlanders visiting Macau. From once a fortnight, the frequency of these visits was cut to once a month from June 1, then once every two months from July 1 - and now once every three months from Oct 1. Macau tourism operators reckon the curbs could slash the number of mainlanders joining package tours to Hong Kong and Macau by 10 per cent.

So where will Chinese gamblers - especially the high-rollers - go for their kicks? Las Vegas is very far away. But Singapore - just three hours from Hong Kong - is not. And it could emerge as their destination of choice when the IRs at Marina Bay and Sentosa open by 2010.

The IRs are going all out to lure big spenders from China and elsewhere, says Andy Nazarechuk, a gaming industry expert and dean of the University of Nevada Las Vegas campus in Singapore. ‘High-rollers in Las Vegas spend anywhere between US$50,000 and US$150,000 for their vacation at such resorts,’ he says. ‘The revenue generated from this group here will be high, which is why the investors are building these IRs.’

But can the China tide alone lift the worry clouds around Singapore’s IRs?

Resorts World (RW) spokesperson Krist Boo does not want to single out China as Sentosa’s big bet. ‘We have an unparalleled sales and distribution network in Asia and are confident of delivering the numbers. We are in 18 cities - Jakarta, Kuala Lumpur, Bangkok, Shanghai, Mumbai and Tokyo, just to name a few.’

Resorts World is sticking to its forecast of 15 million visits in the first year. According to Ms Boo, Asians still take holidays when times are not so good but favour nearby destinations to save on airfare. This could swing the pendulum in RW’s favour, she says. ‘We are confident the visitors will come. We are building a destination that Asia has never had - six hotels, Universal Studios Singapore, the world’s largest oceanarium, a water park, maritime museum and spa.’

Tourists are expected to account for about 60 per cent of visits and locals the rest.

Marina Bay Sands, too, is sticking to its forecast that it will turn a profit the minute it opens. ‘We expect to be profitable from day one,’ says George Tanasijevich, its general manager and vice-president of Singapore development. ‘Our expected payback time-frame remains at five to eight years.’

That, however, may be easier said than done. The Singapore Tourism Board itself is not confident of achieving this year’s target of 10.8 million visitors. And even if visitor numbers do pick up, it remains to be seen whether they will spend as freely as initially expected. For while the IRs have spread their bets to markets all over the world, their problem is that almost each of these markets has sunk in unison. The Shanghai index has fallen 69 per cent from its peak in October 2007 and hit a 22-month closing low in September this year. Mumbai has not fared much better.

‘While locals will be excited about the IRs initially, over time, the tourists will be the main market,’ says Dr Nazarechuk. And that is where the problem lies.

The immediate outlook for the IRs also hinges on how well airlines perform, according to Jonathan Galaviz of Globalysis, a Las Vegas-based boutique travel and leisure consultancy. ‘A significant risk when the IRs open will be the health of the airline industry. If capacity to Singapore is reduced substantially, it will jeopardise the performance of the resorts.’

On their part, the IRs are betting on Singapore’s resilience. ‘Our MICE-driven business model serves to mitigate the effects of a challenging economy,’ says Mr Tanasijevich.

Nevertheless, confidence is hard to pin down in uncertain times - as the principal players behind the two projects know. Las Vegas Sands has seen its share price slump from a peak of US$144.15 last year to just US$11.83 now. Genting International has weathered the storm better, falling from S$0.72 last year to S$0.39 now.

Analysts, meanwhile, have cut back their projections on how much the IRs here will contribute to GDP, and expect the number to remain between 0.3 per cent and 0.5 per cent between 2010 and 2015.

The IRs would give a lot for a glimpse of blue skies now.